• by Sarah Mahoney  @mahoney_sarah, January 23, 2024

A month after Macy’s received an uninvited buyout offer, the department store giant has turned thumbs-down on the deal. The storied department store says the $5.8 billion offer from Arkhouse, a real estate investment firm, and Brigade, a hedge fund, isn’t actionable, citing concerns about the proposed deal structure.

“After consultation with our advisors, the Board continues to have serious reservations about your ability to finance your non-binding proposal,” wrote Jeff Gennette, Macy’s outgoing chairman and CEO, in a letter to Arkhouse and Brigade.

He also said that as a result of that assessment, Macy’s would not enter into a nondisclosure agreement or agree to any due diligence, which would be typical next steps for a company open to a buyout.

Gennette added that Macy’s would consider an updated offer: “We continue to be open to opportunities that are in the best interests of Macy’s, Inc. and all of our shareholders.”

While Genette’s move may sound like a door closing, observers say buyout talk isn’t likely to subside anytime soon.

 Arkhouse’s press release says it is confident in its financing and has the potential for a “meaningful increase” to the offer if due diligence is granted.

There’s also the whiff of a threat. “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,” the Arkhouse announcement says.

The development comes as Macy’s is trying to transition to its next effort at building relevance, with Gennette retiring and Tony Spring, Bloomingdale's chairman and CEO, set to step into the role next month.

David Swartz, an analyst who follows Macy’s for Morningstar, thinks Macy’s rejection of the takeover “could be hasty” and that letting Arkhouse at least peek into the company’s finances could be wise.

“Although it may be a distraction to management, we see little downside for Macy’s in signing a nondisclosure agreement and allowing due diligence,” he writes. “We think there could be great cost to shareholders in not pursuing a potential deal.”

Macy’s inability to differentiate itself from competitors remains a serious problem – a dilemma shared by all department stores. While Swartz does not believe Macy’s “is in danger of financial distress, its sales growth is nonexistent, its operating margins have been in long-term decline, and its annual return to shareholders over the past ten years has been a woeful negative 7%.”

Arkhouse’s offer highlights a stark reality for the retailer: As Macy’s brand power fades and the department store category continues to struggle, its real estate holdings become more valuable by comparison.

Macy’s has more than 500 full-line stores. Swarts points out that while Macy’s operates stores in most top-tier U.S. malls, “it also operates scores of stores in weaker malls, some of which are probably not viable in the long run. The company does not need its vast selling space, as department stores have been losing market share to ecommerce and other retailers.”

Neil Saunders, managing director of GlobalData, writes that Macy’s delayed response and rejection may stem as much from philosophy as finances.

 “At heart, Macy’s management don’t seem to want a deal,” he says. “They likely see the real-estate-focused approach of Arkhouse as wrong for the business – and they have a point. Monetizing real estate with no focus on revitalizing the retailer and bolstering trading would produce short-term gains but severely weaken long-term prospects.”