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 they’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, Macy’s is a known brand with its own Thanksgiving parade, but one thing that most folks don’t know is that Macy’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 Macy’s?
Here are three reasons why we think Macy’s makes sense for Amazon:
Cheap Real Estate: Macy’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 Macy’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 Macy’s is a strong consideration. Macy’s is a cheaper acquisition for space than Kohl’s, which already has a partnership with Amazon.
Existing Infrastructure: In addition to the physical space, Amazon would also benefit from Macy’s existing operational infrastructure. No one is suggesting that Macy’s is operating at the same level of efficiency as Amazon, but Macy’s last three quarters have been positive earnings. So, Amazon would not be buying a sinking ship here. Company “infrastructure” - Amazon can buy it and keep it as-is without required work or change. It is almost like an investment property.
Brand Recognition: Despite the backdrop of so many retail brands like JC Penny’s, Sears, and K-Mart disappearing in recent years, Macy’s is one of the survivors. So, there is some additional upside for Amazon in acquiring the brand Macy’s for itself.
So what does this mean for me as a Macy’s bondholder?
Currently, a typical Macy’s bond yields roughly 5.5%. Macy’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 Macy’s bonds is higher than the typical high-yield bond of 3.5%.
Like a doctor’s annual exam, the rating agencies reviewed Macy’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, Macy’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 Macy’s, you would have this massive kicker of an additional 30% or more upside.
How’s that possible?
Remember, Amazon is a $1.8 trillion company. It has very little debt. Through Amazon’s acquisition of Macy’s, Macy’s bondholders would instantly be facing Amazon credit, not Macy’s. The bond market would price this change, and you are rewarded as the original holder of Macy’s bond.
What’s the catch?
Macy’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, Macy’s still has a lot of debt.
Also, the upside is only realized if Amazon buys Macy’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.