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America’s largest department-store chain, Macy’s, Inc. (NYSE: M) made headlines when the WSJ reported that it had received a $5.8 billion takeover bid from an investor group made up of Arkhouse Management and Brigade Capital.
Macy’s has previously rejected takeovers of this kind, making many wonder if it’ll be the same case with this one. However, these doubts didn’t stop M stock from moving, jumping nearly 20% on the news. The bid raised many questions surrounding the future of Macy’s and the valuation of its assets, and the goals behind the takeover. Is this a fair value for M stock or should Macy’s hold out for a better deal?
An investor group consisting of Arkhouse Management, a real-estate investing firm, and Brigade Capital, a global asset manager, jointly made a $5.8 billion offer to buy the department-store chain and take it private, at a valuation of $21 per share.
The investors already have a large stake in Macy’s through Arkhouse-managed funds and they believe that Macy’s is undervalued in the public markets and have indicated that it would be willing to raise its offer.
The report also revealed that the group has the support of an investment bank that wasn’t named, but it has provided a letter supporting the group’s ability to raise the necessary funds to complete the deal.
As for Macy’s’ reaction to the offer, all we know is that the board of directors met to discuss the offer, but it isn’t clear how they feel about it.
The $21 per share valuation is a roughly 32% increase from the M stock price of $17.39 on the day the offer was made. However, that is still a far cry from M stock’s peak in 2015 when it was trading as high as $70 per share. Clearly, Macy’s is no longer in the same place it once was, as represented by the 75% decrease in M stock price, but does that mean that this takeover bid is the best Macy’s can get?
Macy’s Fall from Grace
Macy’s was once the largest full-line department-store chain in the U.S. with around 850 stores. It also owns Bloomingdale’s, a higher-end department-store chain with more than 30 locations, and a number of smaller shops under the two banners.
Even though Macy’s managed to survive the 2008 recession, it found it harder to get through the rise of online retailers. In 2016, Cowen & Co. analysts said that they were “more confident” that online retailer Amazon would overtake Macy’s in apparel sales, and soon after, Macy’s announced it would close 100 stores within a year.
In 2017 and 2018, Macy’s announced more store closures as it lost market share to online competitors. In fact, the department-store chain saw a 4.1% decline in market share in 2017, accompanied by revenues falling by $3 billion between 2012 and 2017.
Then, in 2020, as Amazon moved deeper into fashion and online retailers like Shein became increasingly popular, Macy’s said it would permanently close 125 more stores.
It’s not just Macy’s that struggled to keep up with the rise of online retailers. In fact, the department-store sector as a whole experienced waves of consolidation and bankruptcy in recent years.
The sector’s troubles were made worse by the pandemic, and in 2020, JCPenney, Neiman Marcus, and Lord & Taylor all filed for bankruptcy. They later re-emerged as smaller or digital-only players a sign that the transition to online retail has become all but inevitable. While Macy’s survived the pandemic, its stock barely did. When the pandemic hit, M stock saw a nearly 75% decline.
Macy’s now operates nearly 500 department stores – a far cry from its 737 stores in 2015 – and the company’s Q3 results show how much it has been struggling. It reported a 7.6% decline in sales, with Bloomingdale’s also reporting a 3.2% decline. During this period, M stock had fallen by about 35% compared with the the S&P 500’s 17% gains.
When news of the acquisition offer was made public, M stock jumped nearly 20% reaching around $20 – making it clear that Macy’s’ board now has a lot to consider.
Is it about Real Estate?
By now, you’re probably wondering why a real estate investing group and an asset management firm want to buy a declining department-store chain. They probably have no intention of reviving the department stores, since the department-store sector has been declining for a really long time.
When looking at major department stores’ Q3 results, Kohl’s recorded a 5.2% year-over-year decrease in net sales and Nordstorm also saw a decrease of 6.8%. Additionally, consumers are expected to continue abandoning stores and malls, with 24% of retail purchases expected to take place online by 2026. Along with that, the e-commerce market is forecast to total over $8.1 trillion in the same year, a nearly 30% increase from 2023.
So, what could the investor group be interested in? The answer is most likely Macy’s’ real estate holdings.
Back in 2022, the investment bank Cowen valued Macy’s’ real estate holdings in the range of $6 billion to $8 billion, which is close to the price this investment group is offering. Macy’s has a really valuable real estate portfolio, highlighted by its iconic location in Herald Square in New York City. This location alone was valued between $3 and $4 billion by various money managers and investors in the past decade. It’s hard to imagine a situation in which these investors decide not to sell some of Macy’s’ and Bloomingdale’s real estate assets if this deal goes through.
Another potential target for the investors could be Macy’s’ Bluemercury brand, a cosmetics and skincare business that Macy’s acquired in 2015 for $210 million. Although Bluemercury has nearly 160 stores, its unlikely it will face the same treatment as the department-store chains, since this is the only chain under Macy’s actually growing.
In fact, Bluemercury reported a 5.8% year-over-year sales growth in Q2 2023, followed by a 2.5% growth in Q3. This is thanks to the cosmetics and skincare industries incredible growth in the US. As is, these industries are expected to grow by 3.54% and 2.99% respectively each year until 2028.
