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Macy's cracks door to an agreement with Arkhouse

The outside of a Macy's Department store decorated for holidays

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Macy's could directly negotiate a sale with activist investor Arkhouse without launching a strategic review, says a source familiar with the retailer's thinking.

Why it matters: On the other side of the negotiation table, Arkhouse is prepared to raise its offer if necessary, says a source familiar with the activist's thinking.

  • It's too early to say a deal, if it is struck, would include a go-shop period, says the source familiar with Macy's.

What they're saying: Post-publication, Arkhouse reached out with the following statement:

  • "Arkhouse has nominated nine candidates to Macy's Board of Directors. Each of these highly qualified individuals possesses necessary experience to be additive to the Board immediately. Any discussion about the management team of a private Macy's is premature. Any statement other than that is not reflective of the views of Arkhouse or its partners."

What's next: Macy's is reviewing Arkhouse Management's board nominees for possible inclusion as it weighs a revised offer from the activist and Brigade Capital Management.

  • The investor group's most recent $24-per-share offer pegs Macy's at an enterprise value of around $9 billion, with cash and debt factored in.

Arkhouse's preference is a deal placing some of its candidates on the retailer's 14-person board, says a source familiar with the activist's thinking.

  • Though it is determined to proceed with its proxy fight, campaigns are expensive, the source adds.

What we're hearing: If Arkhouse and Brigade succeed, Macy's CEO, Tony Spring, could remain in place, pending board approval.

Behind the scenes: The debt would be syndicated as $5 billion is likely too large an amount for private credit, for example, the source familiar with Arkhouse says.

  • Though the financing markets have only recently reopened, arranging the debt won't be as difficult because it will be backed by real estate, the source says.
  • Arkhouse and Brigade, which are being advised by Jefferies, could obtain committed financing after they are allowed to conduct due diligence, the source says.

Zoom in: JPMorgan analyst Carla Casella wrote in a note on Wednesday that after meeting with Arkhouse and Brigade, as well as some of their financing partners, her firm now believes there is a better chance of a deal happening.

  • She cited the increased price, a "softer tone" from Macy's, and the potential financing package backing a deal.
  • "To be clear, the potential buyers have not yet disclosed 'committed'
    financing, which is customary given they have not had the chance to do formal due diligence, but their thoughts around financing struck us as conservative and realistic," Casella said.
  • She noted that the company's bonds rallied between two and four points on the week.

Catch up quick: Casella said the deal would likely be financed with 50% equity and 50% debt, with perhaps $2 billion of bank debt and $2 billion of propco financing.

  • Macy's carries an inventory of between $4 billion and $6 billion that could also be borrowed against.

Macy's declined to comment.

Editor's note: This story has been corrected to reflect Arkhouse would like some of its nominees on Macy's board, not five specifically, and that CEO Tony Spring could remain in his post, not that he definitively would. This article was also updated to include a statement from Arkhouse post-publication.

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