BUSINESS

Hudson's Bay Mulls Bid For Saks Fifth Avenue

06/24/2013 01:48 EDT | Updated 08/24/2013 05:12 EDT
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SAN FRANCISCO, CA - MAY 18, 2013: The Saks Fifth Avenue store on Post Street is among the upscale retailers in the Union Square district of San Francisco, California. (Photo by Robert Alexander/Getty Images)
TORONTO - Department store owner Hudson's Bay Co. (TSX:HBC) is looking to expand its presence in the U.S. with the purchase of high-end retailer Saks Inc., says a source close to the potential deal.

Speaking Monday on the condition of anonymity, they said Hudson's Bay has been eyeing the beleaguered American department store chain for the past few months.

The source said HBC is looking to buy all 41 department stores under the Saks (NYSE:SKS) banner, including the iconic location on New York's Fifth Avenue, which opened in 1924. If the deal were to go through, the stores would stay operating under the Saks name.

They said Hudson's Bay is one of a number of potential buyers vying for Saks, which means that a deal could happen quickly but added that one of the obstacles of the acquisition is its valuation.

Morningstar analyst Paul Swinand said rumours about Saks being sold to various buyers has circulated for at least a year. Currently, he said Saks is being valued at around US$16 a share, even though it was trading on the New York Stock Exchange at US$13.49. Its shares closed 10 cents higher on Monday.

Swinand, whose focus is the retail sector, said Saks potential buyer will have to increase the operating margins at the department store chain to justify its sale price. This may mean deciding whether it wants to keep all the current locations, or unlock the value of the retailer's real estate assets and lease them to competitors.

For months, Hudson's Bay has been rumoured to be planning its own real estate investment company, a move that would fall in step with other major retailers like Canadian Tire (TSX:CTC.A) and Loblaw (TSX:L), which announced similar plans earlier this year.

Retail consultant Wendy Evans said this acquisition would be a smart move for HBC, because it CEO is an American and the company already owns 48 Lord & Taylor department stores in the eastern U.S.

"It would be a good strategic step," said Evans, of Evans and Co. Consultants Inc. "It would widen their brand presence obviously, and could certainly provide the entry into Canada for Saks."

She said a sale could also mean better cost-saving measures by integrating the two companies' administrative offices.

Last week, Hudson's Bay announced that its high-profile president Bonnie Brooks was being promoted to vice-chair. Brooks has been credited with rebranding the national retailer over the past few years into an upscale department store specializing in apparel, shoes, accessories and other merchandise.

Liz Rodbell, who was the company's vice-president and chief merchant and a veteran at Lord & Taylor, was taking over the helm as president.

Evans said the risk Hudson's Bay would be taking if the Saks acquisition happened would be that they would need to ensure they have the right people at the top level to see it through successfully.

"They would have to certainly give that a great deal of thought and expand ... the top and mid-level in order to be able to combine an organization in the most efficient manner," she said.

"Ultimately, to gain the most value, bottom-line out of it, there has to be some integration of the organizations."

Founded in 1670, HBC operates 90 Hudson's Bay department stores and 69 Home Outfitters housewares stores across Canada.

The storied retailer went public in November. In 2011, it sold more than 200 Zellers locations in Canada to U.S. discounter Target as part of a $1.8-billion deal.

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