Macy's Buyout Buzz: Breaking Down the Implications on its Bonds
Exploring the Complexities Behind Arkhouse and Brigade's $5.8 Billion Acquisition Offer
Potential M&A Bid
Earlier this week, the Wall Street Journal reported that Arkhouse Management and Brigade Capital offered to acquire Macy’s for $5.8 billion. This offer values the company at $21 per share with the buyers open to increasing their bid after further due diligence. As per the WSJ, the proposal was made on December 1st, and although Macy’s board has discussed it, they haven’t made any public comments. The buyers also allegedly have support from an investment bank to provide financing for the deal.
This offer corresponds to ~4x EBITDA and comes as a premium for Macy’s, which has been facing challenges in competing with online retailers. The offer, while a 30%+ premium over the previous closing price, remains low compared to historical department store valuations of 4-5x EBITDA and Macy’s 52-week high of $25/share. The bid appears to be underpinned by Macy’s valuable real estate holdings including its flagship Herald Square store in NYC and a portfolio of malls and distribution centers. Analysts estimates vary but firms such as JP Morgan have publicly asserted these assets alone could be worth $8.5 billion, a figure in excess of today’s enterprise value of $8.2 billion.
Note that this is not the first time the value of Macy’s real estate holdings has been highlighted. There have been several unsuccessful efforts to privatize or separate the department store in the past. For example, in 2016, Starboard attempted to persuade Macy’s to divest its real estate assets from its retail operations and in 2017, Hudson’s Bay attempted to acquire Macy’s but faced challenges in obtaining the necessary funding.
Stock/Bonds React
Macy’s stock quickly shot up, at one point trading above the rumored bid of $21/share. The stock gave up some of its gains in the days that followed and currently trades at $19.71/share, which implies a ~60% simple probability of deal success (assuming the offer price does not increase).
The company’s unsecured bonds also participated in the M&A-fueled rally. The company’s most discounted bonds (notes due 2043) traded higher in sympathy, ending the week +7.875 points higher to trade at 72.5 (vs. ~64 pre-news announcement). This was on the backs of the bonds potentially being refinanced at 101 upon consummation of a take-private transaction as well as some recent base rate/credit spread movement lower.
Interestingly, the bond price reaction implied a much lower probability of deal success at ~25%. Now there are of course several potential reasons for this:
The offer price could be raised higher than $21/share
The CoC provision might be avoided as the indenture language requires certain triggers to be met
Equity investors are too optimistic or bondholders are too pessimistic on the probability of deal success
Current Capital Structure
Below is a snapshot of Macy’s current capital structure with pricing as of December 15, 2023. As we can observe, Macy’s balance sheet benefits from modest leverage (1.5x / 2.6x lease adjusted), healthy equity cushion (40% LTV), and minimal secured debt ($177mm) relative to significant unencumbered real estate assets.
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