A special committee, struck by the Hudson’s Bay Co. board of directors to assess a take-private bid, didn’t believe it could do better than the $10.30-per-share offer from a group of shareholders led by company chairman Richard Baker, according to a management circular released Friday.
After months of negotiations, the committee decided the Baker group offer “was the most compelling value proposition reasonably available.” But the 217-page circular details how the committee made repeated attempts to get a better price, going as far as trying to enlist one of the deal’s biggest opponents.
Baker’s group, however, refused to budge. So on Friday, the special committee implored minority shareholders to back the deal in a vote next month, stressing that stabilizing Hudson’s Bay will take an investment of time and money that would impede the company’s “ability to return capital to shareholders” if it remained public.
In a letter to shareholders included in Friday’s circular, special committee chair David Leith gave a bleak portrait of a retailer with a portfolio of 79 properties declining in value and in need of significant capital for redevelopment. HBC’s recent moves, including its sale of its European operations and its Lord & Taylor banner, didn’t improve the company’s declining share price, but caused $825 million in in restructuring costs and dead rent, he said.
The special committee didn’t receive any alternative transaction offers during the process, but Leith wrote that even if he had, “it could not be effected without the support of the (Baker group).”
In late September, the Baker group — which owns 57 per cent of HBC’s common shares on an “as-converted” basis — announced it was sweetening its previous offer of $9.45 per share for the outstanding minority shares.
The next day, the committee sent an emissary from a financial advisory firm to find out whether they’d sweeten the deal a second time. The representative asked Steven Langman — of Rhône Capital LLC and WeWork, as well as a Baker group shareholder — about the group’s “ability to increase the purchase price above $10.30.”
Langman responded that $10.30 per share was the “best and final offer,” according to the circular.
The committee and its financial advisors resolved to ask again a week later, and again they heard the Baker group “was not willing to increase the purchase price,” the circular said.
By mid October, the committee decided to involve Catalyst Capital Group Inc., the private equity firm that has been openly critical of the Baker proposal since the start. In fact, this summer Catalyst increased its HBC position to more than 17 per cent in an apparent attempt to block a deal.
The transaction presents you with the opportunity for immediate and certain value of $10.30 in cash for each share that you own
HBC’s special committee chair David Leith to shareholders
The committee sent advisors from J.P. Morgan to find out whether Catalyst “might be able to assist in the negotiations.” Then, on Oct. 12, J.P. Morgan asked Catalyst to sign a non-disclosure agreement in order to be briefed on the deal. Catalyst signed an NDA eight days later, after the committee suggested to them that “time was of the essence.” Later that day, the committee showed Catalyst a draft of the news release announcing that board had approved the $10.30 per share offer. The release went out the next day.
Catalyst responded with its own news release later that month, deriding the deal as “nothing more than a severely undervalued share buyback at the expense of shareholders.” Catalyst said it had amassed enough support among minority shareholders to reject the deal when it’s put to a vote on Dec. 17. The Financial Post confirmed that Land & Buildings Investment Management, led by activist investor Jonathan Litt, was part of that coalition.
Neither Catalyst nor Land and Buildings would comment on the circular on Friday.
TD Securities Inc. determined the fair market value of HBC’s common shares in the range of $10 to $12.25. In a section on “potential issues relating to the arrangement,” the circular points out that the offer price “is below the midpoint of the fair market value range.”
But Leith, the special committee chair, noted in his letter to shareholders that the $10.30 offer is a 62 per cent premium to $6.37 per share — the closing share price the day before Baker’s group announced their initial proposal in June.
“The transaction presents you with the opportunity for immediate and certain value of $10.30 in cash for each share that you own,” Leith wrote in his letter.
“To receive this value, it is imperative that you vote FOR the transaction.”