Will Macy’s Accept?
But before investors get too excited over the prospect of a takeover, its worth pointing out that this isn’t Macy’s’ first time being targeted. In fact, Canada’s Hudson’s Bay Co. approached Macy’s for a deal in 2017. Like many declining department stores, Macy’s also studied the feasibility of splitting its e-commerce operations from its stores in 2021, but ultimately decided against it.
It’s also not the first time Macy’s was targeted for its real estate. In 2015, its shareholder Starboard Value tried to push the company to spin off its real-estate assets, including its famous Herald Square location. When Macy’s hesitated, Starboard sold its entire stake in the company. Then in 2021, shareholder Jana Partners pushed for the e-commerce separation and when it didn’t work out, cut its stake in Macy’s by 84%.
So, Macy’s doesn’t exactly have a history of entertaining such offers, and the situation definitely isn’t helped with concerns regarding its asset valuations. Remember, Cowen valued Macy’s’ real estate between $6 billion and $8 billion just last year, and the current bid for the whole company is below $6 billion, so why should Macy’s accept such a lowball offer?
Besides that, Macy’s’ flagship store in New York’s Herald Square, is valued at $2 billion all by itself. Some experts have pointed out that since a development is underway in this area which would create a new office tower too, the valuation of $2 billion could already be too low.
It’s also important to note that similar stores to Macy’s rejected even higher bids. In 2018, the special committee advising Nordstrom’s board rejected an $8.4 billion bid from the chain’s founding family. Additionally, Kohl rejected a $9 billion takeover bid just last year. If these floundering department chains are rejecting offers greater than Macy’s then there’s no guarantee that the department store would or even should accept their offer.
Could this Buyout Attempt Be Different?
Real estate valuations aside, Macy’s primary business is clearly beaten down. The company reported a net income of $155 million in Q1, then suffered a net loss of $22 million in Q2, before recording $43 million in net income in Q3.
Under its CEO Jeff Gennete, the company has been undergoing turnaround efforts like closing underperforming locations, opening smaller shops, launching new brands and modernizing the company’s supply chain.
But, the company’s management clearly sees the value of selling its real estate during a period of stagnation. Under Gennette, Macy’s sold some of its real estate assets between 2015 to 2016, including stores in Brooklyn for $270 million, San Francisco for $270 million, and Minneapolis for $59 million.
However things could change once Gennette retires next year and is succeeded by Tony Spring, head of Bloomingdale’s. This change of management and the possibility of going private after an acquisition might make Macy’s willing to sell off more locations.
While its not clear whether Macy’s will accept the offer, it appears that insiders who knew about it leaked the news to several traders. In the days preceding the announcement, these traders bought OTM call options and volume for calls with a strike of $18 spike significantly on December 5th. One trader even managed to turn $70,000 into roughly $700,000.
Traders watching for signs that Macy’s will accept or reject the offer should watch the option chain for more activity. For example if someone is buying a significant amount of OTM puts with a close expiration, that could be a sign that Macy’s is planning to reject the offer.
Looking at the daily chart, M stock is trading in a downward channel. On news of the buyout offer, M stock broke out of the channel and is trading above the 21, 50, and 200 MAs. It will likely retest the upper trendline which will give investors the opportunity to determine whether or not the downward trend has been successfully broken . Given that the RSI is overbought at 69, the stock will need to recalibrate, giving bullish traders the opportunity to take a position or bears to go short.
Fundamentally, its unlikely M stock would exceed the offer price of $21 per share for long. Since the catalyst for this 16% rally was the the takeover offer, M stock will move according to whether the bid is accepted or rejected. Even if the Board rejects this offer, it could announce its decision to proactively consider other offers which may sustain the rally.
Considering that M stock will likely retest the upper trendline of the downward channel based on the technicals, and the possibility that the Board may reject the offer, this could be an opportunity to go short.
However, even if the acquisition doesn’t happen, there are reasons to be bullish. Macy’s is attempting a turnaround strategy that could contribute to its growth, and it has already helped turn Q2’s losses into profits in Q3. If you’re already an investor in M stock, then it could be an opportunity to take a wait -and-see approach.
M Stock Forecast
Macy’s took a long time to solidify its place as America’s leading department store since its establishment in 1858 as a small dry goods shop in New York. However, business has been declining for as long as a decade as consumers shift to online retailers as the future of shopping.
So, Macy’s might not be so exciting as a retailer anymore, but it still has a lot of potential as a real estate play, which could be the reason why investors are offering it $5.8 billion. Whether it’s a lowball offer or not, Macy’s’ board will certainly consider it carefully, especially since it’s operating in a period of stagnation amid other department-store chains filing for bankruptcy.
Even though M stock surged at the news, it could be short-term if Macy’s doesn’t accept the deal. Additionally, the company must weigh how disruptive a takeover process could be into the new year. Traders watching for signs that Macy’s will accept or reject the offer could get a hint from the option chain. So keep an eye out for any whales buying a significant amount of OTM puts or calls with a close expiration.
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