Onex makes move on Hudson's Bay
Last-minute bid came in lower than Zucker's but has fewer strings attached
By MARINA STRAUSS
Monday, January 23, 2006 Page B1
RETAILING REPORTER
Buyout powerhouse Onex Corp. and mall developer Mitchell Goldhar have submitted an offer for Hudson's Bay Co. that is lower than Jerry Zucker's, industry sources say, a move that puts the retailer's board in an awkward position.
The latest development leaves HBC with the U.S. financier's $1.1-billion, or $14.75 a share, highly conditional offer, as well as the Onex/Goldhar proposal, which is below $14.75 but contains fewer, more standard, conditions, the sources said.
The exact value of the Onex team's offer was unclear.
Mr. Zucker's conditions, such as an unusually steep requirement of 90-per-cent shareholder backing, would allow him to walk away from a deal very easily, observers have said. HBC has rejected the Zucker bid as being "inadequate," partly because it is so conditional.
The weekend revelations mean that the outcome of the almost three-month bitter takeover battle appears to be largely in Mr. Zucker's hands.
Mr. Zucker provided no hint of his next move.
Robert Johnston, vice-president at Mr. Zucker's South Carolina InterTech Group Inc., said in an e-mail yesterday that his group was not in talks with HBC or its representatives over the weekend. There is "nothing to do or know until tomorrow," he said, adding he couldn't comment until then.
If the wealthy U.S. businessman is determined to win the fight, he could raise his offer or soften some of his conditions, observers say.
On the other hand, he is under no pressure to increase his price, and may even suggest dropping it, they say. He was only granted access by HBC to its books in late December, and could argue the confidential data prompted him to redo his math.
Whatever the outcome, investors will be anxiously awaiting some news this morning. HBC had set last Friday at 5 p.m. as the deadline for counterbidders to top Mr. Zucker's offer, which expires Jan. 31. Investors may expect the country's oldest retailer, owner of the Bay, Zellers and Home Outfitters, to unveil new suitors before the stock market opens today.
No news would be bad news, observers say.
HBC spokeswoman Hillary Stauth would not comment.
HBC's shares shot up last week on the Toronto Stock Exchange, eclipsing Mr. Zucker's $14.75-a-share offer after The Globe and Mail disclosed that the Onex camp, led by Onex chairman Gerry Schwartz and Mr. Goldhar, had been seriously considering a counteroffer, along with three other groups. The shares slipped by week's end, closing Friday at $15.39, still higher than the Zucker bid, after The Globe reported that none of the parties had yet been able to make the numbers work at $14.75 or more.
Sources said that no one else submitted a bid. One group interested was U.S. private equity firm Cerberus Capital Management LP in partnership with RioCan Real Estate Investment Trust and Kimco Realty Corp. of New Hyde Park, N.Y. RioCan is a key rival to Mr. Goldhar's First Pro Shopping Centres Inc.
Another group that mulled a bid was an alliance between financial firms Bain Capital LLC and Gordon Bros., both of Boston.
The prospect of two major shopping mall developers in the race reflects the importance of real estate to the would-be bidders. After all, HBC occupies about 47 million square feet -- almost 10 per cent -- of the mall space in Canada. A new owner could try to put the space to work more productively by closing some of the almost 400 Bay and Zellers stores and finding another tenant or tenants to replace them.
Analysts say that HBC, which has struggled for years to improve its financial performance, runs too many Bay and Zellers stores, which now number close to 400.
The Onex/Goldhar team may have an extra incentive to try to do an HBC deal because Mr. Goldhar's First Pro has close ties to giant discounter Wal-Mart Canada Corp., which is believed to be interested in picking up some of the real estate.
It may be easier for Wal-Mart than for some other retailers, such as Home Depot, to assume some of the HBC store leases. That's because a number of the leases give the landlords considerable sway in deciding whether a store's use, or structure, could change. Wal-Mart and Zellers both run discount department stores.
HBC leases most of its real estate, although it owns what analysts estimate to be $800-million of it as well.
Another challenge to an HBC deal is potentially huge employee severance costs to close stores. The tab could come to "hundreds of millions of dollars, not tens of millions of dollars," one source said, depending on the number of stores being shut.
U.S. players among the would-be suitors were surprised at the "generosity" of Canada's employment laws, the source said.
In contrast, the Zucker team has said it intends to run HBC largely intact, although it, too, would close some money-losing Zellers stores.