By David Benoit And Suzanne Kapner
Macy's Inc., in the eyes of some investors, should worry less
about selling shoes and dresses and more about selling its real
estate.
Activist investor Starboard Value LP on Wednesday said it had
accumulated a stake in Macy's and is pushing the 157-year-old
retailer to spin off its real-estate holdings. Starboard estimates
that the move could boost Macy's share price by more than 70%.
Shares of Macy's rose 7.9% Wednesday, its biggest percentage
gain since November 2013.
Other investors have been urging Macy's to find ways to extract
value from its vast real-estate holdings, which comprise more than
800 stores it either owns or leases across the country, including
its famous Herald Square location in New York City. Starboard Chief
Executive Jeff Smith valued Macy's real estate at $21 billion.
Before Starboard's disclosure, Macy's market value was $22.5
billion, meaning its retail operations weren't highly valued by
investors.
Starboard, a fund managing roughly $4.8 billion, believes the
company could separate its real-estate in strong-performing malls
and enter into lucrative sale-leaseback transactions with its
trophy properties, which in addition to Herald Square includes
stores in Union Square in San Francisco and on State Street in
Chicago.
Mr. Smith didn't disclose how big of a stake Starboard has
taken, or when it was made. Speaking at a conference in New York
Wednesday he said that while he was hopeful Macy's management was
willing to work with him, Starboard was prepared for a fight.
Macy's said it is evaluating all options for its real-estate
portfolio and the effect it would have across its operations. "We
recognize the potential attractiveness of real-estate investment
trusts and similar alternative real estate ownership structures in
today's marketplace," Macy's said.
The company said it has worked to maximize shareholder value
through share repurchases, increased dividends and continued
investments in its business. Since 2009, Macy's shares have
appreciated 504%, outpacing the 110% gain of the Dow Jones
Industrial Average.
Still, slow sales growth has left Macy's exposed to demands for
better returns. Sales at existing Macy's stores increased 1.4% in
2014, down from 2.8% in 2013 and 4% in 2012.
Macy's joins a slate of other big-name American companies,
including chemical maker DuPont Co. and tech company
Hewlett-Packard Co., that have fallen into the cross hairs of
activists who typically push management to make radical changes,
such as breaking apart into separate businesses or bringing in new
leadership.
Activists have long had their eyes on the retail sector but with
mixed results. William Ackman's Pershing Square Capital Management
LP had high-profile runs at Target Corp. and J.C. Penney Inc. Both
ended badly. Mr. Ackman lost more than $600 million in a failed
turnaround for Penney and emerged the loser of a proxy fight at
Target.
On the other hand, Jana Partners LLC made out well with its
investment in PetSmart Inc., after it pressured the retailer to put
itself up for sale. And Starboard successfully pushed Staples Inc.
and rival Office Depot Inc. into a merger, a deal that is still
awaiting regulatory approval.
With Macy's, Starboard is going back to an old theme: real
estate. Recent moves by Hudson's Bay Co. and Sears Holdings Corp.
to sell properties and lease them back have resurrected an old
investment idea: that much of the value in retail lies in the
bricks and mortar.
Splitting a retailer into an operating company and a property
company makes it easier to see the value of the property and
provides owners of the property company with a sort of insurance in
case the retail business falters.
But Macy's would no longer have full control to react to a
fast-changing market by closing, expanding or remodeling stores. It
also would be saddled with lease payments, and executives would
rather spend the money improving the underlying retail business,
people familiar with the company have said.
"We like having control of our real estate," Karen Hoguet,
Macy's chief financial officer, said in March.
Spurred by the recent Hudson's Bay and Sears deals and prodding
from investors, Ms. Hoguet softened her stance in May when she told
analysts that the company was working with its bankers to study all
options. "If something would make sense, we obviously would do it,"
she said at the time.
Starboard Wednesday pushed back on concerns about control,
saying leases and transactions can be done in a way to keep Macy's
in control.
"In our conversations with them, we think they are receptive to
looking into it," Mr. Smith said at CNBC's Delivering Alpha
conference.
Starboard's effort has allies among other Macy's investors. HG
Vora Capital Management LLC founder Parag Vora said his fund has
held talks with Macy's management to consider options for its
properties and that he was "pleased to see them moving in the right
direction."
Veteran real-estate investor Eduardo Abush, whose Waterfront
Capital Partners LLC counts Macy's as one of its top three
positions, said the retailer is undervalued because its real-estate
portfolio hasn't been recognized fully.
"This has been an evolution for the company, where they didn't
give any credit to the notion of doing anything with real estate,
to slowly mentioning it in a call, to referencing it again," said
Mr. Abush. "It's become a drumbeat."
Macy's management is searching for ideas beyond its traditional
department stores. The retailer plans to wade into the discount
market this fall when it is scheduled to open six Macy's Backstage
stores that will sell low-price goods. In February, it agreed to
buy Bluemercury Inc., a chain of beauty stores, and it is looking
to expand overseas.
Starboard is one of the most active of activists, launching new
investments at a rapid clip. It has shown a willingness to target
large companies ranging from Yahoo Inc. to Staples even with only
small stakes.
It recently succeeded in pushing a similar move at restaurant
operator Darden Restaurants Inc., a plan put in motion after
Starboard threw out the entire board of Darden in a shareholder
vote last year. Its victory over the Darden board, which resulted
in Mr. Smith becoming chairman, garnered it widespread attention.
Since that October shareholder vote, Darden shares are up nearly
50%.
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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