I've been looking at the current buyout of Macys and how its being discussed is the retail or the real estate more valuable?
I'm reading some stuff about how the group buying may have Macy's do a sale-leaseback, but also reading about a sale-leaseback it seems to not be a long term strategy, just more of a strategy that delays the company going out of business. Effectively, it just sinks the ship slower, it doesn't make the ship keep going? Is that correct or is there another way to look at it?
In a sale-leaseback, Macy's would sell the real estate and then simultaneously sign a lease with the purchaser. Macy's gets the benefit of a massive cash infusion from the sale and the new landlord gets a prime site with no lease-up risk. That's slightly different from what I understand is happening though.
This just sounds like "The market values this company at a number less than the value of its real estate holdings, which screams opportunity." In theory, these guys could take Macy's private and it doesn't even matter if Macy's ultimately fails because they'll be own prime real estate either way.
Fair, reminds me of a Buffett trade where you essentially get a side of the business for free, in this case the retail.
I guess the question is, why doesn't current Macy's management do that?
Lots of potential reasons, the easiest being they aren't real estate professionals and that strategy isn't part of their core business model. It could be more advantageous for them to be bought out by a PE firm, have that PE firm cut costs/reposition the company, and have that PE firm's real estate arm sell off some real estate than try to do all of that themselves or hire JLL and pay them millions to "advise" their board.
A useful framework for sale-leasebacks is as a cost of capital arbitrage. The real estate will have a return on assets in the high single digits, while the business can hopefully do better than that, so if they sell their real estate, they can put that capital to better use within their business.
It's a great way to raise at margins, provides upfront liquidity - and if it's a triple-net lease, there's great flex for the sponsor to take out the RE for themselves, provide extremely low financing to Macy, and Macy keeps operational use without day-to-day disturbance. As above user, cost of capital arbitrage, likely sponsor gets out with the RE when cap rates compress again.
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