• Michael J. Knell

Hudson's Bay announces $2.9B deal to buy Saks

TORONTO - Reaction from the financial community and retail observers to Hudson's Bay Company's announcement that it will acquire Saks Inc., has been generally positive, with HBC shares climbing about 6% last week following the announcement.
     HBC said it was acquiring Saks, which operates the iconic U.S. department store chain Saks Fifth Avenue, for US$16 per share in an all cash transaction valued at approximately US$2.9 billion, including debt.
     The transaction has been approved by each company's board of directors and is expected to close before the end of 2013. The deal is also subject to approval by Saks shareholders as well as regulatory approvals and other customary closing conditions.
     In a statement, HBC said the transaction will bring together three of the retail industry's most iconic brands - Hudson's Bay, Lord & Taylor and Saks Fifth Avenue - to create a leading North American retailer addressing a broad consumer spectrum across the luxury, mid-tier and outlet retail sectors.
     Should the deal close as anticipated, the combined company will operate 320 stores, including 179 full line department stores, 72 outlet stores and 69 home stores in prime retail locations throughout the U.S. and Canada, along with three ecommerce sites.
     It will operate under five banners including Hudson's Bay, Saks, and Lord & Taylor, as well as Saks' discount format, Saks Off Fifth. In addition, the combined company would include Home Outfitters, HBC's kitchen, bed and bath banner in Canada.
     HBC noted the combined company would have generated sales of C$7.2 billion in its 2012 fiscal year. The company also expects to achieve C$100 million of annual savings within three years.
     "This exciting portfolio of three iconic brands creates one of North America's premier fashion retailers," stated HBC Chairman and CEO officer Richard Baker.
     "With the addition of Saks, HBC will offer consumers an unprecedented range of retailing categories and shopping experiences," he continued, adding, "This acquisition will increase our growth potential both in the U.S. and Canada, generate significant efficiencies of scale, add to our powerful real estate portfolio and deliver substantial value to our shareholders."
     HBC said it plans to continue building Saks' market leading position and identity as a luxury retailer on both sides of the border.
     However, the deal won't have much impact on HBC's existing furniture and mattress business. Both categories can be found on the floors of most Hudson's Bay department stores across Canada as well as on its web site. Its other banners feature some furniture and furnishings - mainly accent and occasional pieces, rugs and lamps - on their floors and websites, but aren't considered category heavyweights.
     This is in stark contrast to HBC's primary Canadian competitor, Sears Canada, which has been a solid member of this country's Top Five furniture, mattress and major appliance retailers for several decades.
     Baker also announced HBC plans to expand both Saks and Saks Off Fifth into Canada and build on Canada's position as saks.com's largest international ship-to market. As many as seven Saks stores are envisioned as well as 25 Off Fifth locations. Duties will also be waved on Saks e-commerce shipments to Canada.
     Saks will operate separately under the HBC umbrella, including its own merchandising, marketing and store operations teams. It will remain headquartered in New York City and led by its existing management.
     Most analysts noted the real strength in the deal is the value of the real estate, which includes a number of marquee owned properties including Saks Fifth Avenue locations on Fifth Avenue in New York City and Wilshire Boulevard in Beverly Hills, Lord & Taylor's Fifth Avenue flagship, and Hudson's Bay properties in downtown Toronto, Vancouver and Montreal.
     HBC said it is looking at strategies to fully realize the value of its property, including but not limited to the creation of a real estate investment trust.
     Several retail industry watchers praised HBC for what was described as a bold, but risky move to defend its turf in the under-serviced luxury end of the market. It should also help HBC ward off Nordstrom's anticipated entry into the Canadian market next year.
     "It's a risky move but it's necessary," Ceren Kolsarici, a Queen's School of Business marketing expert told the Toronto Star, adding the transaction should help HBC to cash in on pent-up demand for luxury goods.
     Statistics Canada recently reported the net worth of the average Canadian household topped C$400,000 for the first time in history at the end of 2012. A more affluent population, coupled with the recent small uptick in retail sales in Canada, should help HBC achieve its growth ambitions.
     The financing package for the deal includes $500 million in new equity from the Ontario Teachers' Pension Plan, which holds a minority stake in the parent company of U.S.-based bedding producers Serta and Simmons.
     HBC said it has issued 1.5 million share purchase warrants to the pension plan, and will issue warrants for an additional 3.5 million shares when the transaction closes.

Michael KnellMichael J. Knell | Contributing Editor

Michael covers home furnishings news in Canada.

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