ISS Analysis Fundamentally Flawed on Multiple
Points
Special Committee Recommends Shareholders Vote
“FOR” the Arrangement Resolution
Deadline to Vote by Proxy is Friday, December
13, 2019
The Special Committee of the Board of Directors of Hudson's Bay
Company (TSX: HBC) ("HBC" or the “Company”) today commented on the
flawed report from Institutional Shareholder Services (“ISS”)
regarding the proposed transaction in which HBC will become a
private company owned by certain continuing shareholders (the
“Continuing Shareholders”) and the Company’s other Shareholders
(the “Minority Shareholders”) will receive $10.30 per share in
cash.
David Leith, Chair of the Special Committee, said, “We are
disappointed by the ISS recommendation and the errors and flawed
rationale of ISS. The $10.30 per share cash offer is in the best
interests of HBC and fair to Minority Shareholders.”
“The $10.30 per share offer is the only offer available to
Minority Shareholders and provides immediate and certain value at a
significant market premium. ISS acknowledges there is meaningful
downside risk if shareholders do not approve this transaction. We
continue to strongly recommend that HBC shareholders vote FOR the
take-private transaction.”
There are two primary flaws in ISS’ report:
One - ISS misunderstands the significance of the Special
Committee’s determination to waive the standstill obligation of one
of the Continuing Shareholders. The waiver of the standstill had no
impact on the Special Committee’s negotiating leverage with the
Continuing Shareholders as the other Continuing Shareholders
already had sufficient voting power to block any alternative
transaction.
Two - ISS misunderstands the effect of the superior proposal
construct, which requires that any alternative transaction proposal
must be reasonably capable of completion in order to be a superior
proposal. No board of directors, having concluded that an
arrangement is in the best interests of the company, would
terminate an arrangement agreement in order to enter into an
alternative transaction which is not reasonably capable of
completion. As the proposed privatization transaction is subject to
majority of the minority approval, if holders of a majority of the
shares held by minority shareholders oppose the transaction, it
will not proceed.
These and other flaws in the ISS report are discussed in detail
below.
The Fabric Standstill Waiver Had No Impact on the Special
Committee’s Negotiating Leverage
In its report, ISS places great emphasis on a waiver by the
Special Committee provided in respect of a standstill obligation to
which Fabric Luxembourg Holdings S.a.r.l. (“Fabric”) was subject
pursuant to its investor rights agreement with HBC (the “Fabric
Standstill”). The Fabric Standstill was waived by HBC, with the
authorization of the Special Committee, to permit Fabric to
participate as a Continuing Shareholder in the proposed
transaction.
ISS states that “By waiving the standstill and allowing Baker to
form a group controlling 57 percent of the voting power, the board
appears to have sacrificed negotiating leverage in exchange for a
proposal that, in its own words, was inadequate.” The statement
reflects a fundamental misunderstanding of the transaction. The
waiver of the Fabric standstill had no impact on the Special
Committee’s negotiating leverage.
- The argument that the Special Committee “sacrificed negotiating
leverage” suggests that an alternative transaction to that proposed
by the Continuing Shareholders might have had a possibility of
succeeding had Fabric not been permitted to be one of the
Continuing Shareholders. This is not the case.
- A privatization transaction in respect of HBC requires the
approval by at least three-quarters of the votes cast at a meeting
of HBC shareholders, not 50% as implied by ISS’ reasoning. The
Continuing Shareholders other than Fabric own shares representing
34.7% of all votes.
- As a result, if a privatization transaction had been proposed
by the group of Continuing Shareholders other than Fabric, no
alternative transaction to that transaction could be completed so
long as that group of Continuing Shareholders opposed it.
- The waiver facilitated the proposal that was made by the
Continuing Shareholders, which, in the absence of the consent of
the Special Committee, would not otherwise have been forthcoming.
