Federated Not About to Sell Itself as Bargain
It tells you a lot about the real value of a business that Wall Street arbitragers and deal makers are busily buying the stock of Federated Department Stores, even though they don’t believe in the current takeover bid for the Cincinnati-based company.
Canadian real estate developer Robert Campeau announced on Monday that he was offering $47 a share, or $4.2 billion, for Federated. But most people on Wall Street regarded his bid as a mere prelude to others. For one thing, they said, Campeau doesn’t have his financing lined up, and for another, his offer is laughably low for the assets of the nation’s largest department store company.
At $4 billion, Wall Streeters noted, Campeau’s bid only approximates the value of Federated’s real estate--its store buildings and equipment, and the land under some of its stores. One financier estimates the true value of that real estate at $45 per share, or $4 billion in total.
Thus the takeover offer gives almost no value to some of the most prominent department store franchises in the country. Federated owns the fashionable Bloomingdale’s stores in New York and nationally, and prominent stores in more than a dozen other places, including Foley’s in Houston, Burdines in Miami, Goldsmith’s in Memphis and the Bullock’s and I. Magnin stores in California.
So big investors and arbitragers are buying Federated stock--it closed Tuesday at $50.625 a share--because more bidding is expected. Wall Street professionals place the company’s true value between $58 and $70 a share and see the price settling ultimately at about $65 a share.
Could Sell Divisions
Wall Street doesn’t foresee a takeover, but rather that Federated will restructure itself by selling some properties and repurchasing shares, or perhaps by going private in a leveraged buyout. “Federated will take moves to increase its own value,” predicts analyst Joseph Ronning of the Brown Bros., Harriman investment firm.
That could mean selling part of Bloomingdale’s directly to the public in a new stock issue. And it would probably involve the sale of other divisions, almost certainly including the Ralphs supermarket chain in Southern California.
Big question: How can a company that was selling on the stock market at about $35 a share prior to Campeau’s bid on Monday be confidently said to be worth double that price in a takeover or a restructuring? Does that make any sense?
As a matter of fact, it does. The smartest investors have traditionally valued a company’s stock at what is called its private business value, or the price a competitor might pay to purchase the whole company.
The thinking is that a company is worth most to a competitor, explains an investment expert, “because a competitor can do the most with it--take the business and strip out duplicate staff, inherit existing customers.”
Restructuring Likely
That is why the first name mentioned in the speculation over who would buy Ralphs supermarkets was Albertson’s, the Boise, Ida.-based chain that is trying to expand in Southern California.
A competitor might have to pay $500 million for Ralphs, the price Wall Street places on the chain, but could recoup some of the purchase price by closing some stores where the value of the real estate or lease arrangement was more attractive than the food business.
Several potential buyers are named for the department store properties, from Youngstown, Ohio, shopping center developer Edward J. DeBartolo and Chairman Leslie Wexner of the Limited to Britain’s popular Marks & Spencer chain.
And most retailers would be happy to buy the highly profitable Goldsmith’s stores of Memphis as an entree to promising markets in Tennessee.
But Federated management sees no reason to simply sell out and let others reap the benefits. So a restructuring is likely, with Bloomingdale’s--possibly worth $900 million all by itself--being partially spun off or sold to the public.
Would Bloomie’s, or any of Federated’s other properties, be a good idea for ordinary investors? Pretty good. Federated has been increasing its sales and improving profitability in recent years, faster perhaps than was reflected in the retailer’s stock price.
But that only meant that Federated faced the dilemma of many publicly traded companies: If investors don’t see value in the stock, raiders will.
More than a year ago, Federated management reportedly bought back shares from the Hafts of Dart Group. But now another raider’s bid--said to be inspired by the merger-hungry investment firm First Boston Corp.--has put Federated in play. So the company will have to do something or face repeated attack.
As a retailer should know best of all: Bargains attract buyers.
