>>> Macy’s activist Starboard Value urges real estate JVs to unlock value

Macy’s activist Starboard Value urges real estate JVs to unlock value

Macy’s, Inc. (NYSE:M) activist investor Starboard Value has written to the company urging it to raise cash by unlocking the value of its real-estate holdings.

Starboard Value Letter to Macy’s, Inc. CEO (11 January, 2016)
Macy’s, Inc.
Terry Lundgren, Chief Executive Officer
Karen Hoguet, Chief Financial Officer

Dear Terry and Karen,
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 USD 400m, with a target of USD 500m 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 USD 500m 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 USD 21bn, 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:
i) 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;
ii) 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;
iii) 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 USD 1bn in free cash flow per year;
iv) Maintain the current investment grade rating and the current (or higher) dividend;
v) Further monetize minority interests in the JV(s), if more cash is needed to fund a major operating project or other investment; and
vi) 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.
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 (http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf).

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.
Best Regards,
Jeffrey C. Smith
Managing Member
Starboard Value LP

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: QGEN -11.8%, VRTX -4.6%, GCO -4%, EXAS -3%


Select China related names showing weakness with the Shanghai down over 5% last night: JD -2.2%, JMEI -1.7%, JKS -1.5%, CSIQ -0.9%, VIPS -0.9%, SFUN -0.9%, YY -0.7%, CTRP -0.6%

Other news: ACI -64% (files Chapter 11 bankruptcy, agrees on terms of debt restructure deal with Senior lenders), ASTI -12.9% (files 48 mln share common stock offering by a selling stockholder), NURO -5.6% (files ~16.505 mln share common stock offering issuable upon conversion of outstanding shares of Series C Preferred Stock & upon exercise of certain outstanding warrants by selling securityholders), BCLI -2.9% (enters into collaborative agreement with Hadassah Medical Center in Jerusalem), CYTK -1.9% (presents analyses demonstrating predictive value of slow vital capacity for clinical outcomes in ALS)

Analyst comments: UA -4.3% (downgraded to Underweight from Equal-Weight at Morgan Stanley), VFC -2.3% (downgraded to Underweight from Equal-Weight at Morgan Stanley), MJN -1.8% (downgraded to Neutral from Overweight at JP Morgan), WETF -1.4% (downgraded to Sell from Neutral at Goldman), JPM -0.5% (downgraded to Neutral from Buy at Goldman
)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance/SSS: SQNM +6%, IRMD +5.8%, HCA +5.2%, KONA +4.9%, (prelim Q4 restaurant sales above consensus) ACOR +4.6%, (reports prelim Q4/2015 AMPYRA sales and 2016 guidance), SCVL +4.5%, EBS +3.3%, NVRO +3.1%, FOLD +2.5%, (Provides Full-Year 2016 Strategic Outlook and Financial Guidance) EVHC +0.8%, ARAY +0.7%

M&A news: AFFX +48.6% (to be acquired by Thermo Fisher (TMO) for $14.00/share in cash; expected to be immediately accretive to TMO's adjusted EPS), (exploring strategic alternatives; also released earnings), APOL +8.2% (exploring strategic alternatives; also released earnings), (to be acquired by Shire (SHPG) for ~$45.57/share), BXLT +6% (to be acquired by Shire (SHPG) for ~$45.57/share), (acquires AbVitro fro ~$78 mln), JUNO +4.6% (acquires AbVitro fro ~$78 mln), (receives IRS ruling for the planned spin-off of its biosciences business), EBS +3.3% (receives IRS ruling for the planned spin-off of its biosciences business), (to acquire BXLT for 45.57 per share), SHPG +2.9% (to acquire BXLT for 45.57 per share), (Starboard sends letter to the Board encouraging them to pursue more real estate deals, according to the WSJ), M +1.6% (Starboard sends letter to the Board encouraging them to pursue more real estate deals, according to the WSJ)

Select metals/mining stocks trading higher: MT +8.4%, HMY +6.2%, GFI +3.9%, KGC +3.7%, AU +2.4%, RIO +1.7%, VALE +1.5%, GOLD +1%

Other news: ATV +36.4% (announces share repurchase program of $2 mln), SCON +35.2% (reported its Conductus wire achieved a significant milestone for use in High Field Magnet applications), AVXL +21.1% (announces positive dose-response data for ANAVEX 2-73 in Alzheimer's disease patients), THLD +13.9% (Threshold Pharma and Merck KGaA (MKGAY) agree upon terms for the licensing back of all rights to evofosfamide to Threshold), SGYP +12.3% (announces positive phase 1b data with its second uroguanylin analog), VPCO +11.6% (withdrew previously announced offer to issue common stock and warrants in exchange for outstanding Units sold in the July 2015 offering), MNKD +6.1% (confirms Sanofi's (SNY) termination of the License and Collaboration Agreement), OCUL +5.6% (appoints Jonathan H. Talamo, M.D., as Chief Medical Officer), ZGNX +5.6% (Initiation of Phase 3 Program for ZX008 in Dravet Syndrome), ACRX +5.5% (provides anticipated 2016 milestones; reports initiation and completion of final Phase 3 trial in the U.S. for Zalviso, NDA Resubmission), ONTY +5.5% (announces the retirement of President and CEO Robert L. Kirkman, M.D. effective January 11), SGMO +4.6% (details its milestones and objectives for 2016), WLH +4.2% (commences $50 mln of 7.00% Senior Notes due 2022), RXDX +3.8% (details its strategic priorities for 2016), ILMN +3.5% (forms new company GRAIL for early detection blood-based screening; considered significant development in the war on cancer), SCMP +3.2% (granted a sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination product in North America from Cancer Prevention Pharma), IMGN +2.8% (provides anticipated milestones for 2016), CTIC +2.5% (reports positive progress of lead clinical programs; provides outlook for 2016), ARIA +2.4% (elects Alex Denner as Chairman), AA +2% (announces $1.5 bln long-term contract with GE Aviation (GE) for jet engine components; note AA reports earnings tonight), HMSY +1.4% (discloses it & the New York State Office of the Medicaid Inspector General entered into an amendment extending the term of existing third party liability contract), XONE +1.4% (enters into an At Market Issuance Sales Agreement with FBR and MLV & Co. to sell up to $50 mln in shares of its common stock), GPRO +1.4% (slight strength following Friday's weakness), NVS +1.3% (signs licensing agreement with Surface Oncology), MEG +1.3% (Nexstar Broadcasting (NXST) reiterates its commitment to acquire Media General, and to take all necessary actions to consummate a transaction )

Analyst comments: GM +1.9% (upgraded to Outperform from Neutral at Credit Suisse), AAPL +1.4% (upgraded to Buy from Neutral at Mizuho), WFC +1.1% (upgraded to Buy from Neutral at Goldman
)

>>> PBoC's Ma: Stability of CNY against the basket needs to be improved, consens

PBoC's Ma: Stability of CNY against the basket needs to be improved, consensus is to refer more to currency basket 
- CNY fixing to now take into account TWI basket stability
- CNY pressure will abate after the market gets used to the basket system
- There will be no tight peg to the currency basket
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