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BFD Expert Voices - Retail Deals

BFD Expert Voices

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.

1 big thing: Macy's activists weigh their options

The Macy's company logo is seen at the Macy's store on Herald Square on January 19, 2024 in New York City. 

Photo by Michael M. Santiago/Getty Images

Today's Thought Bubble dives into next steps for Macy's and activist investors Arkhouse and Brigade. 

✏️ Big thanks to newsletter editor Claire Rychlewski and copy editor Mickey Meece.

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January 24, 2024

1 big thing: Macy's activists weigh their options