The Special Committee believed that, in the context of HBC’s
shareholder composition, declining stock price and the ongoing
challenges and risks facing the Company, a proposal that would
provide liquidity to minority shareholders could be in the best
interests of the Company, and that the Special Committee should
have the ability to consider, negotiate, and, if thought advisable,
recommend such a proposal to shareholders. The Special Committee
knew that any such transaction it might recommend would be subject
to minority shareholder approval and other protections under
applicable corporate and securities laws, affording minority
shareholders the ultimate choice as to whether to accept or reject
such a proposal.
- While the initial proposal of $9.45 per common share from the
Continuing Shareholders was determined by the Special Committee to
be inadequate, the Special Committee’s negotiations with the
Continuing Shareholders resulted in a final offer of $10.30 per
common share, which the Special Committee concluded was in the best
interests of the Company and fair to minority shareholders.
ISS’ Misunderstanding of the Superior Proposal Provision of
the Arrangement Agreement
Under the terms of the Arrangement Agreement between HBC and
Rupert Acquisition LLC dated October 20, 2019 (the “Arrangement
Agreement”), HBC can terminate the Arrangement Agreement in
circumstances where it receives a “Superior Proposal” and certain
other requirements are satisfied. ISS places significant focus on
this provision, and correctly notes that, in order for a proposal
with respect to an alternative transaction to be a Superior
Proposal for this purpose, it must be “reasonably capable of being
consummated.”
ISS then recounts that the Special Committee responded to
Catalyst’s November 27, 2019 offer to acquire HBC shares at $11.00
per share by noting that the transaction proposed by Catalyst was
not reasonably capable of being completed, due to the opposition by
the Continuing Shareholders to the transaction. ISS then concludes
in its report that “It appears that the special committee
handcuffed itself by recommending an agreement that defines a
superior proposal as something that could never happen.” ISS’
suggestion that the Special Committee may have “tied its own hands”
in this respect in the Arrangement Agreement is unfounded.
- The purpose of a “superior proposal” construct in an
arrangement agreement is to permit the acquired company (in this
case, HBC) to terminate the arrangement agreement (subject to
certain other requirements) if it receives a superior proposal, so
that it may then enter into an agreement to complete the
transaction contemplated by the superior proposal.
- Clearly, an acquired company would wish to terminate an
existing agreement in order to pursue another transaction only if
the other transaction was reasonably capable of being completed. To
terminate the existing agreement otherwise would leave shareholders
without the ability to vote on the transaction contemplated by the
existing agreement, and with no prospect of having their shares
acquired in another transaction.
- Canadian arrangement agreements that permit an acquired company
to terminate the agreement to accept a superior proposal almost
invariably require that an alternative transaction must be
reasonably capable of being consummated in order to be a superior
proposal. This includes not only transactions in which the
acquiring party does not have a significant shareholding in the
target, but also all 11 of the arrangements completed by Canadian
public entities in the last five years identified by HBC1 in which
the acquiring party or parties held 30% or more of the voting
shares of the acquired company and the acquired company had the
ability to terminate the arrangement agreement to accept a superior
proposal. In all of these cases, an alternative proposal would not
have been reasonably capable of being consummated in the face of
opposition by the initial acquiror. In four public company
arrangements completed in Canada in the last five years in which
the acquiring party or parties held 30% or more of the voting
shares of the acquired company, the acquired company had no ability
at all terminate the arrangement agreement to accept a superior
proposal.
- Even if the Arrangement Agreement had permitted the Special
Committee to terminate the agreement at any time in its sole
discretion, the transaction proposed by Catalyst (which would
require approval of at least three-quarters of votes cast) is not
capable of being completed in the absence of approval by the
Continuing Shareholders (and, as noted above, this would have been
the case regardless of whether Fabric was one of the Continuing
Shareholders). The superior proposal construct in the Arrangement
Agreement simply reflects this fact. It does not create it.
Other Flaws in ISS’ Report
The ISS report contains others flaws and inaccuracies.
