HBC strikes $1.6B deal to unlock real estate value amid investor pressure

TORONTO — Hudson’s Bay Co. (TSX:HBC) has struck a $1.6 billion deal that will see it sell its flagship Lord & Taylor property and lease out office space in some of its other high-profile locations amid mounting pressure from an activist shareholder.

The company announced Tuesday that it will sell the Lord & Taylor space on New York’s tony Fifth Avenue to WeWork Property Advisors, a joint venture between workspace company WeWork and Rhone Capital, in a deal valued at $1.075 billion.

In a related transaction, Rhone Capital will buy $632 million of equity in the Toronto-based retailer. HBC expects to use the $1.6 billion in proceeds from the sale and investment to reduce debt or increase cash on its balance sheet. About $501 million of that will be used to repay the mortgage on the Lord & Taylor property.

The deals come as HBC faces increased pressure from a U.S. activist investment fund that has argued Hudson’s Bay stock is worth only one-third of the real estate it owns.

Land & Buildings Investment Management called Monday for the removal of HBC’s board, which is chaired by Richard Baker. The company announced Friday Baker will also act as interim CEO after current chief executive Gerald Storch announced his departure.

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The company’s management has been under pressure for months from Land & Buildings, which estimates that HBC’s real estate is worth $35 per share. HBC shares gained two per cent or 23 cents on Tuesday to close at $11.98 at the Toronto Stock Exchange.

Baker said the deals will strengthen the retailer and “enable us to drive ongoing value creation.”

“HBC and WeWork have been working together to reimagine retail environments for current and future generations,” Baker said in a statement.

Lord & Taylor retail operations will continue to occupy all of the Manhattan location through the end of next year’s holiday season. The Lord & Taylor flagship location will eventually house a smaller store as well as the New York headquarters of WeWork, which provides working space and services for more than 150,000 members around the world.

The agreement will also see WeWork lease the upper floors of three HBC department stores: the Queen Street location in Toronto, the Granville Street store in Vancouver and Galeria Kaufhof in Frankfurt.

“The acquisition by WeWork Property Advisors of the Lord & Taylor flagship building on Fifth Avenue is a statement of intent and commitment by WeWork to New York City,” said Adam Neumann, the company’s co-founder and CEO.

HBC and WeWork plan to work together across the Canadian company’s global real estate portfolio and product offerings, including exclusive HBC sales online and in store for WeWork’s members.

Rhone has agreed to pay $12.42 each for nearly 51 million HBC convertible preferred shares. They can be converted into an equal number of HBC common shares, which represent a 21.8 per cent stake in the company.

Rhone and WeWork will also each have the right to appoint a representative to the HBC board of directors.

HBC says the private placement is subject to approvals by regulators in Canada and the United States, expected in November. It expects to close the Lord & Taylor real estate transaction by Aug. 10, 2018.

David Paddon, The Canadian Press