Macy's rejects $5.8 billion takeover bid as investors eye hidden value

Macy's wants more for its iconic retail business than $5.8 billion. Here's why.

Jan 22, 2024 - 20:30

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Macy's rejects $5.8 billion takeover bid as investors eye hidden value

Updated at 9:50 AM EST

Macy's (M) - Get Free Report shares moved higher in early Monday trading after the iconic retailer rejected a $5.8 billion takeover bid that its proposed buyers now plan to take directly to shareholders.

Macy's, like many of its traditional retail rivals, has struggled to adjust to shifting consumer spending habits and found itself overburdened by high levels of inventory and a debt-laden balance sheet in the wake of the pandemic.

A sharp focus on refinancing under CEO Jeff Gennette, however, as well as a tighter control of inventories and fewer product markdowns and lower freight costs, helped the group post stronger-than-expected third-quarter profit while boosting its profit margins.

That discipline, as well as the value of its estimated $8.5 billion real estate portfolio, has attracted the interest of several private equity suitors, including current investors Arkhouse Management and Brigade Capital Management.

Activist investors have targeted Macy's' real estate portfolio in the past as well, with Starboard Value's Jeff Smith in 2017 making the case for splitting off the group's retail operations from its real estate assets.

Arkhouse-Brigade proposal for Macy's

Arkhouse and Brigade, which were first reported to have interest in buying Macy's late last year, had offered to buy Macy's for $21 a share cash, as of this weekend, but that bid that was rejected as undervaluing the New York-based retailer.

The Macy’s board and management "have a proven track record of evaluating a broad range of options to enhance shareholder value," Gennette said in a statement.

"Following careful consideration and efforts to gather additional information from Arkhouse and Brigade, the board determined that [the proposal] is not actionable and that it fails to provide compelling value to Macy’s,” he added. “We continue to be open to opportunities that are in the best interests of the company and all of our shareholders.”

JP Morgan analysts have pegged the value of Macy's real estate portfolio at around $8.5 billion, or $31 a share, with its Herald Square headquarters alone valued at around $3 billion.

How Macy's might fend off Arkhouse-Brigade

Others have suggested Macy's could fend off the Arkhouse/Brigade proposal by selling a minority interest in either its retail or real estate divisions, which would enable the retailer to pay down debt while maintaining its regular dividend payments.

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Arkhouse has said it's prepared to consider a "meaningful increase" to its $5.8 billion offer, provided it's "granted access to the necessary due diligence."

"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 said in a statement. "We believe Macy’s investors support a privatization given the stock’s largest single-day gain in more than two years following media reports of our interest in acquiring the company."

"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," the statement added.

Macy's shares were marked 3.4% higher in early Monday trading to change hands at $18.25 each. The stock has risen around 14% since the Arkhouse/Brigade deal was first reported in early December.