Macy's stock jumped 5% Thursday morning following a New York Post report stating the embattled retailer is in discussions to sell to a private equity firm in an effort to skirt a potential battle for control of its board of directors.
Citing sources in the private equity and real estate investment fields, the report states that Jeffrey Smith, founder and CEO of New York-based activist hedge fund Starboard Value, is maneuvering for board seats, with a proxy battle looming ahead of Macy’s annual meeting sometime this spring. Starboard Value for months has pressured the department store retailer to unleash its real estate value as the company’s sales and stock price have remained tepid.
Macy’s has refused to confirm “rumors and speculation,” according to the Post, but industry observers told Retail Dive that, if true, the development would be no surprise.
As Macy’s CEO Terry Lundgren’s decades-long tenure winds down, the retailer is at an inflection point. Its massive expansion at the turn of the 21st century diluted its brand and hurt sales, but also left the company with billions of dollars in real estate.
Starboard Value's Smith last October said that the firm bought into Macy’s “too early” and has been growing increasingly impatient with the department store retailer to capitalize on its real estate holdings. “We are not big fans of wait and see. There is value there. How and when it gets unlocked is still open,” Smith said, stating that Starboard is looking into “unlocking value” from Macy's real estate and that there’s now a board member and an executive with real estate chops at the retailer after real estate investment expert William H. Lenehan joined its board of directors in early 2016.
Selling Macy's to ward off Smith's advances makes sense, Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive. “This would not surprise me one bit and in fact would be a very smart move,” Egelanian said. “Sears would have been much better off to sell itself for its real estate value at the height of the market before the Great Recession. Macy's cannot sell at the height of the market, but it can get out now instead of seeing sales decline year after year, no matter what they do.”
Macy’s is faced with unloading some 100 to 150 stores anyway, Egelanian noted. “Its real estate is far more valuable than its aging retail business, which is strategically irrelevant in today's retail alignment and will lose sales, market share and relevancy year after year until it becomes extinct.”
Even Macy’s retail success — its positive cash flow — makes it yet more vulnerable to a sale, says Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates Inc. Davidowitz noted that Macy's has “been down this road before” in 1990 after Canadian investor Campeau Corp. filed for bankruptcy after loading the company (then Federated Stores) with mountains of debt.
Mark Cohen, retail studies professor at Columbia University's business school, agrees. "I would not be at all surprised if Lundgren was scrambling to find an investor who would take a big enough stake in the company to keep the vultures at bay," he told Retail Dive. "Terrible trailing performance, lagging stock price and no forward strategy that anyone believes in sounds just like 1987 and Federated's catastrophic takeover by Robert Campeau."
The retailer's positive cash flow and its high-value real estate mean that it can support a lot of debt, making it a prime target, Davidowitz added. “They’re a perfect target for private equity,” he told Retail Dive. “Without doing anything on real estate, Macy’s has a huge positive cash flow. Sure, earnings are down, but it became a target because the stock price is down, and their stock is down because their business is lousy. They’re in the worst segment, department stores, and they’re in apparel — everything is wrong.
"And, by the way," Davidowitz added, "this will be the end of Macy’s.”
There's a chance that Starboard itself stoked a rumor about a sale, Cohen theorizes. "I wouldn’t put it past someone like Starboard to create this rumor to drive a spike in the stock," he said by email. "The real estate community seems to be into this, e.g. speculating that Amazon will open hundreds of bookstores or thousands of grocery stores."