Hudson's Bay: Activist Slug-Fest?Hudson's Bay: Activist Slug-Fest? Aug. 1, 2017 3:38 PM ET About: Hudson's Bay Co (HBAYF) Bank On Insight Value, long/short equity, REITs, dividend investing (725 followers) Summary Roughly one month ago, an activist investor entered the fray. Land and Buildings wants HBC to accelerate monetization of real estate assets. HBC's board appears to be taking a more conservative approach. What should shareholders do with their shares? Hudson's Bay stock finally caught some much-needed traction last month and reminded longs of the massive upside opportunity present in North America's oldest company, Hudson's Bay (OTCPK:HBAYF). This came in the form of an activist letter, nudging Hudson's Bay to accelerate the selling off of its real estate. Well-known activist investor, Land and Buildings announced they are a substantial shareholder of the company and believes Hudson's Bay is taking too long to monetize its C$35 per share in real estate on their books. Hudson's Bay shrugged the letter off. Today (July 31), they released a more aggressive release, threatening to call a special meeting of shareholders. Who should investors support in the event of an attempted board takeover of HBC? Source: Bank On Insight (Left, CEO of HBC Gerald Storch| Right, Land and Buildings) Activist assertions Land and Buildings clearly believed they could nudge HBC's board to speed up asset monetization and work collaboratively with the board, and released a much friendlier paper in June. It appears they have given up on that line of attack, and are now replacing their carrot with a stick: We recently met with the senior management team of the Company, including Richard Baker, the Companys Executive Chairman, and Jerry Storch, the Companys CEO, to discuss our concerns and the opportunities we believe are available to drive value for the benefit of all Hudsons Bay shareholders. Unfortunately, during the course of our meeting, it became clear to us that the Company feels it has looked at all options to improve value. We completely disagree. We are therefore taking this opportunity to outline what we believe is a path to unlock value at the Company, and why, if left with no other choice, we believe it will be necessary to call a special meeting of shareholders to remove Board members If we continue to read into the new press release, it becomes obvious how different HBC's board and Land and Buildings vision for the company is. Here are the two competing visions, as I see it from HBC and Land and Buildings: Into the new press release, it becomes obvious how different HBC's board and Land and Buildings vision for the company is. Here are the two competing visions, as I see it from HBC and Land and Buildings: Hudson Bay Board Hudson's Bay extensive real estate portfolio provides the company with immense financial flexibility. Given the current brick and mortar retail apocalypse, the company believes they can find retailers with extensive real estate portfolios to acquire and rejig. Hudson's Bay has stated that they want to become a department store company with massive global reach. This is evident in their expansions into the US and Europe. They've been able to fund these transactions largely by spinning the real estate assets out of the companies they acquire. The best retailers will be left standing in the end, and when conditions improve, Hudson's Bay will have global reach, a massive real estate portfolio and create shareholder value. This strategy has worked in the past in the acquisition of Saks Fifth Avenue. Hudson's Bay bought the company for less than the value of the real estate assets on book. Land and Buildings Hudson's Bay's management is ignoring the sweeping changes under way in the retail landscape. Instead of taking a step back, and figuring out how to work with what they already own, the board is applying a growth at all cost model that is losing HBC investors money. The stock has lost near 2/3rds of its value from its highs, and management is continuing with the same strategy. HBC's current real estate portfolio can be monetized now and create immense shareholder value, without the risks associated with HBC's growth plans. "Hudsontage" Growth Properties? Land and Buildings points towards the performance of Seritage Growth Properties (SRG), a spin-off of Sears (SHLD). The REIT has a strategy of redeveloping the assets into higher renting entities. The strategy appears to be working. The stock is performing well and Warren Buffet owns 7% of the common shares. I tend to agree with Land and Buildings on that point, this is the best strategy for HBC to employ. I think to the Hudson's Bay flagship in my home city of Winnipeg and how underutilized it is. Source: Winnipeg Free Press It's a beautiful building in the downtown core of the city. Just a few years ago, the building was full. It contained a packed Zellers (Hudson's Bay's Wal-Mart competitor, no longer exists) in the basement, a flagship restaurant on the top floor and multiple floors of other retail space. Today, two floors remain populated, with the rest looking like this. I ask myself, "What is HBC doing! This is prime space in Winnipeg's downtown core!" If anyone location could use a "Hudsontage", it'd be a flagship store like this... What should longs do? I am a fairly prolific writer on Hudson's Bay, as I see the promise in the real estate portfolio of the company. I am starting to get a real case of what I'll call "battered long syndrome". Management puts out weak quarter after quarter, promises to improve operations, and tell me maybe someday they'll give me something nice (real estate monetization). Instead, every couple of months they're instead trying to finance the acquisition of a collapsing retailer, like Macy's (M) or Neiman Marcus (private). While this worked well for HBC in the acquisition of Saks Fifth Avenue, times are very different today in the retail landscape. I have faith in Hudson's Bay's board, but I don't like the strategy they are currently employing. The market doesn't want a retailer taking on debt to buy more retailers. Disturbing reports that HBC Europe (the company's foray into Germany and the Netherlands) stores are not meeting sales expectations are beginning to trickle out. I frankly don't care about the retail anymore. I like Land and Buildings proposition much more. It is fail proof and immediately would create massive shareholder value. I will use my shares to vote in favor of a special meeting of shareholders, and will also withhold my vote for any non-independent director of HBC's board. Conclusion At the end of the day, I believe Hudson's Bay longs will be greatly rewarded. The real estate portfolio will always be there, and I'll stick with the company regardless of whether Land and Buildings is successful in their demands. However, I feel that Land and Buildings lays out the more fool proof, straightforward path to impressive returns, hence I support them in their efforts.