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Is a Real Estate-Driven Buyout Good for Macy’s?
Macy’s received a $5.8 billion buyout offer from an investor consortium in an apparent bid to take America’s largest department store chain private to monetize its extensive real estate holdings.
Arkhouse Management, an investment firm that seeks to “unlock unrealized equity value caused by the mispricing of real estate assets in the public market,” and Brigade Capital Management, a global asset manager, offered $21 a share for Macy’s on Dec. 1, according to The Wall Street Journal, which first reported the news.
The offer represented a 32.4% premium from Macy’s $15.86 closing price on Nov. 30.
The investor group already has a stake in Macy’s through Arkhouse-managed funds and has discussed the proposal with the department store chain, whose board subsequently met to discuss the offer. The group indicated a willingness to raise the offer subject to due diligence.
Department stores have been a frequent target of takeover attempts over the past several years by investors looking to take advantage of prime real estate, including recently with Kohl’s.
Macy’s real estate properties include the iconic Herald Square, which J.P. Morgan analysts have estimated is worth about $3 billion. Overall, J.P. Morgan places Macy’s real estate value at $8.5 billion, while investment bank Cowen in 2022 valued Macy’s real estate between $6 billion and $8 billion. In 2015, activist hedge fund Starboard Value estimated that Macy’s real estate could be worth over $20 billion.
As of Friday’s close, Macy’s total market capitalization was $4.8 billion, with shares closing at $17.39. On Monday, Macy’s closed at $20.78, up $3.39 or 19.5%, on the New York Stock Exchange.
Macy’s, which also owns Bloomingdale’s, has long struggled against heightened competition, including online players, fast-fashion chains, and apparel off-pricers. Macy’s shares peaked at $70 in 2015. Shares this year have been under pressure as inflation has squeezed discretionary spending, including on apparel.
Macy’s has lately focused on cost-containment initiatives and closing lower-performing stores while investing in smaller-scale stores, localized assortments, and e-commerce expansion to revive growth. The buyout offer comes as Jeff Gennette, Macy’s CEO since 2017, is set to retire and be replaced by Bloomingdale’s boss Tony Spring in February 2024.
According to The New York Times, Neil Saunders, managing director of GlobalData, said he was wary of such deals. “An investor group that sells off real estate and perhaps takes other actions such as spinning off the e-commerce business, would certainly make some short-term gains,” Saunders said in a statement. “But unless some of those profits were reinvested in revitalizing the core retail business, it would leave Macy’s in the worst of all worlds.”
Sears started the trend of monetizing real estate when it raised $2.5 billion by siphoning off 254 stores in 2015 into a real estate investment trust (REIT). As part of its bankruptcy exit in 2020, JCPenney’s lenders swapped their debt for control of 160 store locations and all of the retailer’s distribution centers, which were rented back to the landlords. Hudson’s Bay Company — the parent of Hudson’s Bay, Saks Fifth Avenue, Saks OFF 5TH, and The Bay — has been particularly active in monetizing real estate in recent years.
Discussion Questions
Do you see any potential benefit to Macy’s core retail business from being taken private by Arkhouse Management and Brigade Capital Management? Could the move help accelerate its real estate shift and overall repositioning?
Poll
Loading …BrainTrust
Liza Amlani
Principal and Founder, Retail Strategy Group
Cathy Hotka
Principal, Cathy Hotka & Associates
Macy’s has been past its prime for some time now. Department stores like Macy’s are dinosaurs and their days are numbered. They should sell out to the highest bidder and re-invent themselves in the retail world, as an online fashion shopping experience.
Whether taking Macy’s private is good or not depends on what Arkhouse and Brigade want to do with the chain. At present, their intentions are not clear. However, given their backgrounds and the relative generosity of their bid, it looks highly likely that they want to monetize Macy’s valuable real estate portfolio. While that might be great for both companies financially, unless some of the proceeds were invested back into the Macy’s business it would leave Macy’s in a weakened state. From the lesson of Sears, we have seen what happens when retailers are treated as financial playthings rather than being run as retailers. Macy’s management bears much of the responsibility for all of this: their successive failure to address the issues, get the basics right, and put Macy’s back on track has created a situation in which the Macy’s business is worth less than its underlying assets.
Regrettably, this smells like a real-estate play, which is typically only beneficial to the investors and current stockholders. But it does not paint a bright future for the retail business that has been Macy’s for decades. A pity! The longer I live, the more old friends to whom I say goodbye …
Agreed Bob! If it’s a real estate play with no other aspects – such as investing in stores and the brand – then it is very problematic for the Macy’s brand.
You would be hard pressed to find a deal that was driven by real estate interest that was good for the core retail business. I find these types of deals always dubious for the core business, and I think the same for this one. Private equity firms are driven to get a return on their money, and that is almost always about simply selling the real estate for more than they paid – you will hear nothing about the shopping experience, product mix or even the traditions of this iconic retailer. And as much as I see this as the death knell for Macy’s should the deal be completed, the realities of the department store business model also seem clear – this may in fact be the best deal for Macy’s shareholders.
