How Reports Of A Potential Macy's Takeover Reshape The Real Estate Scenario

Recent media reports have indicated a potential merger between Macy's Inc M and Hudson's Bay. “While we recognize the potential value of the real estate portfolio, we are also mindful of the challenges around monetization,” Deutsche Bank’s Paul Trussell said in a report. He maintains a Hold rating on Macy's, with the price target of $34.

Real Estate Sensitivity Analysis

“Real estate optionality could provide an avenue for M to unlock considerable value as the company owns half its store base and its flagships,” analyst Trussell commented. The revised real estate analysis suggested total real estate value of ~$12.5 billion–$13 billion, or in the low $40's per share. The OpCo/PropCo calculations indicated a value of $53 per share at the mid-point.

Core Operations Continue To Be A Drag

Macy’s had been downgraded at Deutsche Bank from Buy to Hold on January 4, with turnaround initiatives continuing to “fall short of expectations.” Although management’s efforts to streamline operations and reduce expenses are applaudable, the company’s core earnings, excluding real estate, were declining “at an alarming pace,” Trussell noted.

Deal Would Be Around Real Estate

The market cap of Hudson's Bay, at C$1.9 billion, is significantly lower than that of Macy’s, at $11.2 billion. “We think HBC would need an equity partner and immediate real estate financing to execute a deal,” the analyst added.