Report: Macy's-Hudson's Bay merger talks at impasse

Dive Brief:

Merger talks between Macy’s and Canadian department store company Hudson’s Bay have broken down, the New York Post reports, noting that discussions have been on and off for some three months.
Insiders told the Post that Macy’s price is simply too steep, and it’s likely the department store chain feels empowered to hold fast as Starboard Value has reduced its stake: The activist hedge fund for over a year now has pressured Macy’s to extract value from its real estate, and in recent months has expressed frustration about its investment in the company.
Rumors of a sale surged earlier this year as Macy’s sought to head off a proxy fight ahead of its shareholders meeting. A Macy's spokesperson declined to comment to Retail Dive on the matter, and requests for comment from Retail Dive to Hudson’s Bay and Starboard Value were not immediately returned.

Dive Insight:

With longtime Macy’s 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, which owns American retailers Lord & Taylor and Saks 5th Avenue.

But with Starboard Value apparently off its back, Macy’s appears free to unload its real estate in a more orderly fashion. That process will likely leave it a diminished but more productive department store retailer, analysts say.

“[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, recently told Retail Dive. “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 last month reported Q4 sales of $8.515 billion, down 4% from total sales of $8.869 billion in the fourth quarter of 2015. On an owned basis, Q4 same-store sales fell 2.7%, while Q4 same-store sales on an owned plus licensed basis fell 2.1%. For the fiscal 2016 year, sales were $25.77 billion, down 4.8% from total sales of $27.079 billion in fiscal 2015, the company said. On an owned basis, fiscal 2016 same-store sales were down 3.5% and on an owned plus licensed basis they fell 2.9%.

Macy's opened 27 stores and closed 66 stores in fiscal 2016, and said it’s on track to close another 34 stores in coming years. The new stores include a Macy’s store in Kapolei, HI, 24 of the company’s freestanding Bluemercury beauty retail stores, one off-price Backstage store in San Antonio, TX and a Bloomingdale’s Outlet in Orange, CA. All told, Macy's real estate activity generated some $675 million in cash, the retailer said.

Macy's expects sales to continue to decline in fiscal 2017, saying that same-store sales for this fiscal year on an owned basis will likely fall 2.2% to 3.3%, with same-store sales on an owned plus licensed basis to slide 2.0% to 3.0%. Total sales will likely fall 3.2 % to 4.3% overall, reflecting last year’s store closures.