A Strange Tale of Investor Intrigue in Canada, With Implications in Manhattan

There is drama unfolding in the usually staid world of retail business that could have implications on a landmark retail company and one of its iconic holdings, the Lord & Taylor store on Fifth Avenue in Manhattan.

The Hudson’s Bay Company, founded almost 350 years ago in London as a fur trading enterprise, is a Canadian-based retail conglomerate that includes its signature operation, Hudson’s Bay, a chain of 90 department stores in Canada and the Netherlands, as well as Lord & Taylor and Saks Fifth Avenue in the United States. The company’s European holdings include Galeria Kaufhof in Germany and Galeria Inno in Belgium.

It is no secret retail chains are suffering in today’s Amazon-dominated consumer economy. Some chains have fallen on hard times as customers prefer to order online instead of visiting brick-and-mortar stores. These chains tend to rely on leasing retail space instead of owning it. But, because of its history and its overall financial philosophy, Hudson’s Bay owns many of its outlets. The Saks flagship store on Fifth Avenue in New York City, to name only one building, was recently valued at $3.5 billion. The Saks chain can suffer downturns in sales and still be valuable as a company, simply because of its real estate — one reason Hudson’s Bay bought Saks in 2013.

Hudson’s Bay acquired Lord & Taylor in 2008 for the same reason. Its flagship store, at 424 Fifth Avenue, is one of the iconic fixtures of midtown Manhattan. It is that store that is now caught up in a controversy started by an effort to buy a separate Hudson’s Bay property.

Two years ago, Hudson’s Bay paid $3.2 billion for Galeria Kaufhof, a chain of 97 department stores in Germany plus another 16 in Belgium under the name Galeria Inno. The underbidder was Rene Benko, whose Signa is a privately held Austria-based real estate company. Even at 40, Benko, sometimes known as the “Donald Trump of Austria,” is a man with a past. Some years ago, in Italy, he attempted to manipulate tax proceedings. In 2012, in Austria, he was found guilty of corruption and given a one-year suspended sentence.

Last week, Benko made a move to try and acquire Kaufhof again, now from Hudson’s Bay. This would allow him to consolidate the German retail department store business, since he already owns Karstadt, an 84-store chain in Germany. Doing so would position him to negotiate lower wholesale prices for his goods. Benko presented Hudson’s Bay with a non-binding, conditional proposal to buy Kaufhof for 3 billion euros, or $3.5 billion U.S. dollars.

No sooner had Benko issued his proposal than it was supported by Jonathan Litt, an “activist” investor in Connecticut whose company, Land and Buildings Investment Management, owns a 4.3 percent stake in Hudson’s Bay. Litt specializes in acquiring small positions in publicly traded companies and leveraging that minority ownership to his advantage. Recently, Litt tried to use a 1 percent stake in Taubman Centers to wage a proxy fight, but shareholders rejected him and the court dismissed the eventual claims he filed.

Now Litt is taking actions that suggest Hudson’s Bay’s refusal to accept Benko’s offer could jeopardize a deal that recently became public knowledge — Hudson’s Bay’s proposed sale of the Lord & Taylor flagship store. In a deal worth $1.3 billion, WeWork, a seven-year-old start-up specializing in leasing shared workspace to businesses, would buy the building. Hudson’s Bay would lease one fourth of the space back from WeWork and continue to feature the location as the Lord & Taylor flagship store. WeWork would use the remainder of the space for rentals as well as its new national headquarters.

Litt is trying to commingle the two deals. But there is an issue with Benko’s offer to buy Galeria Kaufhof. It’s not clear the offer is fully funded. According to documents, in a 1 billion euro capital raise to be used for the deal, only 55 million euros was in actual cash. Six hundred million comes from Signa Prime Holding in exchange for shares in another company whose assets are not disclosed. The rest comes from Signa Holding in exchange for shares in a mysterious private company. Some observers question the offer since funding sources are not revealed.

It is unclear how Hudson’s Bay will handle Benko’s hostile attempt at acquiring the German department stores. It would be unfortunate if that deal, however it plays out, would jeopardize a sale of the Lord & Taylor flagship store that could make the location financially viable while maintaining the building’s iconic status.

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