Companies & Industries

HBC bulks up its luxury market capabilities with US$2.9 billion purchase of Saks

US$2.9 billion deal.

Long-rumoured but finally verified, Hudson Bay Company is buying Saks Inc. in a deal that allows the venerable Canadian retailer to bulk up its ability to serve the luxury market, grab a host of new stores and leverage its retail acreage into a profitable business in itself.

HBC has agreed to buy Saks for US$2.9 billion, paying US$16 per Saks share. The Canadian department store giant will also pay off the debt of the American luxury retailer, which has experienced its fair share of financial struggles since the 2008-09 recession.

“Hudson’s Bay makes sense for this acquisition—the experience that they have in the department store sector, the ability to bring the concept to Canada, the fact that Saks does get a lot of online business from Canada” will serve to benefit Saks, noted retail analyst Dana Telsey, CEO and chief research officer of Telsey Advisory Group, in an interview.

The transaction will also help Saks head north, Telsey added. Already in the midst of expanding the “Off Fifth” outlet store brand with a website launch and seven new locations this year, “there could be the potential for up to twenty-five of these stores in Canada,” said Telsey.

“It should only help to increase the awareness of the [Saks] brand.”

The acquisition presents an opportunity for Saks “to grow beyond its current footprint,” added Paul Trussell, a senior broadline retail analyst with Deustche Bank.

South of the border, there might also be a chance to turn around a few underperforming Saks locations. Since Richard Baker’s HBC family also includes the Lord & Taylor brand, there may be Saks locations that could simply be swapped for the less expensive Lord & Taylor banner, noted Maxim Group analyst Rick Snyder.

“Aside from the operational synergies—which HBC has said, they expect 100 million of annualized synergies within three years—I also think there [could be] some real estate synergies, just by swapping the signs,” said Snyder.

That said, Saks isn’t the only beneficiary of this purchase. HBC has bought itself a globally-recognized luxury retail brand that, despite some financial wobbles in the past few years, has built a strong online retail presence and a global shipping network for hundreds of high-end brands that in many cases wouldn’t otherwise ship directly to customers. According to a research note by JP Morgan analyst Matthew Boss, Canada represents Saks.com’s largest international market.

“Saks does have a strong e-commerce business,” said Trussell.

“I think it sounds like there’s an opportunity for Hudson’s Bay and Lord & Taylor to leverage that online platform.”

Snyder was surprised by the $16 per share sale price, having valued Saks shares at between $18 and $18.50 due to its online retail presence.

“I think the online and omnichannel opportunities here are vastly underestimated,” he said.

“If HBC buys Saks for $16 a share they are making a tremendous deal.”

In Trussell’s estimation, HBC has also been given an opportunity to monetize Saks’ “valuable real estate position.” Deustche Bank estimates Saks’ total real estate could be worth up to US$2 billion, with its world-famous flagship store on Fifth Avenue in New York valued at approximately $1 billion.

“They made it very clear that they are looking to propose a future REIT transaction, combining all the assets of Hudson’s Bay, Lord & Taylor, and Saks,” said Trussell.

Together these companies own over 17 million square feet in property space, the proceeds of which could be used to pay down debt, he added.

“There’s certainly valuable real estate assets that each brings to the party,” said Telsey.

A focus on luxury retailing has started to take greater hold in Canada. For its part, HBC has been working on initiatives to offer an alternative to Holt Renfrew, and was at the helm in assisting exclusive labels such as the UK’s Topshop and Topman in crossing the Canadian border. As well, high-end US department store chain Nordstrom will also be heading north in the fall of 2014.

“There’s clearly a marketplace for luxury, and I don’t think [HBC] wanted Nordstrom to take that on their own—they wanted their piece of the pie,” said Trussell.

The HBC-Saks deal includes a 40-day “go shop” period, during which Saks Inc. can consider purchase offers from any other interested parties.

According to JP Morgan, HBC will now operate a combined 320 stores, 179 of which are full-line department stores, 72 outlet stores, 69 home stores, and three “Ecommerce sites in the US and Canada.”

The transaction improves HBC’s “competitive positioning in the mid-tier and luxury channels,” wrote Boss.