TORONTO - Luxury U.S. retailer Saks will soon open its doors in Canada with plans to launch up to seven stores north of the border, after being snatched up Monday by Hudson's Bay Co. for US$2.9-billion.
In addition to expected operational savings of about $100 million and a portfolio of prime U.S. real estate, one analyst said the deal will give HBC (TSX:HBC) greater fashion credibility.
"Saks is such a revered name in fashion," said Wendy Evans of Evans and Company Consultants Inc. in Toronto.
"It's been around for a long, long time — since the 1920s. There's an aura about it."
Evans said the deal will broaden the selection of premium brands available to Canadians, including the in-store Saks line, and will also give HBC access to some of the retailer's designers.
The high-end U.S. department store chain carries brands such as Hugo Boss, Prada, Giorgio Armani, Chanel and Dolce and Gabbana.
For some Canadian shoppers, news of the upscale chain's foray into Canada, was overdue.
Adrian Salamunovic, a business owner who lives in Ottawa, said he's been shopping at Saks for about seven years.
Salamunovic, 37, was thrilled to hear that Saks will be opening up to 25 of its Saks Off Fifth outlet stores in Canada, which sell designer brands at discount prices.
Salamunovic said he often visits these stores when he's staying at his second home in Los Angeles to pick up brands such as Vince, John Varvatos and the Made & Crafted line by Levis — all of which he says are difficult to find in Canada.
"Especially in Ottawa, there's limited selection of fashion brands for men," he said.
"The stuff they have on the shelves is always very well selected. It is expensive. I mean, it's on the higher end of the pricing spectrum, but still reasonable, still affordable."
Ada Wong, an executive assistant, writer and self-described shopaholic, said she's visited the flagship Saks store in Manhattan, N.Y. — a popular tourist destination — to pick up items from Gwen Stefani's L.A.M.B. line for her friends.
"I think the people there are kind of snooty, but at the same time they offer some exclusive lines," said the 34-year-old Toronto resident.
"We live in a world-class city, and we deserve some of these world-class brands here."
Richard Baker, HBC’s chairman and chief executive, didn't provide a timeline for the launch.
"We're going to move as quickly as we can," Baker told analysts during a conference call on Monday.
Saks currently operates 42 stores across the U.S., while HBC's holdings include 90 Hudson's Bay stores and 69 Home Outfitters in Canada.
HBC also owns 48 Lord & Taylor luxury retail stores in the U.S. Northeast.
Together, the combined company will comprise more than 32 million square feet of retail space and rake in about C$7.2 billion of sales annually.
HBC said it may transform some of its Hudson's Bay stores into Saks locations, open new Saks stores in existing buildings or, in some cases, build new stores from the ground up.
The Toronto-based retailer is also eyeing the possibility of starting a real estate investment trust.
"The combination of Saks and HBC real estate creates an unmatched, highly valuable North American retail real estate portfolio, with a coast-to-coast footprint serving three strong banners," Baker said.
Paul Swinand, an analyst with Morningstar in Chicago, said the prime real estate portfolio was likely one of the biggest draws for HBC.
"There's no way they could have accessed these real estate assets at any other price, or in any other way," said Swinand.
"These are assets in locations where you couldn't get that size of a store otherwise."
However, Swinand noted it will be a challenge for HBC to improve Saks' operating margin, which is in the low-single digits.
"They have high sales per square foot, but their profitability has not been that great," he said.
Baker said HBC will keep the stores under separate banners, and plans on renovating the Saks stores and working with more vendors to make the chain "as luxurious as possible."
"We think that Saks is very well positioned in the luxury market in the United States, but we think there's a great opportunity to improve that positioning," he said.
HBC, which has been eyeing the struggling high-end American chain for the past few months, said it will pay US$16 per Saks share plus assume debt as part of the transaction.
It will issue US$1 billion worth of equity and $2.3 billion of debt securities to pay for Saks.
It has received funding from the Ontario Teachers Pension Plan, which will buy about US$500 million of the equity, and Canadian private equity firm West Face Capital, which will buy US$250 million of the new HBC equity.
Hudson's Bay Co. will also issue US$1.9 billion of secured loans and US$400 million of unsecured notes.
Saks will pay a fee to HBC if the deal doesn't go through, but HBC would not specify the amount.
HBC shares closed up 96 cents, or 5.82 per cent, to $17.45 on the Toronto Stock Exchange Monday.
