Jeffrey Smith, co-founder and CEO of Starboard Value hedge fund — and the man Fortune labeled as "the investor CEOs fear most" — thinks Macy's stock is undervalued and he wants to unlock it by selling off the company's real estate holdings worth billions.
Starboard Value revealed yesterday that it had taken an undisclosed stake in Macy's, Inc. and that Mr. Smith was pushing for the company to pursue spinning off its property into a real estate investment trust (REIT). According to The Wall Street Journal, Macy's current market value is $22.5 billion. Mr. Smith estimates its real estate holdings are worth $21 billion, including the department store's Herald Square flagship in New York that is valued at $4 billion.
To be sure, Starboard is not the first to suggest Macy's could benefit from the sale of real estate assets. Macy's CFO, Karen Hoguet, addressed the issue on an earnings call with analysts in May.
Photo: RetailWire
"When it comes to real estate, the first thing I would say is this is far more complicated than what most people think. And some of the estimates of value in our real estate, I think, have been done overly simplistically," said Ms. Hoguet. "Having said that, as you might imagine, we are studying closely with our key banking partners all the various transactions that have happened lately and all the possible strategies, the pros, the cons of how you would do it, et cetera, et cetera, to see what's right for us. Our objective is always to maximize value. And up until now, we haven't seen an opportunity that made sense in terms of a global strategy."
If Macy's were to pursue a REIT spinoff, it would follow Hudson's Bay Co. and Sears Holdings in doing the same. While a spinoff provides a form of insurance to investors, who know the value of the real estate even if a retailer struggles, it also limits a chain's ability to close, expand or remodel stores, according to the Journal.
Macy's share price climbed nearly eight percent yesterday to $72.10 and at one point reached an all-time high of $72.75, according to The Associated Press.
- Activist Knocks on Macy's Door - The Wall Street Journal (sub. required)
- Starboard Move Could Store Up Trouble for Macy's - The Wall Street Journal (sub. required)
- Starboard Value suggests real estate transactions for Macy's - The Associated Press/CNBC
- Big investor advocates splitting Macy's - The Cincinnati Enquirer
- Macy's (M) Q1 2015 Results (Earnings Call Transcript) - SeekingAlpha
- Starboard Value's Jeff Smith: The investor CEOs fear most - Fortune