- The ISS report refers to “the possible conflict of interest
between [Richard] Baker as executive chairman voting on an asset
sale [being the SIGNA Transactions, as defined in the Arrangement
Agreement] and Baker as unsolicited acquirer”. Mr. Baker and the
other directors of HBC who are Participating Insiders recused
themselves from the approval of the SIGNA Transactions.
- The report states: “In light of the special committee’s Oct. 10
interest in using or working with Catalyst to improve its
negotiating position, the Oct. 20 decision to approve [the superior
proposal] definition appears counterproductive.” This statement
makes no sense. The Special Committee’s interest in possibly
working with Catalyst in its negotiations with the Continuing
Shareholders reflected the fact that any transaction with the
Continuing Shareholders would require majority of the minority
approval, and that Catalyst’s shares represent a significant
portion of those held by the minority. It had nothing to do with
the possibility that Catalyst might propose an alternative
transaction in which it would, without any reasonable expectation
of succeeding, seek to acquire HBC.
- The report states that the Special Committee should have
“identified the circumstances, if any, under which a proposal could
be deemed superior.” The HBC management information circular dated
November 14, 2019 clearly states that a transaction must be
reasonably capable of being consummated in order to be a superior
proposal. It also states that the Continuing Shareholders had
publicly announced that none of them were, in their capacity as
shareholders, interested in an alternative transaction, and that an
alternative transaction could not be effected without the support
of the Continuing Shareholders.
- The report states that “It bears mentioning that the only
defect identified [in the November 27, 2019 Catalyst proposal] by
the special committee was the Baker consortium’s opposition; the
committee did not question the Catalyst proposal’s financing or
ability to win regulatory approval.” While the Special Committee
did not comment on the Catalyst proposal’s financing in its
December 2, 2019 press release, there should be no inference drawn
that the Special Committee was satisfied with the financing or did
not have concerns about Catalyst’s ability to finance the
transaction it was proposing.
Recommendation of the Board of HBC
The Board of HBC (excluding conflicted directors) recommends
that all shareholders vote FOR the
transaction based on the comprehensive evaluation of the
independent Special Committee and its advisors, and emphasizes the
following:
- After an extensive review process, the Special Committee did
not identify any alternatives that were more attractive than the
proposed transaction
- Despite pursuing several strategic initiatives over the past
two years, HBC still faces a challenging, deteriorating retail
environment
- HBC has significant cash obligations, which constrain the
Company’s ability to return capital to shareholders
- The value of the HBC’s real estate portfolio has declined, and
there are challenges in realizing the Company’s real estate
value
- Any potential redevelopment of HBC’s real estate portfolio will
require significant capital, as well as an extended multi-year time
horizon
- $10.30 per share provides a compelling value proposition and is
within the fair value range determined by the independent valuation
of TD Securities Inc.
- The Special Committee engaged in extensive negotiations with
the Continuing Shareholders, which resulted in raising the offer
from $9.45 to $10.30 per share, a 9% increase.
- The all-cash offer of $10.30 per share delivers immediate and
certain value at a 62% premium to the unaffected closing stock
price on June 7, 2019, the day before the Continuing Shareholders
made the Initial Proposal
Special Meeting of Shareholders on December 17, 2019
The Special Committee and the Board (excluding conflicted
directors) recommend that Minority Shareholders vote in favour of
the transaction in advance of the proxy voting deadline of 10:00
a.m. ET on Friday, December 13, 2019 or at the special meeting of
shareholders on Tuesday, December 17, 2019 at 10:00 a.m. ET.
Shareholders who have questions or need assistance voting their
proxy should contact Kingsdale Advisors, HBC’s proxy solicitation
agent, by telephone toll-free at 1-866-581-0512, collect at
1-416-867-2272 or via email at contactus@kingsdaleadvisors.com.
Materials related to the Special Meeting, will be available
under HBC’s profile on SEDAR at www.sedar.com and on HBC’s website
at www.investor.hbc.com. Shareholders can access additional
information about the transaction, including the Management
Information Circular, by visiting www.HBCGoPrivate.com.
