It wasn’t just Cabela’s sliding stock price and sagging sales that made the company an attractive target for the activist investor now agitating for big changes.
The retailer’s healthy real estate portfolio probably also lured the New York hedge fund. Unlike some retailers, Cabela’s owns most of its stores.
One of the ways activist investors wring money out of a company is by forcing it to sell off its real estate. That could amount to more than $1.5 billion in the case of Cabela’s.
Activist investors — which in the 1980s were called corporate raiders — typically amass a large stake in a struggling company, then demand big changes to juice the company’s stock price. They then sell their stakes for a tidy profit.
When they target retailers, the activists often push companies to sell their real estate, which the retailers then lease back from a new entity.
The thought is that a quick influx of cash from the sale of property can be reinvested into the company — giving it the means to make acquisitions or buy new stores. (Or, alternatively, it can go into the pockets of shareholders if the proceeds from a sale are used to buy back stock.)
“That’s an obvious thing for an activist to say ‘Let’s get rid of that. Why are you carrying it?’ ” said Stuart Eisenberg, a partner and certified public accountant with consulting firm BDO’s New York office.
Real estate is considered an unproductive asset, he said.
“On the activist side, they’re going to get paid out of that immediately,” he said, if the activist is able to force the retailer to sell its real estate. “If they can, they’d monetize the thing and drive the stock price up.”
In a February filing with the Securities and Exchange Commission, Cabela’s said the total net book value of its property and equipment was $1.6 billion as of Dec. 27, 2014. The company said it owned 40 of its stores. On 18 others, Cabela’s had ground leases — in which it owns the building, but not the land. It leased just six locations at that time. Financial publication Barron’s estimates that the properties alone could be worth about $1.5 billion.
In October, Cabela’s Chief Financial Officer Ralph Castner and Chief Executive Tommy Millner said the company already planned to divest some assets, including outparcels and other properties. Outparcels are the small sites in a development that surround a big anchor — places where quick-casual restaurants and small retailers might locate.
As far as the Cabela’s stores themselves? “We don’t plan to sell a store,” Millner said on a call in October with Wall Street analysts.
Now, selling store properties and leasing them right back could be on the table after activist investor Elliott Management announced its 11 percent stake in the Sidney, Nebraska-based retailer just over a month ago.
Elliott also might force the company to sell itself altogether, leaving the fate of 2,000 jobs in Sidney up in the air.
Cabela’s declined to comment for this story. A spokesman for Elliott also declined to comment.
Elliott wouldn’t be the first activist hedge fund to demand that a retailer sell its properties to a real estate investment trust, or a REIT, which is a separate entity formed to hold real estate.
Bill Ackman of Pershing Square Capital Management, an activist investor, tried to force Target to sell its property into a real estate investment trust but was thwarted by the company’s board of directors.
Earlier this year, hedge fund billionaire and Sears Chief Executive Edward Lampert sold 235 Sears properties into a new publicly traded company called Seritage Growth Properties.
The sale resulted in the first quarterly profit for Sears under Lampert as chief executive.
Macy’s, also struggling as of late, had been considering jettisoning its real estate, but in November said it had decided not to.
Beyond the immediate influx of capital, the benefit of real estate investment trusts is that they can alleviate some of a business’s tax burden. REITs pay little in corporate income tax because most of their earnings are usually paid to shareholders in the form of dividends, said Craig Furfine, clinical professor of finance at Northwestern University’s Kellogg School of Management.
In Sears’ case, the retailer was strapped for cash and couldn’t find it anywhere else.
“That’s not typically a great motivation,” Furfine said. “Historically, these sorts of things have happened because companies have looked for other sources of revenue because their core business is failing.”
Similarly, Ken Perkins, president of research firm Retail Metrics in Massachusetts, said selling store properties only to lease them back isn’t exactly a sign of strength.
“I don’t think it is necessarily the best thing for the long-term business viability for the company. It’s a short-term gain for shareholders,” he said.
There are benefits and disadvantages to owning stores as opposed to leasing them, real estate experts say, but in the case of retail businesses, leasing may make more sense, Furfine said.
Owning property requires a hefty amount of real estate expertise, which may take focus away from the core of the business. For Cabela’s, that’s selling clothes, outdoors equipment, guns and ammunition.
“They’re an outfitter. What do they know about real estate?” Furfine said.
It is fairly common for large retail businesses to own their own properties, said Jerry Hoffman, president of Lincoln-based retail consulting firm Hoffman Strategy Group. Competitor Bass Pro Shops, rumored to be interested in buying Cabela’s, also owns most of its real estate. (Bass Pro hasn’t confirmed its interest in Cabela’s, which was reported by Bloomberg News and Reuters news service, citing unidentified sources.)
When it comes to owning versus leasing, sometimes it all depends on the location, said Barry Zoob, senior vice president of Colliers International in Omaha.
Cabela’s La Vista property, for example, probably is only going to increase in value. Selling it just to lease it back, with the possibility of lease payments increasing over the years, might not be a good decision, he said.
“That’s going to be a great location for the next 50 years. Why wouldn’t you want to own that store?” Zoob said.
Furfine said the opposite could be true. Cabela’s anchors developments that its stores are situated in. Because of that, it could argue for a great deal on a lease — something grocery store Whole Foods often does, he said. After all, if Cabela’s pulls up stakes, an entire development is likely to suffer.
Meanwhile, Cabela’s last week announced that it was reviewing “strategic alternatives” — often Wall Street speak for selling parts or all of the business.
Millner stressed that the review might not result in any changes, and that may still be the case. Sometimes a company’s simply saying that it’s planning to spin off real estate or other parts of the business can boost the stock price enough to keep activists happy, said Hoffman, the retail analyst. That means just talking about it — as opposed to actually doing it — might be enough to hold off the activist, at least for now.
For the year, Cabela’s stock price is down nearly 7.6 percent, but over the past month, it’s gained more than 23 percent.
“If that bump in the share price is large enough to fend off the activist investors, that’s part of the game theory in all of this,” he said.
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