HBC has what it takes to stay in vogue with smart investors

The ever-changing landscape of corporations raises the question of business's ability to evolve and stay au courant as fashions and tastes change. This is a vital concern for the most venerable corporate label in Canada, Hudson's Bay Co. (HBC-TSX).

Formed in 1670, this Canadian icon has been awash in press lately because of takeover rumours. This buzz has been a recurring theme over the past number of years, with American retailer Target often suggested as the pursuer.

Amid the bevy of other suitors mentioned as possibilities, two of the more likely names include Jerry Zucker, who has acquired about 20 per cent of the enterprise, and Sears. Even Wal-Mart's name sometimes is thrown into the ring.

This has piqued our interest at Contra the Heard, as 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 value; the dividend; the historical stock price, above $25 for much of the time since 1990; major turnaround potential, and yes, that distinguished name "Hudson's Bay."

Dominating the negative side: 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 $13.27. While we believe a buyout may come to pass, our nature is to anticipate the consequences should the rumours prove to be mere scuttlebutt. The stock would likely droop, as speculators leap to the sidelines. This could exacerbate a further slide, as margin calls would come into play.

If none of the deals come through, HBC still has its Canadian card up its sleeve. We suggest HBC use its Canuck identity in a future advertising campaign. They could even mention Wal-Mart directly, saying that if you want Canadian money travelling southbound, shop at this American giant. But if more coin remaining in this country is a concern to you, Hudson's Bay and divisions Zellers and Home Outfitters are the tickets, with both competitive pricing and quality products.

Takeover or not, 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.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.