Activist Investor Eyes Macy’s Real Estate

Macy's-real-estateThe dirty little secrets of retail stocks are 1) (NASDAQ: AMZN) is competition for everyone, and 2) we are not really in much of a “recovery,” as the Labor Force Participation Rate shows there are more people out of the workforce than at any other time since 1977.
Consequently, retailers like Macy’s (NYSE: M) are struggling. So is Sears (NASDAQ: SHLD), which should have gone bankrupt were it not for the fact that it spun off its real estate holdings and collected tons of cash in the process.
Activist hedge fund Starboard Value thinks the same concept should be put to work with Macy’s. In a recent conference, the fund suggested that Macy’s real estate was not merely worth $7.8 billion but $21 billion. If true, Macy’s stock could actually be worth as much as $125 instead of the current $72.
Of course, Sears shareholders haven’t reaped the rewards of the spinoff, as the stock hasn’t performed so well. Meanwhile, the spinoff Seritage Growth Properties (NYSE: SRG) is up 11%.

Picture a Spinoff

So would a spinoff work for Macy’s? That depends. By separating the businesses, you get a real estate investment trust and you get a retailer. Well, retailing STILL stinks, which is why Sears is probably in even worse shape than it was before the spinoff. That same theory should hold true for Macy’s. The REIT probably ends up being more attractive.
In both cases, though, the retailer ends up with a ton of cash on its books, or at least improves the balance sheet by paying down debt.
Macy’s has $1.5 billion in cash and $7.2 billion in debt. Were the spinoff to occur at the lower valuation, you’d have a REIT that would generate decent returns by collecting sale-leaseback income from those stores that stay open. That should turn out to be a fairly regular payment because the $7.8 billion would be used to pay down the debt and recapitalize it, while shoring up the cash position.

A Chance for Reinvention

Thus, the retailing side could figure out how to re-invent itself or grow sales again, making it a potential value play with lots of cash to play with. If we figure that Macy’s closes some stores, then that real estate either can get sold by the REIT or leased out to another party.
Of course, at the higher valuation of $21 billion, both the retailer and the- REIT are in great shape. Macy’s the retailer could literally become debt-free with tons of cash on the books. It could try oodles of things to reinvigorate its business, while certainly providing the REIT with more than enough guaranteed lease income. Either way, shareholders on both sides benefit.
Starboard doesn’t kid around. It took over the board of directors of Darden Restaurants (NYSE: DRI) and forced it to spin off 430 Olive Garden restaurants into a REIT with a sale-leaseback. It’s a great move because Olive Garden is an awful business with bad food, and now shareholders have a REIT instead.

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