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After many rumors hit the news wires in recent weeks, Saks Inc (SKS) has finally announced that it has sold itself to Canadian-based Hudson's Bay Company.

Saks has under underperformed compared to other high-end retailers as it struggled with underperforming stores and its e-commerce operations. The deal provides investors with an acceptable price and exit opportunity. Most likely shareholders are better of with this deal than owning shares in the stand-alone company in the long run.

As I don't expect it is reasonable to see competing bids, shareholders are best advised to tender their shares.

The Deal

Saks announced that it has entered into a definitive agreement with Hudson's under which the company has sold itself for $2.9 billion, including debt. Shareholders in Saks stand to receive $16 per share in cash for each share they currently hold.

Combined, Hudson's Bay will control three iconic brands in the retail industry including Hudson's Bay, Lord & Taylor and Saks Fifth Avenue. The company will target a broad spectrum in the luxury, mid-tier and outlet sectors of the retail industry. After the deal has closed, Hudson's Bay will operate some 320 stores, including 179 full-line department stores in the US and Canada, while operating three e-commerce websites.

On a pro-forma basis the combination generated $7.2 billion (Canadian, $7.02 billion U.S.) in revenues in 2012. The combination generated EBITDA of $587 million (Canadian, $572 million U.S.) for that year. HBC expects to generate $100 million in annual synergies within three years time.

Hudson will finance the purchase with roughly $1 billion in fresh equity, $1.9 billion in senior secured loans and $400 million in unsecured notes and cash at hand.

The deal has already been approved by the board of directors of both companies. The deal is expected to close before the end of the calendar year and is subject to regulatory approval and Saks' shareholder approval.

Valuation

Saks ended its first quarter of 2013 with $20.0 million in cash and equivalents. The company operates with $316.9 million in total debt for a net debt position of around $297 million.

Net sales for the first quarter were up by 5.2% towards $793.2 million. Net income fell towards $20 million on the back of one-time charges, but would have come in around $30 million otherwise. At this pace, full year revenues could come in around $3.2 billion. The company will most likely struggle to meet last year's earnings of $63 million on the back of increased investments.

The $16 offer values the equity of Saks at $2.4 billion. Including the net debt position of the firm, Saks is valued around 0.85 times annual revenues and around 42 times last year's annual earnings.

Saks does not pay a dividend at the moment.

Some Historical Perspective

Shareholders in Saks have seen mediocre returns over the past decade. Shares rose from $10 in 2003 to highs in the low twenties by 2007 as consumer spending was driving profitability for the entire retail sector. The company paid two special dividends for a total of $6 per share in cash during those good times as well.

Shares hit lows of $2 in 2009 amidst the financial crisis but have steadily recovered to $10 in recent years. Shares have risen some 50% year to date alone on the back of acquisition rumors, which now have materialized.

Between 2009 and 2012, Saks has increased its annual revenues by a cumulative 20% toward $3.15 billion. After reporting losses in 2009, the firm has been consistently profitable ever since. At the same time, the share base outstanding increased by roughly a fifth.

Investment Thesis

The deal offers an exit for shareholders in Saks as Hudson's Bay offers a 30% premium over Saks' closing price on May the 20th of this year, the day before the company announced that it would explore strategic alternatives for the business, including a possible sale.

Hudson's Bay will start evaluating alternatives for Saks' property portfolio, which includes the possible use of real estate investment trusts. Saks' prime location on Fifth Avenue in New York alone is estimated to be worth about $1 billion, as it brings in revenues of $600 million per annum.

While there is a 40-day go shop period, investors should not expect to receive better bids as Saks already indicated it does not expect to receive competing bids.

The continued reorganization in recent years has resulted in the closure of underperforming stores, but has taken its toll on revenues. After a slow recovery in recent years, revenues are still below peak levels in 2008 on the back of the store closures.

HDC will continue to operate Saks as an independent company within its organization. Yet the company is aiming to open stores in Canada by converting existing store locations of HDC.

The consolidation was necessary for Saks as other high-end retailers like Nordstrom (JWN), among others, have been more successful especially with their e-commerce business. The long-term prospects on a stand-alone business were not rosy as the firm lacked competitiveness in both brick-and-mortar as well as online operations.

Investors are best advised to tender their shares. Long-term holders have seen lack of returns, but have found some comfort in the $6 special dividends which have been paid out over the past decade. It will be unlikely to see a competing bid to come in as the deal occurs at fair valuation multiples. Therefore investors are best advised to tender their holdings.

Source: Saks: Shareholders Best Advised To Tender To The Canadians