Hudson's Bay to acquire U.S. high-end retailer Saks in US$2.9-billion deal

TORONTO – Canadian retailer Hudson’s Bay Co. (TSX:HBC) says it will acquire U.S. luxury retailer Saks Inc. in a friendly deal worth US$2.9 billion, with financial backing from one of the country’s largest pension fund managers.

HBC plans to keep Saks as a separate unit headquartered in New York and introduce the Saks brand in Canada through online and other formats. HBC’s other holdings include The Bay in Canada and Lord & Taylor in the US Northeast.

“This exciting portfolio of three iconic brands creates one of North America’s premier fashion retailers,” said Richard Baker, HBC’s chairman and chief executive.

“This acquisition will increase our growth potential both in the U.S. and Canada, generate significant efficiencies of scale, add to our powerful real estate portfolio and deliver substantial value to our shareholders.”

The Toronto-based company says it will pay US$16 per Saks share plus assume debt as part of the transaction, announced early Monday after months of rumours that a deal was in the works.

There have also been reports that HBC will follow the lead of other Canadian retailers and spin off its real estate holdings into a separate company.

HBC says it will issue US$1 billion worth of equity and $2.3 billion of debt securities to pay for Saks.

It has received commitments from the Ontario Teachers Pension Plan, which will buy about US$500 million of the equity, and Canadian private equity firm West Face Capital, which will buy US$250 million of the new HBC equity.

Hudson’s Bay Co. will also US$1.9 billion of secured loans and US$400 million of unsecured notes.

Saks operates 42 stores, including its flagship Saks Fifth Avenue in New York.

HBC has 48 Lord & Taylor department stores in the U.S. Northeast and in Canada it has 90 Bay department stores and 69 Home Outfitters housewares stores in Canada.

Together, the combined company will have about 320 stores, including 179 full-line department stores, and about C$7.2 billion of sales annually.

HBC has been eyeing the struggling high-end American chain for the past few months and there were reports on the weekend that a deal was close. However, an earlier report in the New York Post late last week said HBC could face competition from at least one other potential buyer for Saks.

The chairman and CEO of Saks, Steve Sadove, said in a joint statement Monday that the deal with HBC represents a 30 per cent premium above the value of Saks on May 20, before media speculation on the deal emerged.

“We believe this transaction delivers compelling value to our shareholders and that Saks Fifth Avenue is an excellent fit within the HBC organization,” Sadove said.

“We also believe that HBC recognizes the tremendous value of our people, our real estate, our customer and vendor relationships, and most importantly the power and potential of our iconic brand.”

HBC will receive financial backing from the Ontario Teachers’ Pension Plan, which has one of Canada’s largest institutional funds, and issue a combination of new equity and debt securities to pay for Saks.

Teachers has received 1.5 million warrants and will receive an additional 3.5 million warrants once the deal closes, after a 40-day “go-shop” period when Saks will be entitled to seek out a higher offer.

The warrants allow Teachers to buy HBC shares at C$17 each, which is above Friday’s closing price for the stock on the Toronto Stock Exchange.

West Face will receive 1.75 million warrants when the deal closes.

Saks would pay a fee to HBC if their deal doesn’t go through but details weren’t disclosed in the announcement before a conference call with analysts.

HBC shares closed Friday at C$16.49 on the Toronto Stock Exchange. Saks shares (NYSE:SKS) closed Friday at US$15.31 on the New York Stock Exchange and gained about four per cent in pre-market trading Monday.