The news from North America that Hudson’s Bay is looking to acquire Macy’s is just like the good old days. One company buys another vastly larger than itself. And a department store to boot – can this really be happening in 2017? Hudson’s Bay has a market cap of $1.8bn and fancies Macy’s, valued at $9.8bn. As a retailer, Macy’s has been struggling for many years but it has real estate valued at $14bn and the Bay smells a huge opportunity. This is what has made retail so seductive to financial players for years. It’s also helped to create great confusion in which asset strippers have often been assumed to be great retailers when in reality, they were just great asset strippers.
The overarching structural factor driving retail change today is overcapacity – an excess of supply over demand. For years this was all about real estate but latterly, it’s been more about digital. There is far too much physical space and sales productivity per square foot in every Western retail market is falling like a stone. So, given that there is too much of it, surely it must be worth less?
Raising money against overvalued retail property assets is going to be an increasingly high risk business. No doubt banks will be queuing up for a share of the action but overvalued retail balance sheets can’t be ignored forever. Every retailer I know with a store estate has far too many shops. Are they an asset or liability? Most retailers have overvalued property assets and how these companies are valued, particularly by banks, will be based on a traditional view of balance sheet strength. That rear mirror view is obscuring what is really happening out in front.
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