Macy’s issued its first public response to an unsolicited, non-binding proposal from Arkhouse Management Co. and Brigade Capital Management on December 1 to acquire all outstanding Macy’s shares for $21 per share in cash. Macy’s management stated its board of directors has decided the proposal does not constitute a basis to enter into a non-disclosure agreement or provide any due diligence information to the two investment firms.
In a letter dated January 21 and issued above the signature of Jeff Gennette, Macy’s chairman and CEO, the company maintained its conducted a review of the Arkhouse and Brigade proposition in consultation with its independent legal, financial and real estate advisors. After assessing the proposal, the company indicated that Macy’s board determined that the proposal as offered lacked compelling value. As such, Macy’s management concluded the retailer wouldn’t enter into a non-disclosure agreement or provide any due diligence information to Arkhouse and Brigade.
The letter signed by Gennette read as follows:
I have conveyed to the Macy’s, Inc. board of directors the discussions we have had with respect to your December 1, 2023 non-binding proposal to acquire the company, as well as the related discussions between the company’s financial advisors and your financial advisor, Jefferies. Over the intervening period, the board, with the assistance of its legal, financial and real estate advisors, has carefully reviewed the terms of your non-binding proposal, the accompanying letter from Jefferies and the additional information relating to your financing plan as relayed through Jefferies.
After consultation with our advisors, the board continues to have serious reservations about your ability to finance your non-binding proposal. As an initial matter, the proposed financing plan remains entirely uncommitted and your ‘highly confident letter’ is subject to numerous non-standard preconditions. Even were it to be less conditional, based upon advice from our advisors, we have significant concerns about the viability of the structure of your financing plan. For example, the board has been advised that your proposed cash equity contribution of only 25% of the required capital is well below current market levels for similar transactions, and consequently, your proposed overall leverage is well in excess of what could likely be achieved in today’s marketplace and sustainable for a company in our sector. Based upon advice the board has received, we believe that this quantum of indebtedness, as well as your reliance on a large amount of payment-in-kind securities, make it highly unlikely that your proposed financing structure could be successfully executed.
Given our concerns, which have not been addressed since my December 14, 2023 letter, as well as the lack of compelling value in your non-binding proposal, the board does not see a basis to enter into a non-disclosure agreement or provide any due diligence information in response to your proposal. Such an exercise would unnecessarily distract our management team as it continues to drive value for shareholders through execution of our business strategy and value creation levers.
Should you have anything new to share, we continue to be open to opportunities that are in the best interests of Macy’s, Inc. and all of our shareholders.
For its part, Arkhouse Managing Partners Gavriel Kahane and Jonathon Blackwell released a statement on January 21, noting their firm and Brigade Capital Management have engaged privately with Macy’s regarding a potential acquisition of the company. They emphasized that the proposed purchase price represented a 32.4% premium to the unaffected stock price and a 56.8% premium to the company’s 30-day volume-weighted adjusted stock price as of November 30, 2023.
Arkhouse maintained it sees potential for a “meaningful” increase to its original proposal if granted access to due diligence information and has offered to sign a mutual non-disclosure agreement covering what the material involved.
Arkhouse indicated that its partner and advisers believe that Macy’s long-term success would occur as a private company. It added Jefferies Group LLC has provided a letter supporting the Arkhouse and Brigade ability to raise the funds needed for the transaction to advance.
Arkhouse further asserted the following:
Following conversations between our respective advisors, Macy’s advisors confirmed that they had no further questions regarding our financing. We urge Macy’s to engage expeditiously in good faith discussions with the goal of achieving a mutually agreeable transaction that can provide superior value to stockholders. We are highly motivated to consummate an acquisition of Macy’s and are prepared to pursue all necessary steps, including direct engagement with stockholders, to achieve this goal.
Dennis Cantalupo, CEO of credit rating and consulting firm Pulse Ratings, noted, “The proposed transaction, if completed, would be financed with 75% debt or roughly $4.3 billion, which would add significant leverage to Macy’s balance sheet and likely result in a multiple step downgrade to its credit rating. While we have our doubts that the transaction will close as currently proposed, if at all, we believe that if completed, the investment firms probably plan to enter into a sale/leaseback transaction to pay down debt and/or pay themselves a substantial dividend.” Cantalupo added, “The latter would further erode Macy’s balance sheet and financial cushion.”