Saks Fifth Avenue owner continues to face pressure, amid a bid for its European department store

Key Points
  • Signa Holding has submitted a bid for Hudson Bay's German department store Galeria Kaufhof.
  • Activist Land & Buildings has taken issue with its equity sale to Rhone Capital, saying it was dilutive to shareholders.
  • Land & Buildings has written to the Toronto Stock Exchange and the Ontario Securities Commission to outline its complaints.
Pedestrians walk past a Hudson's Bay store in North Vancouver, British Columbia, Canada, on Thursday, Jan. 12, 2017.
Ben Nelms | Bloomberg | Getty Images

Just a week after Saks Fifth Avenue-owner Hudson's Bay announced a deal to bolster the company's financial condition, the department store operator came back under fire Wednesday.

Austrian investment firm Signa Holding submitted a bid for Hudson Bay's German department store, Galeria Kaufhof. The offer valued the department store at roughly 3 billion euros, according to sources familiar with the situation.

Hudson's Bay confirmed the offer, saying it would review it, though it noted its "European business is an important element of the [the company's] strategy."

The sources asked not to be named because the information is confidential. Signa declined to comment.

Signa, which also owns Germany's second largest department store, Karstadt, tried to buy Kaufhof in 2015, but ultimately lost out to Hudson's Bay.

Separately on Wednesday, Hudson's Bay's activist investor, Land & Buildings Investment Management, took issue with its recent play to infuse liquidity into the company. The retailer sold its Lord & Taylor Fifth Avenue building for $850 million (1.075 billion Canadian dollars) to WeWork Property Advisors and a minority stake of preferred stock to Rhone Capital for $500 million (CA$632 million).

The latter deal was dilutive to common stock shareholders. Rhone's investment gives it the right to convert its preferred stock into common stock, which will increase its number of shares and thereby decrease other shareholders' ownership.

The deal also requires Rhone to vote in support of Hudson's Bay's board nominees, said Jonathan Litt, chief investment officer at Land & Buildings. Litt has written to written to the Toronto Stock Exchange and the Ontario Securities Commission to take issue with the transaction and ask for it to be submitted to a vote of Hudson Bay's minority shareholders.

"This sequence of events begs the question of why Hudson's Bay felt compelled to raise capital through a dilutive share issuance when there appear to be superior sources of capital available," Litt said.

Land & Buildings has urged Hudson's Bay to go private or redevelop its real estate assets. It revealed a 4.3 percent stake in Hudson's Bay this summer.

Under pressure

The squeeze demonstrates the pressure Hudson's Bay is under. The company has long taken a more aggressive approach to deal-making and financing than its department store peers. That model, though, has left it with a debt-load that has proven cumbersome as its sales have declined.

Prior to the Rhone and WeWork deal, Hudson's Bay was leveraged around 12 times its earnings before interest, taxes, depreciation and amortization, compared with 1.6 times for and 2.4 times for , according to Capital IQ. Retailers typically eschew high leverage, because of the unpredictability of sales seasons.

Its use of real estate to finance its transactions has also hit a snag as the retail industry has turned. Hudson's Bay has helped fund its deals through joint ventures with Simon Property and RioCan Real Estate Investment Trust. HBC has said it would consider taking those investments public to bring in cash. An IPO, though, is "unlikely at this point" because of market conditions, RioCan founder and Chief Executive Edward Sonshine previously told Reuters.

Baker, who spoke to CNBC about the Rhone and WeWork transaction, stressed the financial graces it offered to the company.

"Most important, perhaps, is what this does for HBC's financial condition," Baker said. "This drives in a tremendous amount of cash and allows us to pay down $1.6 billion in debt ... This sets us up to be really strong financially going forward, as we execute what's really a difficult retail environment."

Richard Baker has long held tight control of the company. He ran NRDC Equity Partners, the private equity firm that bought Hudson's Bay and took it public, and is a principal shareholder in the company through his investment in L&T B (Cayman).

Other significant shareholders include Abu Dhabi Investment Council and the Ontario Teachers' Pension Plan Board.

Hudson Bay has faced management turnover as of late. CEO Jerry Storch steps down Wednesday without a successor named, following announcement of his planned departure last month. Earlier this year, the company saw the the departure of CFO Paul Beesley and President of HBC International Don Watros.

Baker, who previously worked as CEO, has taken over for Storch on an interim basis.