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The Deal: REIT Plans Underlie Hudson's Bay $2.9B Saks bid

Tickers in this article: RUE SKS

NEW YORK (The Deal) -- Once it acquires luxury department store chain Saks in a deal valued at $2.9 billion, Hudson's Bay Co., plans to place all of the newly combined company's real estate into a publicly held real estate investment trust, or REIT, according to a source.

The cash generated by selling shares in the new public company would be a way to pay down the debt financing the deal, the source said.

Cutting into long-term profitability, however, will be all the rent Hudson's Bay would then have to pay once it starts leasing the store locations both it and Saks currently own.

Hudson's Bay declined to comment on its post-acquisition plans.

Hudson's Bay's stores sit on some of the most expensive real estate in the world, including Lord & Taylor's Fifth Avenue location in New York City and Toronto locations. Now, it would be adding another top-of-the-line locale: Saks' own Fifth Avenue flagship location.

In a REIT structure, the owned real estate is separated from the operating company, and then leased back to the operating company, pays rent at market rates. The rent the REIT collects is how it makes its money, and how it pays not only shareholders, but also affords to pay the property taxes, which are no longer on the operating company's books.

Still, making it a more reasonable deal economically is the fact that retailers these days also tend to be landlords.

At the Fifth Avenue location, for example, Saks can sublet space to high-end boutiques such as Louis Vuitton. Or alternatively, the high-end boutique would rent from the REIT, so that Saks would not have to lease the entire department store space.

It would then be those high-end boutiques that would have the headaches of managing and moving inventory, not Saks or Hudson's Bay, the source suggested.

The $2.9 billion Hudson's Bay is paying for luxury department store chain Saks Inc. is nearly 11.2 times its estimated $260 million in forward EBITDA for fiscal 2014, ending Jan. 31, 2014.

The purchase price is also about 10.7 times the $271 million in trailing EBITDA it generated in fiscal 2013 ended Feb. 2.