Saks shares (NYSE:SKS) closed up 64 U.S. cents, or 4.18 per cent, to $15.95, on the New York Stock Exchange.
Arby's And Wendy's
In 2008, <a href="http://abcnews.go.com/Business/IndustryInfo/story?id=4717253">the owner of Arby's bought Wendy's for $2.34 billion</a>. Only three years later, <a href="http://dealbook.nytimes.com/2011/06/13/wendys-sells-arbys-to-private-equity-group/">Wendy's decided to sell Arby's to a private equity group</a> after the roast-beef sandwich chain <a href="http://www.forbes.com/sites/heatherstruck/2011/06/13/wendys-to-sell-arbys-in-430-million-deal-with-roark-capital/">continually struggled to grow its profits</a>.
Bank Of America And Countrywide
Bank of America's acquisition of mortgage lender Countrywide in 2008 would later be <a href="http://online.wsj.com/article/SB10001424052702303561504577495332947870736.html?mod=WSJ_hps_LEFTTopStories">referred to as</a> "the worst deal in the history of American finance." The bank paid just $2.5 billion for Countrywide, a deal that ended up costing the bank more than $40 billion.
Kmart And Sears
For $11 billion, <a href="http://www.nbcnews.com/id/6509683/#.USPuNuhi4gA">Kmart acquired Sears in 2005</a>. Sears' <a href="http://www.nytimes.com/2010/12/22/business/22sears.html?pagewanted=all">revenue dropped by more than 10 percent in the years following the merger</a>, according to the New York Times. Eddie Lampert, the investor in charge of the deal and CEO of Sears, <a href="http://247wallst.com/2007/12/06/herb-greenberg/">was deemed the worst CEO of the year</a> in 2007.
eBay And Skype
<a href="http://www.pcworld.com/article/171267/skype_ebay_divorce_what_went_wrong.html">eBay decided to buy Skype for $2.6 billion</a> in 2005, only to sell the company four years later for $1.9 billion. Similar to the Sprint-Nextel failure, eBay and Skype were unable to successfully integrate their technological systems, according to PC World.
AOL And Time Warner
In 2000, AOL announced that it was buying Time Warner for $160 billion<a href="http://news.cnet.com/2100-1023-235400.html"> to create the "world's largest media company,"</a> according to CNET. The combination didn't last long. In 2009, <a href="http://news.cnet.com/8301-1023_3-10250944-93.html">Time Warner separated entirely from AOL</a>. Jerry Levin, who sold Time Warner to AOL, later told CNBC,<a href="http://www.telegraph.co.uk/finance/businesslatestnews/6937916/The-shortlist-for-worst-takeover-of-the-century.html"> "I presided over the worst deal of the century, apparently." </a> AOL agreed to acquire The Huffington Post in February 2011.
Sprint And Nextel
Deemed <a href="http://money.cnn.com/2004/12/15/news/fortune500/sprint_nextel/?iid=EL">"the merger of equals," </a>Sprint and Nextel agreed to a $36 billion deal in 2005. Technological differences between the two companies proved to be a difficult challenge and Sprint plans <a href="http://money.cnn.com/2012/05/29/technology/sprint-nextel-shutdown/index.htm">to shut down the Nextel network this June</a>, CNN Money reports.
Quaker And Snapple
Quaker acquired Snapple in 1994 for $1.7 billion. Just 27 months later, <a href="http://articles.latimes.com/1997-03-28/business/fi-42931_1_quaker-bought-snapple">Quaker sold the company for $300 million</a>.
Daimler-Benz And Chrysler
In 1998, Daimler-Benz bought Chrysler <a href="http://www.time.com/time/specials/packages/article/0,28804,1894731_1894734_1894722,00.html">for $36 billion</a>. Ultimately, Chrysler's focus on accommodating customers with lower incomes did not fit with Daimler-Benz's luxury car making business model. In 2007, Daimler-Benz paid <a href="http://www.time.com/time/specials/packages/article/0,28804,1894731_1894734_1894722,00.html">$650 million to Cerberus Capital Management </a>to sever its ties with Chrysler, according to Time.
New York Central And Pennsylvania Railroads
New York Central Railroad <a href="http://www.ibtimes.com/grand-central-terminal-100-centennial-celebration-made-possible-jackie-kennedy-onassis-1056046">merged with Pennsylvania Railroads in 1968 to avoid bankruptcy</a>. The former rivals came together to create Penn Central only to <a href="http://www.american-rails.com/penn-central.html">fall apart and file for bankruptcy just two years later</a>.