About HBC
HBC is a diversified retailer focused on driving the performance
of high-quality stores and their omni-channel platforms and
unlocking the value of real estate holdings. Founded in 1670, HBC
is the oldest company in North America. HBC’s portfolio today
includes formats ranging from luxury to premium department stores
to off price fashion shopping destinations, with nearly 250 stores
and approximately 30,000 employees around the world. HBC’s leading
businesses across North America include Saks Fifth Avenue, Hudson’s
Bay, and Saks OFF 5TH. HBC also has significant investments in real
estate joint ventures. It has partnered with Simon Property Group
Inc. in the HBS Joint Venture, which owns properties in the United
States. In Canada, it has partnered with RioCan Real Estate
Investment Trust in the RioCan-HBC Joint Venture.
Forward-Looking Statements
Certain statements made in this news release are forward-looking
statements within the meaning of applicable securities laws,
including, but not limited to, statements with respect to the
rationale of the Special Committee and the Board of Directors for
entering into the Arrangement Agreement, the terms and conditions
of the Arrangement Agreement, the timing of various steps to be
completed in connection with the transaction, and other statements
that are not material facts. Often but not always, forward-looking
statements can be identified by the use of forward-looking
terminology such as “may”, “will”, “expect”, “believe”, “estimate”,
“plan”, “could”, “should”, “would”, “outlook”, “forecast”,
“anticipate”, “foresee”, “continue” or the negative of these terms
or variations of them or similar terminology.
Although HBC believes that the forward-looking statements in
this news release are based on information and assumptions that are
current, reasonable and complete, these statements are by their
nature subject to a number of factors that could cause actual
results to differ materially from management’s expectations and
plans as set forth in such forward-looking statements, including,
without limitation, the following factors, many of which are beyond
HBC’s control and the effects of which can be difficult to predict:
(a) the possibility that the transaction will not be completed on
the terms and conditions, or on the timing, currently contemplated,
and that it may not be completed at all, due to a failure to obtain
or satisfy, in a timely manner or otherwise, required shareholder
and regulatory approvals and other conditions of closing necessary
to complete the transaction or for other reasons; (b) risks related
to tax matters; (c) the possibility of adverse reactions or changes
in business relationships resulting from the announcement or
completion of the transaction; (d) risks relating to HBC’s ability
to retain and attract key personnel during the interim period; (e)
the possibility of litigation relating to the transaction; (f)
credit, market, currency, operational, real estate, liquidity and
funding risks generally and relating specifically to the
transaction, including changes in economic conditions, interest
rates or tax rates; (g) risks and uncertainties relating to
information management, technology, supply chain, product safety,
changes in law, competition, seasonality, commodity price and
business; and (h) other risks inherent to the Company’s business
and/or factors beyond its control which could have a material
adverse effect on the Company or the ability to consummate the
transaction.
HBC cautions that the foregoing list of important factors and
assumptions is not exhaustive and other factors could also
adversely affect its results. For more information on the risks,
uncertainties and assumptions that could cause HBC’s actual results
to differ from current expectations, please refer to the “Risk
Factors” sections of HBC’s Annual Information Form dated May 3,
2019 and Management Information Circular dated November 14, 2019,
as well as HBC’s other public filings, available at www.sedar.com
and at www.hbc.com.
The forward-looking statements contained in this news release
describe HBC’s expectations at the date of this news release and,
accordingly, are subject to change after such date. Except as may
be required by applicable Canadian securities laws, HBC does not
undertake any obligation to update or revise any forward-looking
statements contained in this news release, whether as a result of
new information, future events or otherwise. Readers are cautioned
not to place undue reliance on these forward-looking
statements.
1 Based on a review of over 250 of the largest target-supported
acquisitions of Canadian public entities announced since June 1,
2013.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191209005409/en/
Investor Relations: Jennifer Bewley, 646-802-4631
jennifer.bewley@hbc.com Media: Special Committee Sard
Verbinnen & Co. Liz Zale, 212-687-8080 Company Andrew Blecher,
646-802-4030 press@hbc.com