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  Playing the Canada card? It's hard not to think of The Bay

BENJ GALLANDER and BEN STADELMANN

Friday, September 17, 2004

Hudson's Bay Co., that Canadian icon created in 1670, has been awash in press coverage lately because of takeover rumours. In fact, the buzz has been a recurring theme over the past few years, with American retailer Target often suggested as the pursuer. Among the other suitors mentioned, two of the more likely names include South Carolina-based investor Jerry Zucker — who has already acquired about 20 percent of the enterprise — and Sears Roebuck. Even Wal-Mart is sometimes thrown into the ring.

The talk piqued our interest, and we became shareholders of HBC at $8.50 in January 2003. Some reasons for the purchase included the corporate real estate valued on the books at $285 million, perhaps half its true worth; the dividend; the historical stock price, which was above $25 for much of the time since 1990; major turnaround potential; and yes, that distinguished name.

Dominating the negative side of the ledger: a debt load higher than our warm, fuzzy norm; negative cash flow; and questions about whether The Bay had become a dinosaur. However, these did not dissuade us from plopping down cold, hard cash and setting a target price of $19.04.

Those rumours have been a tonic for the stock price, currently trading at about $13.40. While we believe a buyout may come to pass, our nature is to anticipate the consequences should the rumours prove to be mere scuttlebutt. In all likelihood, the stock price would droop, as speculators leap to the sidelines. This would likely exacerbate a further slide, as margin calls would come into play, some perhaps offset by short sellers covering their positions.

If none of the deals comes through, HBC still has its Canadian card up its sleeve. We suggest that HBC make its Canuck identity the focal point of a future advertising campaign.

It could even mention Wal-Mart directly, hinting that if you want Canadian money to leave the country, you should by all means shop at this American giant, but that if you're concerned that more coin remains in this country, The Bay and its Zellers and Home Outfitters divisions are just the ticket. The crusade might also highlight how, in addition to competitive pricing and quality products, HBC has the largest community-based fundraising program in the nation. That has Canadian maple written all over it!

Takeover or no, we are very comfortable with our stake in this enterprise over the long haul, confident that HBC will move with the times. Nevertheless, if someone swoops in with an offer to buy the organization at a solid premium to the current valuation, we will happily entertain it.


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