“to monetize the real estate” that’s it. There is no “good for Macy’s here” – It’s a real estate transaction, not a retail reinvention transaction. It’s just an accelerated step toward the eventual extinction of the brand if it goes through.
Mervyn’s, Sports Authority, Sears, Limited… the track record isn’t good for these transactions.
Honestly is there even one example of where this happened that resulted in a positive outcome for the retailer?
I am a veteran of the department store wars, and I see no retail benefit here, only a massive real estate play. From the days of Federated Department Stores with name like Filene’s, A&S, Burdine’s, and subsequently the May Company, the cycle has continued with each acquisition lowering the quality of the brand. I’m not a fan.
But let’s think of it this way: If electric vehicles do eventually take over the world, would we expect C-stores to look the same? Of course not. Macy’s has stores built and designed for shoppers who are quickly aging out. Yes, it’s painful to hear about yet another iconic brand whose only out seems to be essentially a real estate transaction. This is a lesson for retail strategists everywhere. Understand your brand, who cares about it, and why they like shopping with you. If that changes, you need to change, too. Even better, change before your competitors realize what’s going on. Good luck, Macy’s. I really hope you can save this brand, whatever it looks like next.
Macy’s should take the money and run. Didn’t Sears try to focus on “the real estate” too? That story did not end well, and (sadly) I suspect this one will not either.
Reporting on the financial aspects of the potential deal is all over the media. The questions are whether the overture will shift Macy’s into sale mode and how discriminating it will be as it weighs new offers. Does Macy’s care whether the enterprise remains intact? Or is it fine with purchasers deconstructing its real estate, digital, and IP assets? Either way, it will be wild watching all of this unfold in the heat of the holiday season!
There is a moment of reckoning when your real estate assets are potentially worth more than the brand itself.
There is a reason why luxury and fashion brands go after the next generation of shoppers. Tiffany & Co. and other luxury brands have made a big push to attract GenZ with their new experiential showcase store and social influencer campaigns. Living in the present and only serving the core customer is why many brands have become obsolete and bankrupt.
Macy’s has doubled down on serving their core customers, and there is a significant missed opportunity to attract the next gen of consumers, both GenZ and Gen Alpha. The department store sector has faced considerable disruption over the past ten years, with the changing consumer behaviors and the acceleration of digital and social commerce.
Arkhouse Management has submitted a bid for the famed department store chain Macy’s that would take the retailer private at $5.8 billion. Historically, the department store sector has been a frequent target of takeover attempts over the past several years by investors looking to take advantage of prime real estate (i.e., the Sears misguided strategy led by Eddie Lampert)
However, even if the real estate holdings are sold at a profit unless this money is reinvested in the core business, it will be a race to the bottom. This includes:
Haven’t we seen this movie before. PE performs a leveraged buyout of a company and saddles it with debt. (and we’re not talking low interest debt here) Then they sell off the real estate and lease back the facilities to the Retailer (with a higher operating cost than had historically been baked into the equation). Next a recession or other sales slow down, company can’t afford the new servicing costs and goes chapter 11. PE company gets all their money out in the first few years, and the employees and shoppers pay the price a few years later. Only the actors are changing.
We have seen this before. Decisions made my investors that have real-estate goals vs. retail goals puts the customer last. HBC and Saks are getting further away from their customers because they have real-estate moguls telling them how to be retailers. A potential buyout could drive Macy’s to its demise. There is no benefit here except for an influx of cash for the retailer.
Macy’s has a chance but it needs to put the customer first. The future customer. Which means a greater understanding of Gen Z and their spending power. Macy’s hasn’t been on top of their game in quite some time and have lost their swagger. They have a chance with small format stores that have a localized and curated product assortment. The only way for any retailer, including Macy’s, to stay relevant is to build a relationship with their evolving and emerging customer. Macy’s focus is their existing aging customer which is not a terrible strategy but they can’t alienate the younger shopper. They are the future.
Can anyone tell me when a ‘real estate’ deal has worked out for a retail brand?
Just for fun, examine how HBC has performed since be taken over by a real estate ‘guru’.
Zuillily just found out how great a buyout can be….as did 9 West before it. It will bring a tear to my eye to see the Herald Square store turned into offices, condos or God knows what. This is sad. And Macy’s is too large and unwieldy.
As others have stated, this takeover attempt seems like a pure real estate strategy investment deal, which doesn’t have a focus on operational or customer strategies. While the investors may be able to make a good return on their investment, it doesn’t have much upside for Macy’s. The only obvious potential benefit to Macy’s is that as a private company, potentially, they won’t be driven by quarterly results that focus on short-term strategies. Overall, this may be good for Arkhouse Management and Brigate Capital Management and bad for Macy’s.
This is easy to comprehend. Easy, but painful. It’s as easy as taking one statement strictly at face value. “…an investment firm that seeks to unlock unrealized equity value caused by the mispricing of real estate assets in the public market…” That statement offers total clarity. It’s a real estate play. I think the open question is the Time/Action calendar. Which stores in which malls are on the chopping block first? And then, does Macy’s become a renter instead of an owner? Or is there a better opportunity for the new landowner? What re-purposing of that end of the mall throws off a better financial return? Re-purposing of the mall is now as big a part of the story as is Macy’s survival. Those two stories are now inextricably intertwined.
