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Amazon + Macy's = ๐Ÿ’ธ๐Ÿ’ธ๐Ÿ’ธ

Updated: Sep 28, 2021

A potentially intriguing combo

It was recently reported that Amazon has big plans to open its own large retail stores. So, yes, Amazon is making a full circle. As Amazon explores its options to launch large stores, investors are trying to figure out if Amazon will make a big splashy purchase, as they did with Whole Foods, or grow organically, like the more than 24 bookstores theyโ€™ve opened and operate throughout the country.


If Amazon goes the route of an acquisition, Macy's is rumored as a likely target. Of course, Macyโ€™s is a known brand with its own Thanksgiving parade, but one thing that most folks donโ€™t know is that Macyโ€™s has a lot of retail space. In fact, they have 113 million square feet, the equivalent of roughly 2,354 football fields. Hence, buying Macy's gives Amazon a large physical presence quickly.

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If Amazon is looking to expand into large retail through an acquisition, why Macyโ€™s?


Here are three reasons why we think Macyโ€™s makes sense for Amazon:

  1. Cheap Real Estate: Macyโ€™s is one of the cheapest ways for Amazon to acquire a lot of square footage, quickly surveying other potential competitors. If Amazon just bought Macyโ€™s for its retail space, Amazon would be paying roughly $62 per square foot. Of course, this math is an oversimplification. But it highlights the point that Macyโ€™s is a strong consideration. Macyโ€™s is a cheaper acquisition for space than Kohlโ€™s, which already has a partnership with Amazon.

  2. Existing Infrastructure: In addition to the physical space, Amazon would also benefit from Macyโ€™s existing operational infrastructure. No one is suggesting that Macyโ€™s is operating at the same level of efficiency as Amazon, but Macyโ€™s last three quarters have been positive earnings. So, Amazon would not be buying a sinking ship here. Company โ€œinfrastructureโ€ - Amazon can buy it and keep it as-is without required work or change. It is almost like an investment property.

  3. Brand Recognition: Despite the backdrop of so many retail brands like JC Pennyโ€™s, Sears, and K-Mart disappearing in recent years, Macyโ€™s is one of the survivors. So, there is some additional upside for Amazon in acquiring the brand Macyโ€™s for itself.


So what does this mean for me as a Macyโ€™s bondholder?


Currently, a typical Macyโ€™s bond yields roughly 5.5%. Macyโ€™s bonds are high-yield bonds by the rating agencies. The rating agencies are concerned about the high level of corporate debt, approximately $8 billion. Due to these concerns and others, the yield for these Macyโ€™s bonds is higher than the typical high-yield bond of 3.5%.


Like a doctorโ€™s annual exam, the rating agencies reviewed Macyโ€™s at the height of COVID last year and have not updated it since then. To paint a picture, at the end of July 2020, Macyโ€™s had a market cap of just $1.9 billion and was hemorrhaging money. Today, you have a company valued at $7 billion, with three successive quarters of making money. So, you have to look at these ratings in their full context.


Again, why?


If nothing happens, you get to own a bond that is yielding you 5.5% for the next 20 years for a company that is improving its operations and earnings, which is not a bad story to hold by itself. But, on top of that, you have this optionality that if Amazon were to buy Macyโ€™s, you would have this massive kicker of an additional 30% or more upside.


Howโ€™s that possible?


Remember, Amazon is a $1.8 trillion company. It has very little debt. Through Amazonโ€™s acquisition of Macyโ€™s, Macyโ€™s bondholders would instantly be facing Amazon credit, not Macyโ€™s. The bond market would price this change, and you are rewarded as the original holder of Macyโ€™s bond.


Whatโ€™s the catch?


Macyโ€™s is still a brick-and-mortar retailer. As a result, they face the same problems that most retailers do in 2021. On top of that, Macyโ€™s still has a lot of debt.


Also, the upside is only realized if Amazon buys Macyโ€™s. That upside turns into a 30% or more return if an acquisition is completed one year from now. For every year there is no acquisition, the overall return drops.


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