Starboard Value: Unlocking Value At Macy’s, Inc. (M)

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Starboard Value’s presentation on Macy’s, Inc. (M).

Executive summary

Macy’s Inc. (“Macy’s” or the “Company”) has an opportunity to unlock value for the benefit of all shareholders.

  • We believe Macy’s owned real estate is extremely valuable and these real estate assets are underappreciated by the market.
    — We believe the market does not give Macy’s credit for its valuable real estate in its share price.
    — We estimate the real estate assets are worth $21 billion (in excess of the Company’s current enterprise value).
    — With the real estate market near all-time highs, now is the time to separate Macy’s real estate assets and create value for shareholders.
  • Macy’s can take immediate action to unlock this value while reducing risk:
    — Maintain control of its properties;
    — Maintain almost all of its current cash flow at the Macy’s operating company (“OpCo”) or parent level;
    — Maintain its investment grade rating; and
    — Leave the OpCo net debt free, if the Company so chooses.
  • To supplement our own research, we retained the leading independent research firm specializing in real estate valuations, as well as experts in retail operations, corporate restructurings, and debt and transaction structuring.

This presentation outlines the plan that we believe Macy’s should follow to create value for shareholders.

We believe Macy’s can unlock tremendous value and remain investment grade by pursuing a Joint Venture (“JV”) transaction (or series of transactions) similar to the scenario outlined in this presentation.

  • Macy’s should split its real estate assets into two (or more) JVs in order to attract the appropriate partners who will pay the most for different types of assets.
    — We believe it is most logical for Macy’s to immediately drop down Macy’s iconic stores(1) and the substantial majority of its mall stores into two separate JVs (estimated combined value of $16.5 billion(2)). Macy’s could partner with different parties for each JV, maximizing the value of each JV, as certain parties may be willing to pay more for iconic urban properties versus mall stores, or vice versa.
  • In addition to unlocking real estate value, we believe there is an opportunity to further improve margins in Macy’s core retail business and to highlight the highly valuable cash flow stream from Macy’s credit card earnings.
  • We believe shareholders want Macy’s to separate or monetize its highly valuable real estate portfolio, and this plan is an intelligent and prudent way to accomplish that goal.
  • This plan will allow Macy’s to unlock value from the real estate while maintaining a highly conservative capital structure.

By following this plan, we believe Macy’s has the opportunity to create significant value for shareholders and massively improve its share price to approximately $70 per share (before value creation from further improved operations and credit card earnings), while maintaining its cash flow and real estate flexibility and reducing risk.

On a sum-of-the-parts basis, Macy’s represents a compelling value story

Adjusted for Macy’s real estate value, the core Macy’s operating business is currently trading for free. Adjusted for the credit card earnings, Macy’s core operating business is trading for ($10 billion).

Macy’s has a tremendous opportunity to unlock value for the benefit of all shareholders.

We believe Macy’s real estate is highly valuable and this value can be unlocked through a separation

  • Our extensive research indicates that:
    Macy’s real estate is worth approximately $21 billion, and possibly far more.
    — Separating the real estate portfolio could create $10 billion of shareholder value.
    — There are numerous ways to structure a real estate separation to allow Macy’s to keep its investment grade rating and even eliminate all of its net debt on the operating company, if Macy’s so chooses.
    — In the proposed JV structures, Macy’s can retain approximately 95% of its current cash flow by distributing its proportion of cash flows from the JV(s) to Macy’s OpCo for any period it feels it is necessary to do so.
    — A real estate separation can be structured to allow Macy’s to maintain significant flexibility, including control over remodels and rebranding, while maintaining minimal risk of getting “stuck” in underperforming stores.
    — Separating the real estate could create two or more leading entities with highly attractive growth and investment opportunities for years to come.
    — A real estate separation will enable Macy’s to maintain its current dividend, to buy back stock, and to pay down significant debt.

Although we believe there are a number of attractive alternatives for Macy’s to create substantial value for shareholders and remain investment grade, we believe the most prudent first step is to create multiple JVs for the majority of Macy’s real estate.

Macy’s has the largest and most valuable real estate portfolio in the department store space

We believe Macy’s real estate is worth $21 billion. Along with a leading third party real estate valuation and advisory firm, we used a highly detailed property-by-property valuation methodology and conservative assumptions.

Starboard Value Macy's, Inc. (M)

Macy’s real estate portfolio represents more than 100% of Macy’s enterprise value.

The total value of Macy’s owned and ground leased stores is estimated to be $11 billion, with the owned stores estimated to be $8.9 billion and the ground leased stores $1.9 billion.

Starboard Value Macy's, Inc. (M)

The vast majority of the value creation potential comes from the B or better mall stores; no value is attributed to C- or below malls.

See full presentation below.

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