It would seem that Jerry Zucker, the South Carolina businessman who has been stalking embattled Canadian retailer Hudson's Bay Co. (TSX: HBC) for the past 18 months or so, is on the cusp of bagging his prize. On Jan. 26, HBC, Canada's oldest company and largest department store retailer, finally accepted a sweetened takeover bid from Zucker of $15.25 a share–up from his offer of $14.75 made last October. Combined with Zucker's agreement to buy the company's convertible debentures and take over senior corporate debt, the deal has an enterprise value of about $1.55 billion. That was enough for HBC governor Yves Fortier to say in a statement, “We are satisfied that the amended offer constitutes full and fair value for the company.”
It's been a long drive to this fork in the road. The very private Zucker (who rarely grants interviews) started buying HBC stock in the fall of 2003, and now owns about 18% of the outstanding shares. While the retailer originally expressed support for Zucker's interest in the company, things turned sour quickly. HBC CEO George Heller promised back then to triple earnings over a five year period and increase annual sales by more than 3% with a plan that included cutting costs, standardizing Zellers outlets and adding more big-ticket items and exclusive brands to its inventory mix. But HBC lost money in six of the last seven quarters. In November, it reported its third-quarter net loss widened to $50.3 million, or 72¢ a share, from $7.87 million, or 11¢, a year earlier. Sales fell more than 3% to $1.63 billion.
Zucker said in a letter to the board that in August 2004 he was willing to offer at least $15.50 a share, possibly increasing that after being granted access to the company's financial records. Heller responded the company was “not for sale.” Last May, Zucker asked the company to appoint some of his people to the HBC board so he could have some influence, but his request was denied.
However, now that the two sides have kissed and made up–at least publicly–the question is: What does the future hold for the 336-year-old retailer? To hear Zucker's camp explain it, having this deal go through will herald a glorious renaissance for HBC. “We certainly want to reinvigorate the company, we want to focus on customers,” said Robert Johnston, vice-president of strategy at his holding company, InterTech Group Inc. They also intend to use technology to forecast supply more accurately, he says. While some industry watchers say Zucker wanted HBC as a real estate play–breaking up the company to parcel out store locations–analyst Peter Holden of independent research firm Veritas Investment Research says Zucker's stated intentions have been “very consistent.”
Hudson's Bay, founded as a fur-trading venture in 1670, operates 550 stores, including 98 Bay department stores and 292 Zellers locations. The company got its start when England's King Charles II gave an investor group the exclusive right to trade around Hudson's Bay. To save the Canadian retail icon, Johnston says Zucker will stick to the basic principles of the turnaround plan developed by HBC's current management team, but seeks to revive revenue by selectively selling some real estate, and by refurbishing the discount Zellers chain, which is losing sales to Wal-Mart Stores Inc. Decisions have not yet been made on who will manage the company. No job cuts are anticipated yet, says Johnston, but a recent decision to trim 825 management jobs–part of a plan to save between $40 million and $45 million in costs annually–will likely go ahead.
While Johnston says Zucker is committed to making HBC work, others watching the Canadian retail industry aren't so sure the retailer's woes can be solved by better execution. Veritas analyst Holden says that, overall, the history of the department store sector “has not been very inspiring lately,” nodding to the demise of Eaton's and Sears Canada's current problems. It's difficult to see how Zucker, running HBC as an ongoing entity, can make the numbers work, adds Holden, given issues with the retailer's real estate portfolio such as the expense of getting out of lease obligations for unwanted stores. “If you could take the crappy stores off your hands, it would be a no brainer,” Holden says.
Whatever happens, the prospect of closure must come as a blessing to HBC shareholders. In recent weeks, investors have watched the retailer's stock zigzag to media rumour. In mid-January, the company's shares rose above Zucker's first offer price to a 52-week high of $16.05 on published reports that Onex Corp., Canada's biggest buyout firm, was interested in making a bid. Shares fell below Zucker's initial $14.75-a-share offer after further media reports that Onex and its real estate partner, mall developer Mitchell Goldhar, submitted a lower offer in the $10 to $12 range. Another rumoured bid–from U.S. equity firm Cerberus Capital Management LP together with RioCan Real Estate Investment Trust and Kimco Realty Corp.–was also reported as lower.
It's hard for industry watchers to understand why Zucker would need to up his bid, if indeed the rumoured Onex and Cerberus-led proposals were lower, but sweetening the pot helped seal the deal. “I think upping the price was the cost of getting the deal done,” said Greg Eckel of Morgan Meighen & Associates in Toronto, which owns about 60,000 HBC shares.
Johnston says Zucker has always maintained he would consider upping his offer if granted access to the company's financial data, which he finally got in late December. To grease the wheels, Zucker also removed some of his original conditions. For example, he will now accept a minimum of two-thirds of HBC's outstanding shares being tendered to the offer; originally, he had wanted 90% acceptance, which would have made it easier for him to walk away. (Analysts speculated Zucker put the offer forward in order to “smoke out” other bids, then bow out with a nice profit.) A circular outlining the new terms goes out Feb. 10, and shareholders have until Feb. 24 to tender to the bid.
There's nothing to stop someone coming in with a better deal, but analyst George Hartman at Dundee Securities Corp. notes “common sense says investors should tender to his offer.” HBC has been a difficult acquisition target because its results have rarely “been attractive enough to entice a real buyer.”
Zucker, 56, is No. 346 on Forbes's list of the richest Americans, with an estimated net worth of US$1 billion. He bought his first textile plant in the early '80s and now–among other operations–heads InterTech, which controls chemical and manufacturing companies with annual sales of about $3 billion. Customers include Procter & Gamble and Johnson & Johnson.
Could Zucker's bid yet be topped? Hartman says “it's clear Zucker is not walking away.” If Onex, Cerberus or any of the others rumoured to be interested are serious, “they now know the real hurdle they have to exceed.”
