Saks appeal
Hudson’s Bay Company’s acquisition of luxury department store Saks was savvy to say the least. In what was a hotly-contested purchase, the iconic Canadian retail company padded its US$2.9bn financing package with upfront equity commitments from cornerstone investors, allowing it to push sizing while limiting pro forma combined leverage.
Anchored by an upfront US$750m cheque from Ontario Teachers’ Pension Plan and West Face Capital, the package allowed HBC to push funding to 10.4 times leverage, with subsequent funding taking pro forma consolidated leverage to 6.4 times.
“Having Teachers’ and West Face as cornerstone investors certainly helped to validate the transaction when we went out to market, but we were confident that we could raise the extra equity,” said Kirby Gavelin, head of Canadian equity capital markets at RBC Capital Markets.
RBC moved to seal the equity component within one month. Conducted on a capital-committed overnight basis on August 20, the equity sale brought in another C$275m and printed at a 1% discount to last sale at the time. Significantly, around 40% was placed with retail investors, with the balance allocated to institutions.
The bridge funding was equally spectacular. With a five-year, US$1.7bn asset-based loan revolver split between US and Canadian dollars atop the capital structure, strong demand for the seven-year Term Loan B allowed for the addition of an eight-year second-lien loan – and the elimination of a planned high-yield bond sale.
Bank of America Merrill Lynch, which along with RBC agreed to bridge the purchase, finalised pricing on the US$2bn first-lien loan in early October at Libor plus 375bp, and a US$300m second-lien loan at Libor plus 725bp. Although slightly more expensive than targeted – price guidance was Libor plus 325bp–350bp and Libor plus 750bp–775bp, respectively – the financing closed amid uncertainty from the US government shutdown.
“The debt markets liked how favourably the equity markets reacted. The strategic rationale made for a very successful debt transaction,” said Charles Smith, a banker in RBC’s leveraged finance team based in New York.
Indeed, financial underpinning from Teachers’ and West Face was crucial, especially as the turnaround of HBC – bought by chief executive Richard Baker in 2008 – was still in its early days. And the fact that the entire transaction was fully backstopped with debt meant the company was not captive to the public equity markets.
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