Saks Owner Hudson’s Bay Makes Takeover Approach to Macy’s

Talks are in the early stages and may not lead to a deal

By DANA MATTIOLI, SUZANNE KAPNER and DAVID BENOIT

Updated Feb. 3, 2017 5:23 p.m. ET

Canada’s Hudson’s Bay Co. has approached Macy’s Inc. about a takeover, people familiar with the matter said, as the biggest U.S. department-store chain grapples with disappointing results and restive shareholders.

Talks between the companies are at a preliminary stage and also encompass other ways they could cooperate, one of the people said, adding that a deal for only Macy’s real estate is also a possibility. Other details of the talks are unclear and it is far from guaranteed there will be any deal.

Shares of Macy’s jumped 6.4% to $32.69 Friday after the The Wall Street Journal reported the talks.

Hudson’s Bay is an acquisition-hungry owner of marquee names in retail including Lord & Taylor department stores and Saks Fifth Avenue. While its market value is dwarfed by that of Macy’s—1.9 billion Canadian dollars ($1.4 billion) compared with $10 billion as of Friday’s close—Hudson’s Bay could raise equity and debt against its real estate portfolio, which could be worth $14 billion, one of the people said. It could also bring in a partner.

But potentially complicating a takeover, Macy’s is saddled with about $7.5 billion in debt.

Macy’s has struggled in recent years amid increasing competition from upstarts as shopping habits change and consumers buy more online. Its stock has fallen more than 50% from the highest level it reached in 2015. Its sales in the quarter ended in late October fell 4.2% from a year earlier to $5.63 billion.

It is facing mounting investor pressure to turn around its performance and reverse the stock drop. Starboard Value LP took a stake and called on Macy’s to hive off its valuable real estate, which the activist investor says is worth more than $20 billion. Macy’s later added a Starboard ally to its board.

Macy’s in June said its longtime chief executive, Terry Lundgren, would step down later this year and hand the reins to one of his top lieutenants, current President Jeff Gennette.

Hudson’s Bay views Macy’s as a healthy company with good cash flow that just needs to invest more in its business, one of the people said. Hudson’s Bay is also considering potential deals with other companies, this person said.

As of January, Macy’s operated more than 800 stores. In addition to its flagship Macy’s stores, the Cincinnati company owns upscale department-store chain Bloomingdale’s. Its recent travails mark a change in fortune for Macy’s, which once was a dominant player in retail that gobbled up competitors in a series of acquisitions.

In 2005, Mr. Lundgren orchestrated the merger of the two biggest chains, Federated Department Stores Inc. and May Department Stores Co., creating what today is the largest U.S. department-store chain.

Macy’s was one of the brands owned by Federated, and the whole company was renamed Macy’s in 2007 as Mr. Lundgren eliminated regional brands like Burdines, Filene’s and Marshall Field’s.

But the retail sector has been pressured in recent years by a change in consumer habits. Department stores have been slow to adapt to a consumer shift to online shopping on sites like Amazon.com Inc. and so-called fast-fashion chains such as Zara and Hennes & Mauritz AB. Declining foot traffic in shopping malls as well as the ability of consumers to compare prices online before buying products has hurt department stores.

At the same time, a bifurcation in shopping habits toward the highest and lowest ends has been bad for retailers like Macy’s that cater to midrange customers.

In July 2015, Starboard made a public presentation that said the stock market wasn’t properly valuing the real-estate assets inside Macy’s. The activist, which held a 1% stake as of the end of September, said the property was worth $21 billion, including $4 billion alone for the flagship Herald Square store on 34th Street in Manhattan. It said the entire company was worth $33.7 billion, roughly double the price at the time, but the stock has plunged since then.

In January 2016, Starboard reiterated its case and said Macy’s could structure a joint venture, similar to the one Hudson’s Bay struck with Saks Fifth Avenue’s flagship Manhattan property—by partnering with a real-estate investment firm.

Macy’s has been selling some stores, and recently formed a joint venture with Brookfield Asset Management that could enable 50 or more stores to be fully or partially redeveloped. But the company has resisted a traditional sale-leaseback of its real estate portfolio, as Starboard and others have advocated, saying the move wouldn’t be in its long-term interest.

Macy’s started as a dry goods store by Rowland Hussey Macy on the corner of 14th Street and Sixth Avenue in Manhattan in 1858. Over time, the store grew into a full-fledged department store, and in 1902 it opened its Herald Square location, according to the company’s website. After going public in 1922, it began to acquire other department stores. In 1994, Federated Department Stores acquired R.H. Macy & Co.

Hudson’s Bay Chairman Richard Baker has made a habit of unearthing hidden value in the real estate of retail chains he has acquired.

A year after the Canadian company bought Saks Fifth Avenue in 2013, its flagship store on Fifth Avenue was appraised for $3.7 billion—more than the $2.9 billion Hudson’s Bay spent to acquire the entire chain.

Hudson’s Bay has also formed joint ventures with mall owners and property developers aimed at showing shareholders the value of its real estate without selling it off.

In a 2015 interview with the Journal, Mr. Baker said many retailers aren’t properly valued by the market because investors don’t fully understand the real estate they hold.

Still, Hudson’s Bay stock has lost more than 60% since its highs in 2015. Its shares rose 3.9% to CAD10.39 in Toronto on Friday.

Corrections & Amplifications 
 Hudson’s Bay’s market value was 1.8 billion Canadian dollars, or $1.4 billion U.S., as of Friday morning. An earlier version of this article incorrectly stated the amount as $1.8 billion.

Write to Dana Mattioli at dana.mattioli@wsj.com, Suzanne Kapner at Suzanne.Kapner@wsj.com and David Benoit at david.benoit@wsj.com