Talk about the ultimate holiday shopping extravaganza. Shares of department store chain Macy’s (NYSE:M) surged more than 20% Monday to about $21 following several reports suggesting that current investors Arkhouse Management and Brigade Capital Management have submitted a proposal to buy the rest of the company for $5.8 billion, or $21 a share.
Will a deal go through? Long-suffering Macy’s shareholders must be hoping so. M stock is up only slightly this year, despite Monday’s big jump. What’s more, shares of Macy’s have plunged 30% in the past five years. Meanwhile, the S&P 500 has gained more than 75% since December 2018 and the SPDR S&P Retail ETF (NYSEARCA:XRT) is up more than 60%.
Why M Stock Needs Saving
But there are challenges. Macy’s new owners will have to be willing to absorb the company’s $3 billion in long-term debt. Macy’s also is struggling to adapt to the rapidly changing world of retail. Overall sales fell 7% from a year ago in the third quarter. Digital sales were also down 7%.
That’s not a good sign. Some retailers are finding it difficult to get shoppers to come to brick-and-mortar stores but are at least racking up big sales from online and mobile retail operations. That’s not happening at Macy’s or its Bloomingdale’s subsidiary.
Still, Arkhouse and Brigade might be hoping that they can convince the company’s soon-to-be new CEO that going private is a better option. Tony Spring, a veteran Bloomingdale’s executive, will be taking over as Macy’s CEO in February from current CEO Jeff Gennette, who is retiring after leading the retailer since 2017. It’s not clear if Arkhouse and Brigade would want Spring to stay in charge or if they have someone else in mind to lead the retailer.
Going private would allow new owners to focus more on turning around the core retail operations, boosting digital efforts further and selling real estate without having to deal with the scrutiny of stockholders who typically yearn for short-term profits.
Private equity firms have been increasingly attracted to top consumer brands as of late as well. Beauty and personal care products giant Unilever (NYSE:UL) announced in October that it was selling Dollar Shave Club to private equity firm Nexus Capital Management. Vitamin Shoppe owner Franchise Group went private earlier this year in a $2.6 billion deal. And fashion retailer Chico’s FAS (NYSE:CHS) said in September that it will be acquired by Sycamore Partners, the PE firm that also owns Hot Topic, Belk, Torrid and several other retailers, for $1 billion.
The Bottom Line
Whether or not Macy’s decides to join this group of retailers going private remains to be seen. But it’s clear that Wall Street would prefer a Macy’s takeover, especially at such a high premium. After all, the current consensus recommendation on Macy’s stock from sell-side analysts is a tepid “hold” rating. And the average price target is just $15.27 a share, more than 25% below the reported takeover price.
The retail landscape isn’t likely to get any easier for smaller chains in the next few years, particularly as companies like Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT) and Costco (NASDAQ:COST) grow larger and larger. Macy’s would probably be better off taking the $21-a-share offer. It’s not clear if the stock will get back to that level based on its own fundamentals any time soon.
As of this writing, Paul R. La Monica did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.