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Starboard Value Letter To Macy's: JV For The Real Estate

Here's the letter that activist investor Starboard Value sent to Terry Lundgren and Macy's (NYSE: M) on Jan. 11. As well, here's Starboard Value's Jan. 11 presentation on the company.  

We appreciate the discussions we have had with you and members of the Board of Directors (the "Board") over the past few months.  As you know, Starboard Value LP, together with its affiliates ("Starboard"), is a large shareholder of Macy's Inc. ("Macy's" or the "Company"). 

While we are frustrated with the recent operating performance of the business, we appreciate that you have begun to take actions to re-size the cost structure and reduce Macy's store base. We were pleased to see the Company announce an immediate reduction in operating expenses of $400 million, with a target of $500 million in expense reductions by 2018. As we have shared with you in other presentations, we, along with our retail- and operations-focused consultants, have identified more than $500 million in cost reductions through a combination of improved labor productivity and SG&A reductions, as well as other EBITDA improvement opportunities through potential reductions in lost sales with customers who have a clear purchase intent.  We believe that as you continue to review the Company's operations, you should find additional opportunities to improve efficiencies.

In addition, we are pleased that management and the Board of Directors (the "Board") recognize that Macy's owned real estate has substantial value.  The recent announcement that Macy's is moving forward with pursuing joint venture structures ("JVs") for both its mall-based and iconic properties is a good decision for the Company and its shareholders.  As you well know, we firmly agree that Macy's real estate portfolio is extremely valuable.  We estimate the real estate assets are worth $21 billion, which implies that the operating business is currently trading for a negative value.

As we have outlined in our presentation materials to you and as discussed with you during our calls and meetings, we believe pursuing JV structures is the most prudent step for Macy's at this time to create significant value for shareholders given the wide discrepancy between the value of the real estate and the current enterprise value of the Company.  We believe that a JV, or series of JVs, can crystallize the value of Macy's real estate while bringing in a partner with substantial capital and real estate expertise that will enable the JVs to grow and diversify their real estate holdings.  The structures that we have proposed, which appear to be in-line with what you are actively exploring, would enable Macy's to:

  1. Highlight the value of Macy's underlying real estate, via the price paid by a well-respected real estate investor for a substantial minority interest;
  2. Maintain flexibility to further separate or monetize its real estate JV(s) via a future IPO after more seasoning of the JV strategy, more comfort with the financial position of Macy's and the JV(s), and increased clarity on the retail outlook.
  3. Further monetize minority interests in the JV(s), if more cash is needed to fund a major operating project or other investment; and
  4. Maintain the current investment grade rating and the current (or higher) dividend;
  5. Retain almost all of its cash flow availability at the parent company level, through distributions from the JV(s) (if desired at the time), resulting in the Company continuing to generate over $1 billion in free cash flow per year;
  6. Immediately take in cash to pay down debt such that Macy's OpCo could achieve a net cash balance, if desired, or more likely, substantially less funded debt;

As you know, we believe that the combination of these benefits not only creates substantial value, but also reduces risk, as the Company will have the ability to leave the OpCo with no net funded debt.  The Company can maintain flexibility with all of its properties, and, if it so chooses, maintain the use of substantially all of its current cash flow through distributions from the JV.

Since you have previously requested that we provide you with our presentation materials and we believe shareholders would also benefit from a better understanding of the merits of the JV structure, we have decided to share a section of the presentation materials previously presented to you publicly with this letter. 

Despite what is clearly a challenging retail environment, we believe the execution of the real estate strategy outlined in the attached presentation can create meaningful and lasting value for shareholders.  When matched with an operational turnaround plan that includes hundreds of millions in cost reductions and margin improvement, we believe Macy's is an extremely attractive investment.

As per your request, we have not included the details of our operational improvement plan in our public presentation at this time.  We look forward to continuing our dialogue with you as you look to create maximum value for Macy's shareholders.