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Macy's activists weigh their options

A Macy's sign hangs above the entrance to one of its department stores.

Photo: Michael M. Santiago/Getty Images

Arkhouse Management and Brigade Capital Management haven't decided whether to make a hostile offer or wage a proxy contest if Macy's doesn't engage in sale talks, says a source familiar with the firms' thinking.

Driving the news: Arkhouse and Brigade have said they are willing to go directly to shareholders to consummate a buyout of the department store chain.

Of note: After Arkhouse issued its statement, Macy's issued one of its own — rejecting the investors' $5.8 billion bid because it undervalued the company and the financing behind it was uncommitted.

What's next: A proxy contest would make it easier for activist investors to get their board nominees elected, and is a more logical move than a hostile offer, sources tell Axios.

  • "With a proxy process, the goal would be really to put more pressure on the board to get through a transaction, not so much that they want to get on the board," says Keith Gottfried, CEO of Gottfried Shareholder Advisory.
  • Arkhouse and Brigade may be angling for a take-private as they're unlikely to want to orchestrate a turnaround of Macy's as a public company, he adds.

Be smart: A proxy contest and a tender offer are often launched in tandem directly to shareholders, says Sebastian Fain, a partner at Freshfields Bruckhaus Deringer.

  • The tender offer would certainly show a "level of seriousness," significantly more so than writing a letter, he says.
  • "If you want to get enough people on the board [on your side] to make a difference, you have to make it look like you're serious about trying to take over the company," he adds.

Context: Since Aug. 31, 2022, both companies and activists are required to list the candidates nominated by both sides to the board of directors on each proxy card.

  • The nomination window opened on Jan. 20 and closes on Feb. 19.

The latest: Gavriel Kahane, managing partner at Arkhouse, told Bloomberg TV on Monday he hopes Macy's will sign a confidentiality agreement so his firm can share more information on the financing.

  • He also said he was optimistic that the offer could be increased if the bidders have a chance to look at Macy's books.

Reality check: The retailer's rejection is not only tied to the offer's valuation but also the fact the financing remains uncommitted.

  • Debt financing at reasonable terms is difficult to come by, hence Macy's desire for committed financing versus a "highly confident letter" from Jefferies, which is providing the bidders with financial advice.

By the numbers: Macy's real estate — likely its most attractive asset — could be valued at as much as $7.5 billion, according to TD Cowen.

  • Macy's has nearly $3 billion of long-term debt, which would need to be refinanced or repaid, in addition to the $5.8 billion offer for the shares.
  • It also has about $360 million in cash and cash equivalents as of Oct. 28, though that figure is likely higher now due to holiday sales.

Zoom in: Macy's had nearly $2.6 billion in EBITDA for its fiscal year ended Jan. 28, 2023, though that number may have shrunk to about $2 billion for the trailing 12 months also ended Oct. 28.

  • Based on the offer's enterprise value of about $8.4 billion, the multiple of EBITDA would equate to somewhere between 3.2x and 4.2x.
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