Note: This story has been updated to include a comment from an HBC spokesperson.
Hudson's Bay Co. (HBC) may have relieved some of the pressure that an activist has been applying to the struggling Canadian retail giant.
HBC agreeing to unload its subsidiary Lord & Taylor's flagship store on New York City's Fifth Avenue for $850 million.
The deal is part of a strategic partnership announced Tuesday, Oct. 24, that will see a $500 million equity investment in HBC by Rhône Capital, the private equity arm of New York-based Rhône Group, and an agreement to lease space in retail stores to WeWork, a global network of workspaces in buildings.
The investment by Rhône takes the form of 8-year mandatory convertible preferred shares, initially convertible into the HBC's common shares at C$12.42 ($9.82) per share. HBC's stock was trading at C$12.10 in early morning trading.
The deal follows a move by real-estate focused activist Jonathan Litt on Monday to escalate a months-long battle with HBC, though a spokesperson for the company told TheStreet that "the transactions announced on Tuesday were underway well before Mr. Litt got involved."
The Lord & Taylor Fifth Avenue store is expected to continue operations in the entire building throughout the 2018 holiday season, according to a press release by HBC. The building is then to be converted into WeWork's New York headquarters, WeWork office space, and a redesigned Lord & Taylor store of approximately 150,000 square feet.
For HBC, the transaction is expected to result in $1.6 billion of debt reduction, incremental cash on its balance sheet, or both, and an increase in total liquidity of approximately $1.1 billion, according to the company.
"These transactions are expected to significantly strengthen HBC's balance sheet, enhance our liquidity, and advance our core strategies by monetizing the Lord & Taylor Fifth Avenue building and increasing the productivity of key locations," HBC CEO Richard Baker said in the release. The price agreed to by WeWork for the building represents a 30% premium over its appraised value, according to HBC.
Insurgent hedge fund manager Litt said on Monday that he planned to call a special meeting at the department store chain, which could include an effort to remove incumbent Hudson Bay directors or have shareholders vote on proposals.
Litt, who runs Land & Buildings Investment Management LLC, launched an activist campaign in June and had floated several initial ideas for Hudson's Bay, such as going private or selling the Saks Fifth Avenue brand. The activist fund also has been urging Hudson's Bay to sell and lease back its extensive real estate holdings.
The escalation on Monday came after Hudson's Bay revealed late Friday that its CEO, Jerry Storch, was leaving the company Nov. 1. Replacing Storch, in an interim capacity, is the company's executive chairman Baker. However, Litt argued in a statement that Baker's installment as interim CEO, as the company seeks a full-time CEO, was a move in the wrong direction. He contended that Baker had been "stonewalling" Land & Buildings regarding its plan to "unlock the value of the real estate..."
—Ronald Orol contributed to this report