A special committee at Hudson’s Bay Co. rejected an offer by private-equity firm Catalyst Capital Group Inc. that values the Canadian retailer at more than $2 billion, giving the upper hand to a lower bid by the company’s chairman.

The offer presented last week by Catalyst is “not reasonably capable of being consummated,” the committee said in a statement late Monday. Catalyst’s proposal of $11 a share represented a 6.8 per cent premium to the $10.30 a share that Hudson’s Bay Chairman Richard Baker and his partners agreed to pay in October, and which the committee and the board backed.

Baker and his allies confirmed that they weren’t interested in any transaction that would result in the sale of their interest in Hudson’s Bay, the committee said in its statement. Since the group owns 57 per cent, and the Catalyst offer requires at least three-quarters of votes, it means the transaction can’t be completed, the committee said.

Hudson’s Bay fell as much as 6.6 per cent, the largest drop in nearly a year. They were trading at $9.25 a share, down five per cent, as of 10:48 a.m. in Toronto, giving the company a market value of about $1.7 billion.

The response is the latest twist in the battle for the struggling retailer, which Baker said he wants to turn around outside the glare of public markets. The rivalry next moves to Dec. 17, when shareholders are set to vote on Baker’s offer.

The Baker group requires a majority of the minority holders to support the deal at the meeting, which could prove challenging with Catalyst holding 17.5 per cent of the common stock in the company. Only the common shares are subject to the vote by minority holders, according to a regulatory filing.

As of the record date, there were roughly 184 million common shares outstanding, of which the Baker group held about 83.6 million, or 45.3 per cent, the filing shows. That leaves roughly 100 million shares that will be counted, of which Catalyst owns roughly 32.3 per cent. Compounding the issue is that only those votes cast at the meeting will be counted, and seldom do all shareholders cast their votes at such meetings.

Catalyst Response

Catalyst said in a statement late Monday that it filed for a hearing with the Ontario Securities Commission, seeking to prohibit the Baker group transaction and postpone the Dec. 17 vote. Catalyst asked the OSC’s assistance to redress what it claims are inadequate and inaccurate disclosures to shareholders.

The Toronto-based investment firm run by Newton Glassman has urged fellow shareholders to vote against the Baker offer, saying it undervalues the department store chain.

Catalyst is concerned about the value Hudson’s Bay has recently ascribed to its real estate, which amounted to about $8.75 a share, people familiar with the matter told Bloomberg last week. In particular, it’s questioning why the value of the retailer’s flagship Saks Fifth Avenue store in Manhattan fell sharply in a recent appraisal, they said.

The Baker group shot back at the Catalyst offer early Tuesday, calling it an “illusory” bid that would saddle the company with debt.

“Catalyst’s reckless financing plans would swiftly add the company to the long list of retailers that have been forced to close their doors, shed jobs and impact pensioners,” the group said in a statement. “Catalyst has a track record of failing to execute on its promises and of engaging in conduct that is viewed critically by many participants in the capital markets.”

‘Final Offer’

The special committee of independent directors was formed in June by the Hudson’s Bay board to evaluate Baker’s proposal with help from financial and real estate experts. In the past few weeks, the company went out of its way to win support for the offer, releasing hundreds of pages of documents, including building-by-building appraisals.

Baker said the terms of the deal it reached in October would be its “best and final offer.”

Hudson’s Bay shares have plunged by about two-thirds in the past five years as the company has faced growing competition from sellers like Amazon.com Inc., joining other department store chains that are losing ground to online shopping.

--With assistance from David Scanlan.