Macy’s, Arkhouse take-private fight continues after proxy settlement

Tony Spring was already working against the clock to shoot Macy’s around.

The CEO will now have two new faces on the department store’s board, which will have to decide whether to bet on his vision or sell the nearly 166-year-old retailer to activist investors.

The board appointments, announced this week and ending a proxy fight with activist Arkhouse Management, are the latest development in a broader and so far unsuccessful effort by Arkhouse and fellow bidder Brigade Capital Management to acquire the emblematic but struggling American department. retailer in store.

“It stops the pressures here and now,” said Neil Saunders, managing director of research firm GlobalData. “But in a way, you let the wolf into the henhouse.”

Arkhouse made an initial offer in December to buy Macy’s and take the company private at a price of $21 per share. Macy’s rejected the offer, Arkhouse increased its offer, and Macy’s rejected that offer as well. Arkhouse then launched his proxy fight and put forward nine candidates for Macy’s 15-person board of directors.

For Macy’s, this week’s settlement — an agreement to appoint two of Arkhouse’s nine nominees to its board — could end the distractions and high costs of a prolonged campaign to win shareholder support. For Arkhouse and Brigade, the move could help hand the keys to investors whose focus on real estate, not retail, has led to fears that their acquisition could mean the end of Macy’s.

Macy’s and Arkhouse struck a conciliatory tone in their statements this week. But one thing is clear: The battle at Macy’s is not over.

Other department store chains have faced challenges from activists in recent years, and even when those efforts fail, pressure can lead to sweeping changes.

At Kohl’s, for example, CEO Michelle Gass left the company to lead the jeans maker. Levi Strauss after a long battle with Kohl’s activists. At the time, her predecessor at Levi, Chip Bergh, said activist investors helped her get out of Kohl’s doors.

Even before Macy’s had activist investors behind its back, Spring faced an uphill battle.

The department store – with its flagship store in the heart of New York’s Herald Square and its Macy’s Day parade that captures the attention of millions of families on Thanksgiving morning – occupies an important place in American retail.

But by almost every metric, Macy’s has lost size over the past decade. The number of employees, number of stores and stock price have fallen as the company has lost market share to competitors, including off-price chains like TJ Maxx, big box stores such as Target, as well as online retailers and specialty stores.

Macy’s shares, which hit a 10-year high of $72.80 in July 2015 and fell to a 10-year low of $4.81 in April 2020, closed at $19.30 on Friday, ending the week with a market value of $5.29 billion.

Macy’s said in late February that it expected full-year net sales to be down slightly from a year earlier. It forecasts that comparable sales, excluding the impact of store openings and closings, will vary from a decline of approximately 1.5% to a gain of 1.5% year over year over a more licensed ownership base and including sales on third-party marketplaces.

Spring, the former CEO of Macy’s upscale Bloomingdale’s chain and the man charged with turning the tide, took over as CEO in early February, about two weeks after the company announced it would cut more than 2 300 jobs and would close five stores.

Spring outlined its vision for the retailer earlier this year, saying it would close many of the company’s fledgling namesake stores and instead invest in stores that have been more successful. This includes Macy’s locations with stronger sales as well as its two chains that outperformed the namesake brand, upscale department store chain Bloomingdale’s and beauty supply chain Bluemercury.

And while it will continue its plan to open smaller versions of Macy’s stores in malls, the aggressive plan will close more than 150 stores by early 2027 — nearly a third of its namesake stores — leaving the retailer approximately 350 Macy’s stores.

The number of stores in its other two chains is significantly lower.

At the same time, buyout efforts from Arkhouse and Brigade threaten to completely change the retailer’s direction.

In addition to adding new members to the Macy’s board of directors, Arkhouse and Brigade have begun conducting due diligence, a process that allows suitors access to the department store operator’s accounting records so that one -he can have a clearer idea of ​​the finances and potential liabilities of the company.

This in itself was a hard-fought battle with bidders, who wanted more information to secure funding commitments for the proposed acquisition. Arkhouse claims that Macy’s refused to engage with it, and Macy’s rejected Arkhouse saying it did not have the financing for the buyout it was proposing.

GlobalData’s Saunders said Macy’s future as a retailer could be at risk if Arkhouse succeeds in its efforts to take the company private. He said the activist investor had a background in real estate, not retail, and seemed more inclined to suck up value from the main mall and flagship Macy’s locations than to invest in his company.

“It will become a Sears-like situation,” he said. “A very long wind-up, indeed.”

Arkhouse, for its part, announced plans to keep Macy’s stores open. In an interview with CNBC in March, managing partner Gavriel Kahane said the activist investor wanted to run Macy’s as a retailer, while adding value to its real estate holdings.

“Our plan is not conditioned on closing stores. That is not at all, fundamentally, part of our business plan,” he said. “In fact, we think this real estate has great value, in large part because it’s occupied by Macy’s.”

Kahane said the activist investor wants Macy’s to become “a stable, growing company that can live for decades, and potentially another 150 years.”

But, he argued, a private company is better able to achieve this goal than a publicly traded company: “We think this needs to be done behind the scenes, away from the public markets. We think the current management has really solved most of the problem. quarter and when you’re so focused on short-term execution, it’s really almost impossible to ensure your long-term viability.

Arkhouse raised its offer last month to $24 per share and said it had the backing of Fortress Investment Group and One Investment Management.

Saunders noted that the proxy settlement could give the retailer the time needed to implement Spring’s turnaround strategy and attempt to increase the company’s value.

The two new directors joining the Macy’s board will bring extensive experience in retail and real estate. Richard Clark spent nearly four decades in the real estate industry and was the former Chairman and CEO of Brookfield Property Group, Brookfield Property Partners and Brookfield Office Properties. The second director, Richard Markee, was the former CEO of Vitamin Shoppe and held executive positions at Toys R Us and Babies R Us. He currently serves on the board of directors of discount retailer Five Below.

Although both directors are independent, with no affiliation with either Arkhouse or Brigade, they will join the board’s seven-person financial committee charged with evaluating and making recommendations regarding the acquisition offer and any other similar offer.

Kahane and Jonathon Blackwell, Arkhouse’s managing partners, said in a statement this week that the appointment of the two new directors “will ensure that our discussions continue to be constructive and that our proposal is treated seriously and expeditiously.”

For Macy’s, accepting two new directors will not tip the scales on the board. That could be considered a win for the retailer because it’s far from the total figure Arkhouse offered, said Patrick Gadson, an attorney and co-head of the shareholder activism practice at Vinson & Elkins.

Nonetheless, the settlement allows Arkhouse to move forward as a critical and persistent activist investor, said Gadson, who represented Preferred Apartment Communities, a real estate investment firm that Arkhouse also targeted and made an acquisition offer . Arkhouse was ultimately outbid by another buyer in that effort.

Macy’s deal lacks a non-disparagement clause, he said, and has “mild” status quo restrictions, or conditions that can temporarily suspend activist activity and prevent activists from make critical comments. This means that Arkhouse and Brigade could still have room to run their campaign.

“Shareholder activism is a performance-based skill set,” Gadson said. “If the company is performing well, significantly exceeding expectations, then, in all likelihood, performance itself will be the cure. If the company fails to do this, then it can make any governance changes and all the non-fundamental and non-operational gymnastics that it requires.” I would love to, none of this will save them.