Macy’s Reportedly Receives $5.8B Buyout Offer From Arkhouse, Brigade

It is Macy’s Inc.’s turn in the deal rumor mill.

The retailer is said to have received a $5.8 billion, or $21 a share, buyout offer from an investor group including the real estate-minded Arkhouse and Brigade Capital Management, according to a report in the Wall Street Journal.

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Macy’s and Arkhouse declined to comment on Sunday. Brigade could not be reached.

UPDATE: Macy’s Future Up in the Air

If the offer pans out, it comes at a time of transition for Macy’s, where chief executive officer Jeff Gennette is just about to hand the reins over to Tony Spring.

The bid of $21 a share would represent a 20.8 percent or $1 billion premium over the company’s market capitalization as of the close on Friday, when shares inched up 2.4 percent to $17.39.

Including the value of all its shares and its debts, Macy’s entered the weekend with an enterprise value of $10.6 billion — giving it a multiple of about 5-times earnings before interest, taxes, depreciation and amortization.

The price Arkhouse and Brigade are reportedly proposing to pay for Macy’s is about 5.4-times EBITDA.

Valuations differ from sector to sector and company to company, but that represents a lower valuation historically, given that stronger retailers would be expected to trade at closer to 10-times EBITDA and luxury companies go for multiples in the teens.

One source described a deal to buy Macy’s at the reported price as “a steal.”

It’s unlikely that the retailer’s board would accept the offer, at least as it currently stands, at $21, according to the report.

It’s also likely that Arkhouse and Brigade up the price. One source said the two parties have a third party lined up that could come in to sweeten the offer made by Arkhouse and Brigade. “I heard they could be aligning with a third party to increase the price,” the source said.

The source also pointed out that Arkhouse, being a real estate company, would be particularly interested in Macy’s valuable real estate, which includes its Herald Square flagship, and other store properties in Brooklyn and elsewhere, as well as owned distribution centers and land adjacent to Macy’s Inc. department stores, such as parking lots. Not long ago, Starboard Value, a shareholder activist, valued Macy’s real estate at more than $20 billion and was urging the company to step up efforts to monetize properties to raise shareholder value.

Macy's, Herald Square, holiday windows, 2022
Macy’s Herald Square

Also, Macy’s executives are hoping that cost-cutting measures and growth strategies begin to kick in next year, to raise value. However, with Christmas shaping up to be a tough Christmas particularly in the luxury and middle markets, Macy’s is not sitting in a very strong bargaining position.

The glare of the deal spotlight also comes at a time when department stores have not been getting much love from Wall Street.

Dillard’s Inc. is trading at 4.8-times EBITDA, while Nordstrom Inc. is at 4.7-times EBITDA. Kohl’s Corp. — which was hounded by activist investors to boost its valuation — is trading higher, at 9.1-times EBITDA.

In an analysis, Neil Saunders, managing director of GlobalData, noted: “Years of chronic underperformance has put downward pressure on Macy’s share price and means that the iconic department store chain is now a relatively attractive prospect.”

Saunders also speculated that it was Macy’s real estate that was drawing interest and not its retail operations.

“Macy’s struggles with the fundamentals of retailing and its recent sales performance underlines that it continues to lose market share and relevance in an increasingly competitive market,” he said. “Correcting years of missteps will be expensive and risky for anyone acquiring the business at a premium. Where Arkhouse likely sees value is in Macy’s real estate.

“As Macy’s still owns many of its own stores, including some flagship locations, its real estate portfolio is worth at least $6 billion at a conservative estimate,” Saunders said. “That’s more than Macy’s current market capitalization, which means that any savvy investor could snag Macy’s for a bargain and make a generous return by monetizing the real estate alone. For a real estate focused business such as Arkhouse, this is a bet worth taking.”

Macy’s has been considered undervalued by the investment community and is trading well under its 52-week high of $25.12 and its peak of $70 eight years ago.

Macy’s stock has been depressed by the company’s inadequate earnings record in recent years, negative sales trends and industry concerns about the condition of a major portion of its department stores, excluding its downtown flagships in major cities and in A malls where the company has focused upgrades.

Macy’s $11 billion acquisition of May Department Stores Co. in 2005 saddled the company with many smaller and weak department stores, hundreds of which were closed.

Bloomie's in Skokie, Illinois.
Bloomie’s in Skokie, Ill.

Macy’s has launched smaller, specialized brick-and-mortar formats including Market by Macy’s, Bloomie’s, Backstage and Bloomingdale’s The Outlet to reduce its dependence on department stores, tap new markets, replace full-line department stores in markets where a smaller Macy’s would be warranted and develop new sources of revenue and profit.

After three years of testing and tinkering with the scaled-down version of its Macy’s department store,  Macy’s said in October that an additional 30 openings of  the small-format will open in 2024 through 2025. meaning the store count on the format could increase to 42 in 2025. The format originally was called Market by Macy’s but is transitioning to being just called Macy’s.

There are currently three Bloomie’s stores operating, which are scaled down, contemporary-focused versions of the Bloomingdale’s full-line department stores. Macy’s Inc. has not yet greenlit a rollout of Bloomie’s, which is still in a trail and error phase.

In the third quarter of this year, the Macy’s division logged a 7.6 percent comparable sales decline on an owned basis in the quarter and a 6.7 percent drop when the licensed businesses were included. Bloomingdale’s fared better with a 3.2 percent owned comp decline and a 4.4 percent drop with the licensed businesses. And the Bluemercury beauty business comped up 2.5 percent on an owned basis.

Inventories at the end of the quarter were down 6 percent from a year earlier and down 17 percent compared with 2019.

While the third quarter saw Macy’s net income fall 60 percent to $43 million, or 15 cents a diluted share, the result beat expectations. In the year-ago quarter, Macy’s net amounted to $108 million, or 39 cents.

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