Following a statement from Arkhouse Management and Brigade Capital Management urging Macy’s to respond to their takeover proposal, the department store on Sunday firmly rejected it.
Macy’s confirmed that on Dec. 1 it had received an offer from financial firms but that, following a “careful review,” its board “has determined that the non-binding proposal does not constitute a basis to enter into a non-disclosure agreement or provide any due diligence information to Arkhouse and Brigade.”
They offered $21 per share, per releases from Macy’s and the firms. That equates amounts to about $5.76 billion, based on Macy’s outstanding shares.
“We have conviction in the long-term success of Macy’s but believe that its potential will only be realized as a private company,” Arkhouse Managing Partners Gavriel Kahane and Jonathon Blackwell said in a statement.
The retailer took more than a month to respond to this overture, which could be construed as holding out for a better offer, according to GlobalData Managing Director Neil Saunders. Indeed, the Arkhouse executives said that their offer could be increased “if we are granted access to the necessary due diligence.”
“We are highly motivated to consummate an acquisition of Macy’s and are prepared to pursue all necessary steps, including direct engagement with stockholders, to achieve this goal,” they also said.
However, this seems unlikely to motivate Macy’s board, according to Saunders.
“[G]iven Macy’s has failed to even advance talks with Arkhouse, nor allowed them to undertake due diligence when they’ve dangled the prospect of sweetening the price, suggests a deeper, almost psychological, resistance to doing a deal,” he said in emailed comments.
There are some clues from a Jan. 21 letter to the firms’ executives from Macy’s CEO Jeff Gennette, which was attached to the retailer’s press release. In consultation with financial advisers, the Macy’s board determined that the “proposed cash equity contribution of only 25% of the required capital is well below current market levels for similar transactions.”
In the letter, Gennette was critical of the firm’s approach, saying that they didn’t have the financing and that their confidential communication with Macy’s “is subject to numerous non-standard preconditions.” As recently as Jan. 15, Macy’s financial advisers had requested more information on a financing plan but didn’t hear back from financial advisers for Arkhouse and Brigade, he said.
However, the Arkhouse partners in their statement said that, following some discussion, Macy’s advisers had “confirmed that they had no further questions regarding our financing.”
According to Gennette, the debt required for the deal would not be achievable in the current market, and would be problematic for a retail company. Bank of America Securities and Wells Fargo are Macy’s financial advisers and Wachtell, Lipton, Rosen & Katz are its legal advisers.
“Based upon advice the Board has received, we believe that this quantum of indebtedness, as well as your reliance on a large amount of payment-in-kind securities, make it highly unlikely that your proposed financing structure could be successfully executed,” Gennette wrote in the letter.
In their statement, Kahane and Blackwell noted that their offer “represents a 32.4% premium to the unaffected stock price and a 56.8% premium” to Macy’s 30-day volume weighted adjusted stock price as of Nov. 30 — and that shares had fallen last week after Macy’s announced it would downsize its workforce and brick-and-mortar footprint. Moreover, shares rose following reports of their proposal, which they said reflects shareholder enthusiasm for their proposal.
The Arkhouse stated focus on unlocking value from “the mispricing of real assets in the public market" could rightly be making Macy’s nervous, according to Saunders.
“Monetizing real estate with no focus on revitalizing the retailer and bolstering trading would produce short-term gains but severely weaken long-term prospects,” he said.
Despite Macy’s rejection, the offer presents a quandary for Macy’s shareholders and a challenge for incoming CEO Tony Spring, Saunders also said.
“Years of neglect of stores and the fundamentals of retailing has reduced Macy’s market share and relevance in retail,” he said. “The company is now in a weaker position and is scrambling to engineer profit gains as sales fall.”
