How Macy’s became a takeover target

New York (CNN) — Macy’s has struggled for years against rising competition and shoppers migrating away from department stores. Now, a group of investors reportedly wants to take Macy’s private at a vulnerable moment for the famed company.

Arkhouse Management, a real estate investment firm, and Brigade Capital Management, a global asset manager, submitted a bid to buy Macy’s for $21 a share, valuing Macy’s at $5.8 billion, the Wall Street Journal reported. The deal would pay shareholders a 32% premium above Macy’s closing price Friday.

The takeover bid is a sign that investors believe Macy’s is undervalued on the public market. Retail analysts say Macy’s valuable real estate, including its flagship store in New York City, is a coveted asset to the investors.

“Years of chronic underperformance has put downward pressure on Macy’s share price and means that the iconic department store chain is now a relatively attractive prospect,” Neil Saunders, an analyst at GlobalData Retail, said in a note to clients.

It isn’t clear how Macy’s executives and board members view the proposal. Spokespeople for Macy’s and Arkhouse declined to comment to CNN on the proposal. Brigade did not respond to CNN’s request for comment.

Macy’s was synonymous with the department store model for decades and consumers visiting Macy’s stores to shop for clothing, perfume and other products. The modern Macy’s was created in 2005 after a merger between Federated and May.

But Macy’s has been slow to adapt to online shopping, overhaul its stores and adjust to shoppers’ changing preferences. Macy’s has attempted numerous strategies in recent years to revitalize business, such as new brands and smaller stores, but the moves have done little to alter its long-term trajectory. Macy’s stock price has dropped 75% from a peak of $73 a share in 2015. Since then, it has closed nearly 300 stores — one third of its stores — and lost $3 billion in annual sales.

Macy’s fortunes have declined alongside the department store industry.

Since 2000, retail sales at department stores have dropped by half, according to the Census Bureau. The dropoff has tipped some department stores such as Sears, Neiman Marcus, JCPenney, Lord & Taylor and others into bankruptcy.

“The whole concept of department stores has been under tremendous pressure,” said Venkatesh Shankar, a professor of marketing and e-commerce at Texas A&M University’s Mays Business School. “Any retailer that thrived under the old department store concept is struggling to grow.”

Competition and mall struggles

Amazon has cut into Macy’s sales in recent years, but Amazon is just one reason why Macy’s has struggled. Macy’s is stuck in the middle, squeezed by luxury retailers at the high end of retail and discount stores offering lower prices on the other end.

Over the past decade, direct-to-consumer online fashion brands have grown, aided by Instagram and TikTok. Big-box stores such as Target, Walmart and Costco have expanded. Fast-fashion giants like H&M, Uniqlo and, more recently, Shein and Temu have taken aim at Macy’s. And discount clothing stores like TJ Maxx and Burlington have become larger competitors.

Macy’s has also been hurt by its large presence in regional malls.

Macy’s for decades was a reliable anchor tenant for mall owners and a draw for shoppers, but lower and mid-tier regional malls are struggling to compete against the growth of online shopping and discount chains. As consumers stopped going to these malls as frequently and neighboring stores closed inside malls, Macy’s suffered.

“All these trends are making it harder for legacy department stores to thrive,” Shankar said.

Private equity track record in retail

Some analysts say the investor group’s offer is too low for Macy’s.

In 2015, activist investor Starboard said Macy’s properties were worth $21 billion, including $4 billion alone for its flagship Herald Square store in New York City, In 2017, Hudson’s Bay, the owner of Saks, said Macy’s could be worth $14 billion.

If a deal does go through, however, it could mean trouble for Macy’s retail business.

Investor groups such as private equity funds and hedge funds have been active in recent decades in buying struggling or under-performing retailers, with the stated goal of taking them private, improving their operations and selling them for a profit.

“An investor group that sells off real estate and perhaps takes other actions such as spinning off the ecommerce business would certainly make some short-term gains,” Saunders said. “But unless some of those profits were reinvested in revitalizing the core retail business, it would leave Macy’s in the worst of all worlds.”

The results have often led to bankruptcies for many well-known companies, such as Lord & Taylor, Toys R Us, Payless, Sears and others.

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