The latest offer to take Hudson’s Bay (OTCPK:HBAYF) private by the investor group led by Richard Baker appears to be a fair one. I had noted before that I thought the last bid at C$10.30 (US$7.92 at current exchange rates) per share undervalued the company and real estate by a bit.

The offer was raised to C$11.00 (US$8.46) per share, which brings it in line with Catalyst Capital Group’s bid and at least appears to be close to the fair value of the company and real estate.

Catalyst has signaled its approval for the Baker group’s revised bid pending several conditions, and I believe that it is highly likely that this bid will go through.

Offer History

The Baker group’s C$11.00 (US$8.46) per share bid is the second increase from its original bid of C$9.45 (US$7.27) per share, and represents a 16% increase since the original bid.

Catalyst previously acquired 18.5 million shares as part of a tender offer at C$10.11 (US$7.78) per share. The C$11.00 value is around 9% above that tender price.

Catalyst’s support for the Baker group’s latest bid indicates that there will be little pressure for the Baker group to increase its bid more. Catalyst’s approval is contingent on the amended management information circular being filed and mailed to shareholders by February 14. The amended management information circular also needs to include updated fairness opinions and a TD Securities valuation that puts the lower end of the fair market range for Hudson’s Bay’s common shares at no more than C$11.00.

An updated valuation range starting at C$11.00 or less seems likely given that TD Securities previously provided a C$10.00-12.25 (US$7.69-9.42) valuation range. As well, there is some wiggle room when determining valuation estimates and there is the knowledge that most stakeholders want the deal to go through.

Revised Bid Appears Reasonable

I had noted before that the real estate value attributed to Saks Fifth Avenue flagship appeared low. Hudson’s Bay reported an estimated real estate value (net of debt) of C$8.75 CAD (US$6.73) from its appraisals, but the 2019 sale of 711 5th Avenue pointed to the flagship store potentially being worth closer to US$2.0 billion. This would push the value of Hudson’s Bay’s real estate up to around C$10.84 per share (US$8.34) per share without any further adjustments.

I think an argument could be made that the appraisals of some of the company’s other real estate could have undervalued that real estate a bit as well. However, that would involve quibbling over minor changes to the inputs, and it doesn’t appear to be worth fighting over some extra pennies per share at this point.

Downside Risks Without The Bid

Hudson’s Bay indicated (in the press release discussing the latest bid) that its revenues have been lower than expected since October 20. While there was no quantification about how much sales were below expectations, it does indicate that the company’s retail operations are still having some struggles and that comps probably remained slightly negative in November/December. Given recent trends, November/December expectations were probably for around flat comps (or close to that).

(Source: Hudson’s Bay)

Retail results don’t appear likely to be a notable catalyst in the near term, so if the latest bid were to fail, Hudson’s Bay stock would likely fall to C$8.00 (US$6.15) or below, a level that it approached in late December after reports indicated that the takeover offer could be shelved.

Conclusion

The Baker group’s revised C$11.00 per share bid appears quite likely to go through. Catalyst Capital Group was the main source of opposition to the deal before, and it has indicated its support for the increased bid. While one could come up with an argument that Hudson’s Bay’s real estate is worth more than C$11.00 per share, the Baker group’s bid appears to be for a reasonable amount. There is also no competing bid that would push its offer above C$11.00 per share now, and the benefits of holding out for a bit more per share appear to be outweighed by the near-term downside risk to Hudson’s Bay stock if it doesn’t get acquired.

Free Trial Offer

We are currently offering a free two-week trial to Distressed Value Investing. Join our community to receive exclusive research about various companies and other opportunities along with full access to my portfolio of historic research that now includes over 1,000 reports on over 100 companies.

Disclosure: I am/we are long HBAYF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source link

2020-01-09