Dive Brief:

• Hudson’s Bay Co. is in takeover talks with beleaguered department store chain Macy’s, according to a report in The Wall Street Journal. Macy's share price jumped 8% in trading Friday morning in the wake of the report. 
• Citing sources close to the discussions, the Journal states that negotiations between the companies remain preliminary, and address outright acquisition as well as a deal for Macy’s real estate and even potential partnership opportunities. There is also a strong possibility no deal will materialize at all, the report adds.
• With a market value of $9.8 billion, Macy’s dwarfs Hudson’s Bay, which is valued at $1.8 billion and is the Canadian owner of retail brands including Saks Fifth Avenue and Lord & Taylor. Macy’s is burdened with about $7.5 billion in debt, which further complicates a deal. But a source said Hudson’s Bay could raise equity and debt against its real estate portfolio, which is worth as much as $14 billion, and could also bring a partner into the negotiations.

Dive Insight:

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. With the toothpaste now officially out of the tube, shares of Macy's were halted Friday morning due to volatility, Seeking Alpha notes.

A potential Macy’s sale would effectively fend off the advances of Jeffrey Smith, founder and CEO of New York-based activist hedge fund Starboard Value. Reports indicate Smith is maneuvering for Macy’s board seats, with a proxy battle looming ahead of the retailer’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. 

That kind of headache is the last thing Macy’s needs. With longtime CEO Terry Lundgren’s decades-long tenure winding 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 — property that could prove irresistible to a potential suitor like Hudson’s Bay.

“[Macy’s] 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,” Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive earlier this week. “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.”

Hudson’s Bay seems like an unlikely partner, not only given its size but also in light of its own recent struggles. Just last month, the company lowered its fiscal year revenue expectations for the second time, citing challenges in North America and Europe. Hudson’s Bay now expects total capital investments, net of landlord incentives, to range between $660 million and $710 million in Canadian dollars, approximately 4.5%-4.9% of the midpoint of the sales outlook. Included in these amounts are the capital expenditures associated with the recent acquisitions of flash-sales site Gilt and European retailers Galeria Kaufhof, Galeria INNO and Sportarena.

Hudson's Bay CEO Jerry Storch maintained the company is dedicated to improving its exclusive product offerings, store improvements and “all-channel shopping experiences.” The retailer also is focusing on high-performing segments like dresses and active wear, and adding new categories, like toys, to its home goods assortment (something Macy’s also did in its holiday Backstage pop-ups in full-line stores). Late last year, Hudson’s Bay instituted a comprehensive review of its business operations to identify efficiencies, streamline processes and improve back of store productivity, while also enhancing customer service.

Hudson Bay’s promises echo similar forward-looking statements by Macy’s. But while the two companies may be philosophically aligned, recent earnings results offer little concrete evidence that even their combined might is enough to overcome the massive challenges facing the department store segment — most notably, the seemingly unstoppable rise of e-commerce and the corresponding decline in brick-and-mortar sales and mall traffic.