Hbc Capital Structure

Capital Structure Choices

Financing Mix

The financing structure of Hudson’s Bay Company (TSE: HBC) as of Sept 23, 2013 consists of 1.102 billion (CAD) in total long-term debt and 2,080.8 billion (CAD) in total equity. The company says it will issue US$1 billion worth of equity and $2.3 billion of debt securities to pay for Saks acquisition. It has received commitments from the Ontario Teacher’s Pension Plan, which will buy about US$500 million of the equity, and Canadian private equity firm West Face Capital, which will buy US$250 million of the new HBC equity. Hudson's Bay Co. will also issue US$1.9 billion of secured loans and US$400 million of unsecured notes. The company’s current debt to equity is ratio as of Jul 13, 2013 is 1.286. The debt burden following the leveraging acquisition of Saks is expected to increase the company’s proforma debt/EBITDA by an estimated at 6.4 times multiples. In order to reduce leverage quickly, the company has proposed plans to cut the quarterly dividend to $0.05/share from over $0.09/share in the short term.

Advantage of Debt

Tax Benefit with lower effective tax rate

The company currently enjoys a modest consolidated effective tax rate of 29.0% but this number is expected to increase to 31.0% once the company acquires the US firm Saks later this year. This is relatively low compared to the industries aggregate average tax rate of 37.37%. HBC also enjoys an added benefit from relatively lower D/E ratio among the industry, providing a higher flexibility for financing through long-term debts without obviously deteriorating its financial health compared with its main rivals. Due to this reduced debt, the company’s “Cash flows used in financing activities relating to continuing operations decreased from $1,679.5 million in Fiscal 2011 to $232.1 million in Fiscal 2012, a decrease of $1,447.4 million”. This means that much of the financing activities for operations were finance with debt. The company also had the flexibility...