Fireworks, hot dogs, flags, private department store deals? The news/chatter calendar was surprisingly active on the after-market eve of the 4th听and into the holiday proper with the WSJ reporting that Macy鈥檚 bidders Arkhouse and Brigade have upped their go-private offer price for Macy鈥檚 by $0.80 to $24.80 (or just shy of $9 bn on an EV basis, roughly $180 mn more than the latest offer) or ~4.4x EV/24e EBITDA. This news was followed shortly by confirmation that Hudson鈥檚 Bay/Saks had reached a deal to acquire luxury department store peer, Neiman Marcus.
Macy鈥檚 Bigger Better Bid?
While the incremental boost is relatively small (recall that the suitors started their M bid at $21/sh in Dec 鈥�23, before boosting it to $24/share in early March 鈥�24) the more interesting takeaway may be that Arkhouse/Bridage is still trying. We鈥檝e seen so many department store LBO rumors just fade into the sunset. If the rumor proves true, it will mark the first time we鈥檝e heard an LBO-specific update since early April, when Macy鈥檚 settled a pending proxy fight with the suitors, adding two Board members (Arkhouse/Brigade sought nine) 鈥� both of whom joined the seven member Finance Committee evaluating the LBO offer. With share price treading water in the high-$17/sh range ahead of the news, or ~38% below the latest offer, market skepticism of a deal remains relatively high.
We update our rough math for a $24.80/sh offer (and retain the initially rumored desire for the suitors to limit equity contribution to 25% of funding mix) which still shows M landing in the ~3.9x lease adjusted leverage range, while retaining post-deal positive FCF in the low-to-mid-$400mn range. Stress testing for a decline in EBITDA, we show the FCF figure would fall to zero on a -21% hit to EBITDA (which is certainly possible in a modest-to-difficult recession scenario), at which point lease adjusted leverage would jump to a lofty 4.8x. While we still think such a deal is inadvisable, it is impossible to rule it out on a simple metrics basis. We do note that the whole LBO process has likely put additional pressure on the 鈥渓et鈥檚 unlock real estate value鈥�, a concept reinforced by the CRE focus on Arkhouse鈥檚 appointees as well as Macy鈥檚 own addition of its former Head of Real Estate, Doug Sessler to its board (Sesler served as M鈥檚 Head of Real Estate at Macy鈥檚 until 2021, and was behind ~$2 bn of real estate monetization during his tenure, as well as the OpCo/PropCo split for some M real estate holdings to raise secured financing early in the pandemic 鈥� which has since been repaid. In maintaining our O/P recommendation on Macy鈥檚 we take some comfort in M鈥檚 history of directing real estate sale proceeds towards balance sheet friendly deleveraging, as well as CoC protection for most M bonds in the event an actual LBO comes to fruition.
Neiman Sells Out
Neiman Marcus will be acquired by Hudson鈥檚 Bay (not to be confused with Hudson Bay, which played a role in the Bed Bath & Beyond situation) in what is being described by the press as a $2.65bn transaction (we haven鈥檛 seen a formal announcement of details). We don鈥檛 currently have access to NMG鈥檚 private financials, but based on a series of quarterly reporting by our colleagues at LFI, NMG鈥檚 LTM EBITDA looks to be on the order of $230 mn, which would make the transaction multiple relative lofty (mid-11x), particularly vis a vis Macy’s mid-4x math. However, as in most department store transactions, there is an element of unlocking owned real estate value which may cloud the multiple on an underlying organic earnings basis. Hudson鈥檚 Bay has been pursuing NMG for years, including prior to NMG鈥檚 early pandemic bankruptcy.
Hudson鈥檚 Bay owns (most notably for this transaction) Saks, and was itself taken private in early 2020 after a rough run in public equity markets. In late 2023, the company鈥檚 retail operations were reportedly falling behind on payments to vendors amid a cash crunch, although the company was able to unlock some liquidity through real estate transactions. Also somewhat fascinating, Amazon and Salesforce are said to be taking a (yet-to-be-disclosed) stake as part of the transaction. The appearance of AMZN in any traditional retailer transaction always sends shockwaves through the sector (recall the fallout to grocery’s from AMZN’s Whole Foods buy – a transaction which ultimately did little to change the grocery landscape; AMZN’s involvement with prescription drug sales similarly shocked traditional drug store retailers, but has yet to take meaningful share.)
Saks/NMG is expected to jump through hoops with the FTC, with the Tapestry/Capri developments proving that the current FTC leadership is willing to take all comers to the mat, even deep into the very discretionary corners of the consumer spectrum. Adding AMZN to the mix is unlikely to win friends at the FTC.
James Goldstein, CFA
Head of Retail
jgoldstein@creditsights.com
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Noah Schucking
Analyst, Retail
nschucking@creditsights.com
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