Hudson’s Bay Co.’s acquisition of a 136-year-old German retailer lifts the value of its real estate by 20 percent to C$11 billion ($8.9 billion) and brings it a step closer to unlocking that value in a new initial public offering.
Shares of Hudson’s Bay soared as much as 13 percent as investors applauded the C$3.2 billion takeover of Metro AG’s Galeria Kaufhof stores. The former fur trading company is financing the deal by selling 40 of 59 Kaufhof properties to its joint venture with Simon Property Group Inc. for at least C$3.3 billion. As a result, Hudson’s Bay won’t issue shares or debt.
The purchase is Hudson’s Bay’s first under the joint venture with the biggest U.S. mall owner, marking a new era of real-estate fueled growth as retailers try to squeeze more value from their property. The Toronto-based company also has a joint venture with Canada’s RioCan Real Estate Investment Trust.
“As part of our plan to continue to highlight the value of our real estate, we structured these JVs in a way that allows them to be taken public at some point in the future,” Paul Beesley, chief financial officer of Hudson’s Bay, said on a call with analysts following the announcement Monday.
Hudson’s Bay rose 8.3 percent to C$25.99 at 11:30 a.m. in Toronto, the most since it unveiled the joint venture with Simon Feb. 25. Indianapolis-based Simon fell 0.3 percent to $176.25 and Metro fell 4.6 percent.
Hudson’s Bay, which bought Saks Fifth Avenue with its purchase of Saks Inc. in 2013, has bigger ambitions in Europe. The company also owns the Lord & Taylor chain.
“This acquisition provides a strong European base for future retail expansion,” Jerry Storch, chief executive officer of Hudson’s Bay, said on the call. “There are additional growth opportunities in Europe for the Simon-HBC real estate joint venture.”
The Kaufhof stores, which are the No. 1 department stores in Germany and Belgium, make up 16.6 million square feet (1.5 million square meters), of which Hudson’s Bay is selling 12 million to the Simon joint venture. The retailer, will work on the remaining 4.6 million square feet and may sell the properties to the partnership at a later date, Chairman Richard Baker, 49, said on the conference call.
“HBC offers investors several avenues to create long-term value,” Oliver Chen, an analyst at Cowen & Co, said in a note to clients, including real estate and “healthy retail diversification.”
U.S. retailers are moving to give investors direct access to their real estate holdings, especially as consumer spending remains spotty. Sears Holdings Corp. is creating a real estate investment trust that will acquire stores and then lease them back to the department-store chain. The effort is expected to generate $2.6 billion in cash -- a crucial windfall for a company that has posted 12 straight quarterly losses.
Bob Evans Farms Inc. also announced plans last week to pursue a real estate deal. Shares investors jumped the idea, which would involve selling or spinning off its restaurant properties.
Even McDonald’s Corp., the world’s largest restaurant chain, is under investor pressure to consider the idea. Hedge-fund manager Larry Robbins has said the company could unlock at least $20 billion in value by converting to a REIT. But McDonald’s has given no indication it wants to go that direction. For one thing, the company generates billions in profit from the rent it charges franchisees.
After buying retail chains Lord & Taylor for $1.2 billion and Saks Inc. for $2.9 billion in the U.S., Hudson’s Bay discussed spinning out its real estate assets into a REIT. Instead of taking that step, the company in February announced it was forming separate companies with Simon and RioCan.
At the end of the Kaufhof transaction, Hudson’s Bay will rely on the U.S. for 44 percent of sales, Germany for 31 percent, Canada for 23 percent and Belgium for about 2 percent, Storch said on the call.
The transaction would add C$200 million in earnings before interest, taxes, depreciation, and amortization, according to the statement. The company made C$77 million based on that measure in the quarter ended May 2, down 78 percent from the prior year, according to financial documents.