By David Benoit And Suzanne Kapner
Starboard Value LP on Wednesday disclosed a new investment in
Macy's Inc. adding pressure on the retail giant to spin off its
real estate holdings into a separate company.
Starboard Chief Executive Jeff Smith said Wednesday that Macy's
real estate is worth about $21 billion, and that the full value of
the company isn't being recognized by the stock market. Mr. Smith,
speaking at CNBC's Delivering Alpha conference in New York, didn't
say how big of a stake the New York hedge fund has taken.
Shares of Macy's rose 8% to $72.06 in afternoon trading, and
have climbed 27% over the past year. Before Starboard's disclosure,
Macy's market value was $22.5 billion, meaning its retail
operations weren't highly valued by investors.
Macy's said it is open to such a move, and Mr. Smith said the
two sides have talked about it.
"We recognize the potential attractiveness of real-estate
investment trusts and similar alternative real estate ownership
structures in today's marketplace," Macy's said in a statement. "We
are currently evaluating those structures including analyzing the
various economic, tax, operational and other issues associated with
them."
The company added that it has worked to boost shareholder
returns through stock buybacks, increased dividends and investment
in its business. Macy's said its total shareholder return over the
past six years has been 700%, outpacing most of its peers.
Macy's has already come under pressure from other investors who
want it to follow a similar path set by Saks owner Hudson's Bay Co.
and Sears Holdings Corp., both of which have recently sold
properties in sale-leaseback transactions. Those deals have
resurrected an old investment idea: that much of the value in
retail lies in the bricks and mortar.
Hudson's Bay, which owns a chain of Canadian department stores
and bought Saks in 2013, grabbed headlines in November when an
appraiser valued the Saks flagship store in Manhattan at $3.7
billion--more than Hudson's Bay paid to acquire the entire
chain.
Macy's three flagships in New York, Chicago and San Francisco
are valued at nearly $7 billion, according to a report from
Buckingham Research Group. At the end of January, Macy's owned or
had ground leases on more than two-thirds of its 823 department
stores.
"Our hope and belief is that we'll be able to work with
management," Mr. Smith said in response to a question about whether
or not Starboard might pursue a proxy fight. "But we have to
prepare for instances where there might be a good-faith
disagreement."
Starboard recently succeeded in pushing a similar real estate
move at restaurant operator Darden Restaurants Inc., a plan put in
motion after the activist investor threw out the company's entire
board in a shareholder vote last year. Since that October vote,
Darden shares are up nearly 50%.
Starboard believes Macy's could separate its real estate in
strong-performing malls and enter into lucrative sale-leaseback
transactions with its trophy properties, such as its Herald Square
location in New York. Such a transaction could allow Macy's to
continue controlling the stores.
Mr. Smith estimates that the Herald Square building is worth $4
billion, while the company's Union Square location in San Francisco
is worth $1.5 billion. He said Starboard had hired a real estate
advisory firm to conduct an analysis, location by location, to come
up with the valuations.
Starboard's analysis suggests the move could drive Macy's stock
above $125 a share.
Macy's executives have weighed the merits of such deals over the
years, but haven't wanted to give up flexibility or burden the
company with debt-like lease obligations, people familiar with the
situation said.
Macy's Chief Financial Officer Karen Hoguet signaled earlier
this year that the company was open to a transaction. "We're
studying everything, and if something would make sense, we
obviously would do it," Ms. Hoguet told analysts in May.
The retailer already has taken some one-off actions with its
real estate, selling several locations including properties in
Cupertino, Ca. and Pittsburgh that it no longer plans to
operate.
Mr. Smith said real estate isn't the only way to improve the
value of Macy's, calling on the company also to cut costs to
improve its profitability.
Juliet Chung contributed to this article.
Write to David Benoit at david.benoit@wsj.com and Suzanne Kapner
at Suzanne.Kapner@wsj.com
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