Hudson's Bay Company: Canada's Largest IPO Of 2012

By Will Ashworth | November 20, 2012 AAA

The Hudson's Bay Co., Canada's oldest company, went public on the Toronto Stock Exchange Nov. 20 at C$17 per share. Over four million shares traded hands on a "when-issued" basis, with the official trading set to begin Nov. 26, after the offering officially closes. American Richard Baker, along with his father Robert, are selling 18% of the company. Baker bought the Hudson's Bay Co. in 2008 for C$1.2 billion. Given what's transpired since, this is a great moment for the Bakers. As for investors, I'm not so sure. Here's why.

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Baker's Benefit
You have to tip your hat to Ricard Baker, because the moves he's made in the four years that he's owned Canada's largest department store are some of the finest in Canadian business history when it comes to the real estate investment arena. Prior to purchasing HBC, he acquired U.S. department store Lord & Taylor from Macy's (NYSE:M) in 2006 for $1.2 billion. Baker and his partners invested just $25 million in capital, financing the rest using its real estate as collateral. Then he acquired 20% of HBC from another American, Jerry Zucker, for C$100 million and just C$10 million cash.

Two years later, Zucker died of brain cancer; Baker bought the remainder for C$1.1 billion using C$800 million in debt and C$300 million from a sovereign wealth fund in Abu Dhabi to pay for the acquisition. He put nothing down, while still maintaining control. If you're following this, Baker and his partners invested $35 million to own two large department stores whose 2011 revenues were $3.85 billion. That's some maneuver he pulled off.

It gets better.

Because Baker accumulated $2.1 billion in debt between the two purchases, he had to find a way to boost revenues and profitability while also reducing the debt burden. Conveniently, HBC had Zellers, a dowdy version of Target (NYSE:TGT) that was massively underperforming. It was ready for the trash heap. Using his real estate background, Baker was able to assign 189 of its Zellers leases to Target for C$1.83 billion, with some of the remaining 81 stores sold to Walmart (NYSE:WMT) and other retailers. The stores that are not able to find a new home will close permanently by the end of March. With the C$1.83 billion in proceeds, HBC paid C$668.3 million to Baker and partners for a dividend and the return of capital.

Between 2009 and 2012, Baker and his partners have seen payments totaling $820 million. I'm going to assume that Baker repaid the C$500 million (earlier I stated C$300 million - the extra $200 million went to pay down some HBC debt) invested by the sovereign wealth fund. Adding to the pot, the C$109.3 million will receive from the IPO, Baker and his partners have already seen a return on their C$35 million investment of 1,127% for a realized profit of C$394 million. Even better, they still own 81% of the company, - a C$1.67 billion value based on the IPO price of $17. Not bad for six years' work.

The Company Itself
HBC wants investors to forget about the past and to look to the future. Its current sales per square foot at Lord & Taylor is $210. HBC believes it can grow them to at least $240 in the next three to five years. At its Hudson's Bay locations in Canada, its sales per square foot is currently C$133; it would like to boost them to C$170 within five years. It seems easy enough except that it's not, especially in Canada. Target opens its first Canadian stores in April and you can be sure they'll be bombarded with customers. Eighteen months later, Nordstrom (NYSE:JWN) opens its first Canadian location in Calgary, and that should also see big crowds. Canadians are thirsting for better retail - U.S. has 23 square feet of retail per capita compared to 14 in Canada - and statistics show that we spend C$580 per square foot in malls, C$271 more than in the U.S. It's why so many American retailers are crossing the border.

Simon Property Group (NYSE:SPG), the world's largest mall owner, announced in July that it's opening its first Premium Outlet in Canada on the outskirts of Toronto, unleashing 350,000 square feet of deals for high-end goods. Canadians who cross-border shop are more than familiar with Simon's outlet malls. If that's not enough, Canadian high-end retailers like Holt Renfrew and Harry Rosen are bulking up to face the American onslaught.

Although CEO Bonnie Brooks is a talented lady, its got too much work to do. Any profitability it currently is experiencing will likely disappear under the necessary weight of capital improvements. If you must own Canadian retail, there are plenty of names to choose from including Canadian Tire (TSE:C.CTC.A), which is growing faster now that it owns Sport Chek, Canada's largest sporting goods chain. Otherwise, there are countless publicly-traded American retailers that make better investments, including some of those invading our shores.

The Bottom Line
In three to five years, it's likely that Hudson's Bay Company will be a better business than it is today. I know this to be so, because it's a better company today than four years ago, when Richard Baker bought it. However, just because it will be a better business doesn't mean you should buy its stock - at least not right away. I'd wait 12 to 18 months to see what transpires. You might even be able to get it for less than $17.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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