Miracle On 34th Street- Is Starboard’s Plan To Unlock Value Back On The Table At Macy’s (M)?

As we discussed back in November 2015, Starboard Value Partners, led by the brash Jeffrey Smith, had acquired a stake in Macy’s(M) and pushed for a spinoff of the real estate into a REIT(Real Estate Investment Trust). Now, with the stock down 60% from Starboard’s purchase price and longtime Macy’s CEO Terry Lundgren stepping down, the plan may be back on the table.

One major complication is legislation passed last year that was intended to eliminate REIT spinoffs.  The IRS followed up by implementing rules to close some remaining loopholes. It remains to be seen whether there still exists a tax efficient way for a company like Macy’s to monetize its real estate, but if there is, Starboard’s Jeff Smith has every incentive to find it. It is also possible that the new administration will look more favorably on such deals.

The NY Post reports that Lundgren is entertaining offers to sell the company in his final days as CEO rather than deal with Starboard, which is said to be seeking seats and planning to launch a proxy fight, if necessary, to gain them. Starboard is no stranger to such fights, having forced the sale of Yahoo’s(YHOO) US business to Verizion(VZ), and the spinoff of Darden Restaurants'(DRI) real estate as Four Corners Property Trust(FCPT). It probably does not hurt that Macy’s has already added Four Corners CEO William Lenehan to its Board. A proxy fight is not a sure thing for either side, and it might be in both Lundgren’s and Starboard’s best interests to sell either the real estate or the whole company without resorting to one.

In July 2015, Jeff Smith said that Macy’s real estate value exceeded $20 billion.  Though the stock has risen 10% since news of a potential sale was reported, Macy’s market capitalization remains below $11 billion. There are reports that Hudson’s Bay Company(HBAYF), which owns Saks Fifth Avenue and Lord & Taylor, is in talks to acquire or partner with Macy’s. Interestingly, Mr. Lundgren sold Lord & Taylor to Hudson Bay’s predecessor, NRDC Equity Partners. Hudson’s Bay is the oldest commercial corporation in North America, having received an English Royal charter in 1670. It also is formerly the world’s largest landowner having once owned 15% of North American acreage.

Hudson’s Bay enters the situation as a white knight, forestalling a Board takeover by Starboard. However, Starboard is unlikely to be satisfied with a sale of the whole company given that the premium is unlikely to deliver a meaningful return. Hudson’s Bay would also be hard pressed to do a deal of this size.

Whether Lundgren is able to sell the company in a deal that meets Starboard’s approval, or Starboard gains control, it is likely that there will be major changes ahead for Macy’s. Starboard has a strong track record of successfully engineering transformative transactions for the companies that it targets. We expect that Macy’s will be no exception.

Disclosure: The author holds no position in any stock mentioned