Column: Best of luck, Jerry…

Here’s a column I just posted to the website, about Jerry Zucker’s $1-billion bid for Hudson’s Bay Co.: “To U.S. investor Jerry Zucker, who has just launched a takeover bid for the oldest company in North America — The Governor and Company of Adventurers of England Trading Into Hudson’s Bay, otherwise known as Hudson’s Bay Co. — we have just one thing to say: Best of luck.

Way back when, this legendary company may have controlled more than a third of what is now Canada, and part of the northern United States, but here in 2005 it barely controls anything. HBC may be the largest remaining department store retailer in Canada, but it has achieved that title mostly by default, since Simpson’s went out of business decades ago, Eaton’s went bankrupt (not once but twice) and eventually ceased to exist, and Sears has shrunk to a shadow of its former self and is on life support.”

You might think that with all those competitors out of the way, and as the owner of one of the leading discount chains in Zeller’s, Hudson’s Bay might have prospered by having the entire Canadian department store market to itself. But you would be wrong — very wrong. In fact, the word “prosper,” (not to mention lesser words such as “succeed” or even “get by”) haven’t appeared in the same sentence as the name Hudson’s Bay for years, at least not without being prefaced by words like “hasn’t,” or “won’t,” or “can’t.”

HBC has spent the past half decade or more trying to revamp its business, cut costs, change its merchandising strategy and reawaken some interest in the marketplace, all to no avail. If anything, its decline has only accelerated.

How Mr. Zucker plans to change all that isn’t clear. It’s obvious that he has grown increasingly frustrated with the company’s inability to turn itself around since he first bought a stake in December of 2003. He might have hoped initially that he would be able to bring about some positive change at HBC (otherwise why would he wait almost two years to launch a takeover bid?) but those hopes have been dashed. Like many others, he has likely come to the conclusion that the company needs radical surgery if it is to survive, let alone prosper.

One popular theory is that the U.S. financier has no intention of actually operating Hudson’s Bay as a retailing franchise, and is only interested in it as a real estate play. This might as well be called the Ed Lampert theory, since it assumes that Mr. Zucker will follow the same route Mr. Lampert took in unlocking value from KMart, the bankrupt retail chain he took over last year. Not long after taking control, the venture capital investor sold off over 100 stores for a total of almost $1-billion (U.S.).

Those hoping for a similar payoff from Hudson’s Bay might want to give their heads a shake, however. For one thing, while Mr. Lampert liquidated real estate at KMart, he hasn’t done anything of the sort at Sears, which he took control of earlier this year. Although the financier has said he wants to cut costs and make other improvements, he plans to operate Sears as a going concern. Mr. Zucker has also shown signs of wanting HBC to continue operating, not to break it up and sell the pieces. If he wanted to break it up, he could have bought control in 2003 for $250-million less than the $1-billion he’s offering for it now.

The other wrinkle when it comes to Hudson’s Bay is that despite being Canada’s largest department store and therefore an anchor tenant in dozens of large shopping malls, the company isn’t exactly sitting on a huge trove of potential real estate value that can be “unlocked.” A few months ago, Jennings Capital retailing analyst Cynthia Rose-Martel wrote that the reason a takeover offer hadn’t been made for HBC already was that “the numbers don’t work.” According to Ms. Martel’s calculations, the department store chain had a “real” book value or net worth of negative $4.52 a share, including the value of its real estate.

Ms. Martel’s analysis was done on the basis of HBC continuing as a going concern, however. If Mr. Zucker decides to break the company up, substantially more value could be realized from real estate sales, as well as the sale of the chain’s credit-card operation — the only profitable part of the company, and one that Hudson’s Bay has already said it is thinking about selling. Sears sold its credit-card division to J.P. Morgan earlier this year for about $2.2-billion, although it’s not clear whether HBC would be able to command that kind of price. CIBC says the company might be able to get about $400-million.

Even if HBC were to sell its credit-card division and some of its more highly-valued real estate, however, CIBC says that the company’s value would still only get to about $16 a share (and that’s probably being generous). The chain’s landmark Queen Street store is valued at $1.40 a share and the Simpson’s Tower is worth an estimated at $1.20 a share, while the credit-card operation is valued by CIBC at $6.13 a share. In case you were wondering, the retail operation — all that remains of a legendary 335-year-old retailing behemoth that is older than the country it is a part of — is valued at $6.80 per share. And that too is probably being a little generous.

Good luck, Jerry. You’re going to need it.

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