Activist investor Starboard Value's Jeff Smith escalated his campaign at Macy's (M) Monday by issuing a letter and 27-page presentation urging the department store chain to separate its real estate and "unlock value" for shareholders.
"With the real estate market near all-time highs, now it's the time to separate Macy's real estate assets and create value for shareholders," Starboard said in the presentation it submitted to Macy's executives.
His escalated insurgency comes after Smith revealed in July at an annual Delivering Alpha conference in New York that Starboard had taken a stake in the department store chain and that he wanted to see it consider separating into two companies, one consisting of its retail operations and the other of its real estate. He also said his hedge fund has hired a real estate consultant to help the firm value the properties and that he thinks Macy's was receptive to considering the opportunity.
"They pushed this stock in the high $60s," commented TheStreet's Jim Cramer. "You want to own it [and] you need better numbers but it is a cheap stock." However, for his Action Alerts PLUS portfolio he prefers Costco (COST) and Target (TGT) . "I like COST and that’s why we want to be bigger in that one...for the trust. I also think Target is doing better and we own that one, too," he said.
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On Monday, the activist fund manager suggested Macy's could split off most of its real estate from its operating business and set up two joint ventures with partners holding "substantial capital and real estate expertise." Macy's would raise cash by selling a minority interest in the joint ventures and it could later consider an initial public offering for one or both of them.
The letter noted one such JV structure could be set up for its "iconic" stores located in New York, San Francisco, Chicago and Minneapolis, and another for the substantial majority of its mall stores. Smith said he wanted Macy's to use the cash from the real estate transactions to pay down debt so that Macy's operating business would either have a net cash balance or "substantially" less debt.
The result, Smith said, would help Macy's maintain its investment-grade rating and current dividend. However, he suggested the dividend could be increased, a move that would likely benefit Starboard's large minority stake more than other smaller investors.
According to a November Starboard securities filing, the activist fund held 3.3 million shares valued at $167 million in Macy's as of the end of September. Macy's shares spiked early Monday and traded at $37.73 a share, up from its $35.89 a share close Friday. They currently trade around $38. However, the stock price has been on a downward trajectory since Starboard launched its public campaign in July, dropping from a high of about $72 a share during the summer.