Macy’s will shrink to survive. That’s not a shocker. It’s just going to happen on a different calendar than anybody imagined a week ago. And I imagine there are shock waves pulsing through the owners and tenants of a couple hundred malls right now. What does this mean for MY mall?
When an investor offers money in return for shaving off parts of the company, that’s a terrible choice. Macy’s shouldn’t accept a short term boost for that.
Let’s be honest; vultures have seen this opportunity for nearly a decade. If not this one, it will be another. I don’t believe department stores are dead, just as I don’t think malls are dead. That said, following Neil Saunder’s escapades each week showcasing the actual Macy’s experience, there are core areas for improvement from essential cleanliness to merchandising to staffing and training. Whatever we say here is irrelevant, just like when the Bass brothers purchased the Holiday Inn chain and could sell off the classic Harrah’s car collection and pay for the price they paid. Some see value; others see how they can take advantage. Sorry, but something is truly lost when most everyone here says, “Good riddance.” Malls and department stores are instrumental in creating community and goodwill between strangers. That doesn’t happen with another building or parking lot.
Not much I can add to the consensus here: It’s an effort to leverage the value of Macy’s real estate, not its brand equity or strengths as an ongoing retail operation.
Anytime a company starts to look to sell off assets to stay in business, it is a red flag. Macy’s may not be in this dire situation, but it is concerning. I get that raising some cash to take the company private, thereby eliminating competition from a take-over, maybe their main strategy. It’s never easy to decide what goes, but I will put some trust into the Arkhouse to figure this out.
I am so tired of negative comments about department stores. They are not all dinosaurs and the retail landscape would be sad without them. I started my career in department stores; there is really nothing like them. Brandon Rael summed it up nicely on LinkedIn when he said, “I’m rooting for Macy’s to continue to be a force in the department store sector. I started my career as a buyer and working in the Herald Square corporate offices in those days it was magical and full of energy.” I’m with you, Brandon. I am rooting for Macy’s, too.
Macy’s is a 165 year old legacy, that alone is worth fighting for. Yes, the company needs to refocus on what’s important, and many of the stores need attention, but that doesn’t mean the brand is not worth more than the sum of its parts. I would hate to see a retail world without Macy’s in it.
Thank you for the shoutout Georganne!
When a department store is good there is nothing like it. We are privileged for having experienced it.
While we’re toting up the real estate value of this deal, let’s not forget: In addition to its Herald Square store, Macy’s also owns the iconic building in Chicago’s Loop that was once the flagship for Marshall Fields. Also the Bloomingdales flagship store on Manhattan’s East Side. To name just two. Certainly $billions more there.
The proposed $5.8B purchase price feels kinda low-ball to me, based on those three assets alone. Then again, those structures are iconic (Chicago is on the National Historic Register) which makes for some limits on how the properties might be re-developed if sold.
Others here have cited the slow-motion dismantling of Sears as a rapacious precedent. True, but the first major instance was the overnight shut-down of the Korvettes discount store chain in 1981. The key lesson: When you can earn a greater profit leasing the properties than you can selling the merchandise, it makes for an upside-down reality that becomes harder and harder to deny. (When the retailer also has a significant and profitable online business, the formula becomes even more interesting.)
It’s hard to blame the investors for perceiving those value-gaps and moving to make a profit. But Macy’s is a profitable business (unlike Korvettes or Sears) that could be (is being) adjusted to match the interests of younger cohorts who comprise its future. Alas, PE investors prefer fast returns that are unencumbered by such annoyances as merchandising, personnel and capricious shoppers.
Simply put, this is Sears all over again.
I’m afraid this offer looks more like an opportunity to scrape real estate value than it does to create any customer value. Sears being one of the more notable transactions along these lines in the past 20 years.
But the opportunity is in here, with Macy’s due a long-needed a makeover, a new compelling story and brand promise, bolstered by a product offering customers believe in. The stores have been on the treadmill of constant promotional sales, dropping service levels, and uninspired merchandising. I don’t know the details of this offer, but if it takes them in a new direction, it’s worth a look.
This offer has “Sears, The Sequel” written all over it! Other commenters here have listed numerous examples of retail brands taken over by real estate investors who maintain no value to the retail brand or business. They are simply identifying valuable real estate than can be leveraged for sizable short-term gain at the expense of the long-term viability of the retail business. Unless, as Neil Saunders has stated, those profits are reinvested in stores, ecommerce, and the rest of the retail business. At the moment, there is no public evidence that this will happen should this deal go through.
I also have to agree with those here that are tired of the doom and gloom circling the department store sector. I believe there is no reason these brands need to drift off to irrelevance and disappear. The dept store formula is broken, yes, but not irrelevant. We simply have not seen the necessary investment in both fundamentals (merchandising, clean stores, well-staffed & trained stores) that other specialty brands have done. If dept stores can “see the light” there should be hope without the need for these type of real estate deals that only serve to dismantle the business.
I started my career with Macy’s in their executive management training program. They taught me to dump anything that didn’t sell or wasn’t profitable.
I never imagined it would be them.