Richard Baker is photographed in Toronto on Tuesday June 17, 2014.Chris Young/The Canadian Press
If there were a Hall of Fame for real estate investors, Richard Baker would be a unanimous, first-ballot inductee.
Ironically, Mr. Baker's proven skills in property deals are making investors and lenders very nervous about what the Hudson Bay Co. governor may do next as head of Canada's oldest company.
Flagship U.S. department stores such as Sears and Macy's are on the ropes as shoppers go digital. HBC consistently pops up as a potential suitor. The expectation, which Mr. Baker encourages by talking up HBC's acquisition-based growth strategy, is that the New York-based executive will stake another large takeover, trying repeat an approach that has worked wonders at HBC and Saks Fifth Avenue on a far larger scale.
Mr. Baker, who made his first fortune building strip malls and is the son of a real estate developer, has the ego and experience to think he is the doctor with a prescription that can fix what ails venerable department store chains. Critics say it would be an enormous mistake for the HBC boss to apply real estate cures to retail diseases that may well be terminal.
In banking circles, Mr. Baker is starting to raise eyebrows. Many bankers remember the history of Robert Campeau, who had a stellar first career as a property developer, but whose businesses went bankrupt after diving into debt-fuelled takeovers of department store chains, including Macy's.
Accommodating credit markets and low interest rates could allow Mr. Baker to stage a heavily leveraged acquisition. Investor concerns over the company's plans, along with well-documented digital headwinds facing all bricks-and-mortar retailers, have taken HBC's share price from $25 two years ago to $10 levels recently.
HBC is clearly on the hunt. The Toronto-based retailer's latest investor presentation, released in June, devotes four of 33 pages to the company's approach to what it called "opportunistic acquisitions," highlighting a focus on undervalued real estate, under-managed retail chains and attractive financing options.
On HBC's last analyst call, also in June, Mr. Baker made it clear that in the midst of an internal restructuring that is expected to eliminate 2,000 jobs, the company continues to scout for deals. He said: "I continue to believe that there are opportunities around the world for us to create synergies and increase our market share, in different markets."
Mr. Baker is drawn to department stores because he sees the potential to pull cash from even the most unproductive of outlets. To date, another retail chain or real estate investor has always been willing to pay up for properties that Mr. Baker controls.
The deal that Mr. Baker will dine out on for the rest of his life saw Target Corp. enter Canada in 2011 by paying $1.8-billion to take over the leases on 220 Zellers locations, stores that were generating minimal returns for HBC.
Mr. Baker has shown he can consistently generate cash by selling real estate or store leases. For example, the 2014 sale-and-leaseback of the flagship Hudson Bay store in downtown Toronto turned up $650-million.
The flaw in Mr. Baker's approach is that cash stops rolling in when there is no retailer willing to take over unwanted space, or when a new tenant is only willing to pay a fraction of the previous rent. When HBC bought Saks in 2014, it paid down much of the debt from the deal within a year by aggressively reworking the real estate holdings. It's much harder to pay back loans quickly if no quick gains can be made from flipping properties.
Consider the fate of Target's Canadian expansion, which ranks alongside French and German invasions of Russia as failed growth strategies. Target's retreat has left empty space in malls across Canada. If HBC were to buy another department-store chain, such as the 700-outlet Macy's, and attempt to raise capital by selling or re-leasing locations, how many rival retailers will be interested?
The retail landscape is clearly changing as online shopping expands. Outside a few stand-alone big box outlets, chains are spending on their digital platforms, not new stores.
It doesn't take much of a crystal ball to conjure up a retail landscape without department stores; malls full of boutiques, food courts and theatres, with no Sears, Macy's or The Bay to anchor the corners.
Despite Mr. Baker's proven touch with real estate, that's not a world where HBC wants to stage the largest acquisition in its storied history.
Andrew Willis