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Oct 24, 2017

HBC raising $1.7B in Manhattan property sale and share financing

Lord & Taylor HBC Hudson's Bay Company New York City Manhattan Fifth Avenue

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Hudson’s Bay Company is selling its flagship Lord & Taylor property on New York’s tony Fifth Avenue to WeWork for US$850 million as part of a flurry of deals.

The Lord & Taylor flagship store will continue to operate through the end of the 2018 holiday season, upon which it will be converted to WeWork’s New York headquarters, though HBC will continue to operate a 150,000 square-foot Lord & Taylor store in the location.

In addition, Rhône Capital, which partnered with WeWork in a real estate investment fund last year, will make a US$500 million equity investment in HBC, bringing HBC’s total take in the deal to C$1.7 billion.

Upon closing of the equity investment, HBC intends to appoint Rhône’s Steven Langman and WeWork’s Eric Gross to its board of directors.

The deal, which has already received approval from investors holding more than half of HBC’s shares, comes as the retailer faces pressure from activist Land & Buildings to unlock the value of its substantial real estate holdings. HBC said it doesn’t anticipate the reduction of its retailing footprint will have a significant impact on its earnings because the Lord & Taylor location is much less productive than the Saks Fifth Avenue flagship store down the street.

In a press release, HBC Executive Chairman Richard Baker highlighted further opportunities to add co-working spaces to a greater number of retail locations.

“Our partnership with the WeWork team creates new opportunities for HBC to redefine the traditional department store by extending those communities and drive additional traffic to our stores, particularly as we add co-working and community space to existing, vibrant retail locations,” he said.

As a part of the initial deal, WeWork will lease retail space within HBC’s Queen Street location in Toronto, its Granville Street store in Vancouver and the Galeria Kaufhof store in Frankfurt, Germany. HBC will also offer WeWork members exclusive sales offers, and funnel existing HBC customers into WeWork’s membership platform.

HBC has repeatedly claimed its real estate is worth three times more than its current market cap. HBC said the transactions announced on Tuesday will allow it to pay down $1.6 billion worth of debt.

While HBC is pocketing a tidy sum in the deal, at least one retail veteran thinks the company simply can’t stop here. In an interview on BNN, Bruce Winder, co-founder and partner with Retail Advisors Network, said the company should pursue more deals to secure its long-term survival.

“I think they need to continue on this path of monetizing the real estate and reinventing what they can do with the real estate to make it more productive; because, let’s face it, the productivity of department stores is just not there. The numbers aren’t working anymore,” he said.

“If they continue down this path, I think they might actually find a new way to survive in this really challenging department store era.”


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