The best value at Macy’s (M) this year may be the store itself.
Shares of Macy’s, the 165-year-old retail giant, soared more than 19% on Monday after it received a $5.8 billion takeover offer from real estate investor Arkhouse Management and asset manager Brigade Capital Management, people familiar with the matter said. sources told Yahoo Finance late Sunday.
What is the intention behind the offer? As the iconic company struggles to maintain sales, its robust real estate portfolio is likely to become a target, but maximizing its value will not be easy.
Estimates for Macy’s real estate portfolio vary. Evercore ISI has priced the company at his $5 billion to $7 billion, and its flagship New York City Herald Square store is priced at his $900 million to $1.5 billion. TD Cowen values the portfolio at $7.5 billion to $11.6 billion, while JPMorgan values the portfolio at $8.5 billion, according to a note to clients from research led by Matthew Voss, Herald Square. It is said to be worth at least $3 billion.
“The cake is the real estate. That’s the core of this deal,” Neil Saunders, managing director of retail at GlobalData, told Yahoo Finance by phone.
Saunders said Macy’s actual retail operations are likely just an “additional bonus.” Miller Samuel CEO Jonathan Miller said Macy’s is profitable, unlike many other big retailers, making the deal “more palatable” to real estate investors. He told Yahoo Finance over the phone.
But the disparity in the portfolio numbers and the fact that the bid price is lower than the value of Macy’s assets speaks to the challenges facing retail real estate. There’s no shortage of buyers waiting to secure space in the big box. Instead, these million-square-foot buildings will need to be repurposed in an environment where rezoning is cumbersome, interest rates are high, and office space is no longer in demand.
TD Cowen analyst Oliver Chen said in a note to clients that “unlocking real estate value will depend on the time horizon, use and restrictions, developer appetite, and how they intersect with Macy’s as a retailer. It may not be realistic,” he wrote.
Evercore ISI’s Michael Binetti said in a client note that in 2015, activist investors valued Macy’s properties at $21 billion, including $3.3 billion for seven downtown properties. He pointed out that Macy’s subsequently sold four of his properties (San Francisco, Minneapolis, Pittsburgh, and half of the Chicago store) for a total of $351 million.
Binetti said the value of department stores has historically been overvalued. Binetti added that reconfiguring the Herald Square store for ease of use could cost between $200 and $500 per square foot, further reducing the value available to Macy’s.
While these factors are likely to limit Macy’s bid, the retailer’s prime location is an advantage for Macy’s. Miller said housing conversions can unlock upside potential, especially during times of housing shortages.
“They should have some idea of the challenge and the time frame, and that’s factored into the price they’re willing to pay,” Miller said of bidders.
Transformation is expensive and does not happen overnight. Miller estimates the process will take three to five years, but the timeline is consistent with other economic trends as financing costs fall and the economy strengthens in the future.
And this is just the beginning of the battle for department stores, which could open up room for further participation in acquisitions.
“They’re bidding at a premium that’s not particularly high, and I wouldn’t be surprised if the price goes up before the bidding ends,” Richard Kestenbaum, co-founder and partner at Triangle Capital LLC, said on Yahoo Finance LIVE. ” he said on Yahoo Finance LIVE. If there is another bidder, another financial bidder. ”
The offer comes after Macy’s latest quarterly results beat modest expectations, but before Monday’s jump Macy’s stock price was 45% lower than it was five years ago.
The beginning of a new end for big box stores
It’s no secret that department stores are feeling the effects of changes in the way consumers shop.
J.C. Penney, Lord & Taylor, Stage Store, Bon-Ton, Belk and Sears have closed about 1,500 department stores since 2018, according to JPMorgan.
Macy’s is supposed to be winning back customers after bankruptcy, but says it has lost 90% of its customers. [basis points] US softline retail industry market share compared to 2019, according to Evercore ISI.
With the continued growth of e-commerce, more cautious consumers, the expansion of discount retailers like TJ Maxx, and brands’ preference to operate their own stores, Macy’s trends are only going to get worse.
“Even in this environment, [other big box retailers] Sanders noted that some luxury lines, such as Michael Kors and Coach, often sell out at their own stores, which are within the same distance as Macy’s.
JPMorgan believes Macy’s is valued at less than the takeover offer, with a December 2024 price target of $19 based on 3.5x 2025 EBITDA.
TD Cowen breaks down the current offer as “Based on a $7.5 billion real estate valuation, Bluemercury will receive 1x EV sales, Bloomingdale’s will receive 0.25x, and Macy’s will receive nothing.” , it will erase the value of the main business.
Consumers don’t want to “shop where their parents shopped,” Kestenbaum said. Today’s shoppers seek a connection to the brands they wear and value factors such as environmental sustainability and fair labor practices.
But for big-box stores whose purpose is to mix up all the brands, it’s difficult to convey the value of a brand. “The decline of department stores is consistent with what consumers are looking for now,” Kestenbaum added.
Macy’s future is up in the air, but one thing is almost certain: it won’t look like it does now.
“Going private could allow for greater freedom, rapid change, and dismantling of Macy as we know it today, and the new owners could balance short-term and long-term goals and objectives. “This could include Macy’s return to the public market in a different way,” TD Cowen said in the note.
Luxury chain Bloomingdale’s and cosmetics store Bluemercury are doing better financially than Macy’s. It’s too small to save the parent company, but it could be sold separately.
Sanders said investors could get a “reasonable premium” for Bluemercury. Meanwhile, Bloomingdale’s may merge with other luxury retailers such as Saks Fifth Avenue and Neiman Marcus.
Alternatively, Macy’s could return to its former self as investors, like Sears, unload Macy’s real estate and other income-producing assets, University of Michigan professor Eric Gordon told Yahoo Finance in an email. Ta.
“Real estate players and fund managers who have taken over retailers have a dismal track record. Buying Macy’s with their own real estate might work out a little better than Eddie Lampert’s real estate strategy at Sears, which would have led to bankruptcy.” finished.”
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Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter @brooke di palma Or email bdipalma@yahoofinance.com.
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