Hudson’s Bay Company to Acquire Galeria Holding, Parent of Kaufhof, #1 Department Store in Germany

Hudson’s Bay Company (TSX:HBC) (“HBC” or the “Company”) announced today that it has entered into a definitive agreement with METRO AG (DB:MEO) to acquire Galeria Holding (“Kaufhof”), the parent company of Germany’s #1 department store Kaufhof, for an enterprise value of €2.420 billion (C$3.357 billion)(1). The acquisition is subject to customary closing conditions and is currently expected to close by the end of the third fiscal quarter of 2015.

HBC also announced today that it has concurrently entered into an agreement in principle with Simon Property Group (“Simon”) pursuant to which the previously announced U.S. real estate joint venture between HBC and Simon (the “Simon-HBC JV”) intends to purchase at least 40 of Kaufhof’s owned or partially-owned properties (“Kaufhof Real Estate Transaction”) for at least €2.4 billion (C$3.3 billion), subject to definitive documentation, securing acceptable debt financing and certain other conditions.

The Kaufhof acquisition price is expected to be largely financed by proceeds received from the Kaufhof Real Estate Transaction and, as a result, HBC does not intend to issue equity and expects to incur limited additional debt at HBC. See “Financing Summary” further below.

The contemplated transactions are expected to be significantly accretive to HBC’s earnings per share without requiring any synergies. HBC expects to generate more than C$200 million(2) of incremental Adjusted EBITDA and reduce leverage, pro forma for the Kaufhof acquisition and the Kaufhof Real Estate Transaction, as well as the previously announced joint venture transactions.

With the Kaufhof transactions, HBC is building a premier international retailer with, on a pro forma basis:

• 464 locations in 4 countries with 8 leading banners;
• C$13 billion in revenue;
• C$1.5 billion in Adjusted EBITDAR(3);
• More than C$754 million in Adjusted EBITDA(2,3);
• C$11 billion(4) in real estate value; and
• Strong management teams leading each business in North America and Europe.

Mr. Richard Baker, Governor and Executive Chairman of HBC, said: “These are exciting transactions that demonstrate our proven growth formula in action: improving solid retail operations, unlocking the value of real estate and growing through acquisitions. This is the right investment at the right time. We have been carefully surveying the European retail landscape for many years for a potential expansion opportunity and have watched Kaufhof build on its exceptional real estate to become the #1 department store in Germany. We are excited to work with the existing Kaufhof management team, bring our expertise to bear in the German retail sector and welcome Kaufhof to our portfolio of dynamic brands.”

#1 Department Store in Germany and Belgium with Exceptional Locations

Kaufhof is the #1 German department store by market share, with 103 Galeria Kaufhof locations and 16 Sportarena stores. Kaufhof also operates Belgium’s only department store with 16 Galeria INNO locations across the country. Kaufhof has exceptional store locations on high-streets in densely populated and prosperous cities throughout Germany, the largest economy in Europe and fourth largest in the world, and in prime locations across Belgium. For the twelve month period ended March 31, 2015, Kaufhof generated sales of €3.1 billion and Normalized EBITDA of €282 million.

Kaufhof’s management is expected to remain in place following the closing of the acquisition providing separate management teams for each business in North America and Europe, with each fully focused on their respective businesses. Kaufhof will be overseen by Richard Baker, Jerry Storch and Donald Watros, and will work closely with HBC’s leadership to explore opportunities to further strengthen Kaufhof’s offerings to consumers.

Creation of a Global Platform which Positions HBC for Future Growth in Europe

Jerry Storch, CEO of HBC, said: “This acquisition is a significant step forward in our plans to become a premier international retailer. With Kaufhof, we will operate eight leading banners in Canada, the United States, Germany and Belgium. Expanding our footprint into Europe with Kaufhof also provides us with a strong foundation to explore to explore additional opportunities for growth throughout the Continent.”

When Kaufhof is combined with HBC’s current portfolio of iconic store banners, including Hudson’s Bay, Lord & Taylor, Saks Fifth Avenue, Saks OFF 5TH and Home Outfitters, HBC will operate 464 stores with approximately 44% of sales generated in United States, 31% in Germany, 23% in Canada and 2% in Belgium. HBC will also have a strong and growing eCommerce platform, supporting best-in-class, all-channel sales opportunities.

Significant Value Creation for HBC Shareholders: No Equity Issuance by HBC, De-levering of HBC, and Significantly Accretive to EPS

Mr. Richard Baker added: “These transactions have the potential to deliver significant value to our shareholders. The anticipated sale of more than 40 prime Kaufhof properties to the Simon-HBC JV should allow HBC to generate significant incremental Adjusted EBITDA, while issuing no equity and incurring limited additional debt at HBC.”

Pro Forma for the transactions:

• HBC is expected to generate incremental Adjusted EBITDA of more than C$200 million(2,3) and does not intend to issue equity and expects to incur limited additional debt at HBC(5);
• HBC’s leverage is expected to decrease pro forma for the Kaufhof acquisition and Kaufhof Real Estate Transaction, as well as the joint venture transactions;
• Assuming the transactions close as contemplated, the transactions are expected to be immediately accretive to EPS without requiring synergies;
• The transactions increase the value of HBC’s real estate portfolio to C$11 billion(4); and
• Any proceeds from the Kaufhof Real Estate Transaction in excess of the Kaufhof purchase price will be reinvested in the Simon-HBC JV.

Financing Summary

HBC has received aggregate term loan B commitments of approximately US$3.250 billion (C$4.001 billion) from Bank of America Merrill Lynch, Morgan Stanley Senior Funding, Inc., RBC Capital Markets, and Scotiabank to fund the Kaufhof acquisition purchase price and expected transaction costs, as well as to refinance the existing US$650 million (C$800 million) senior term loan B.

HBC does not currently expect to utilize the large majority of the term loan B commitments. Instead, HBC currently intends to use the proceeds from the anticipated Kaufhof Real Estate Transaction to largely fund the cash purchase price of the Kaufhof acquisition and expected transaction costs. HBC intends to reinvest any excess proceeds in the Simon-HBC JV.

The Simon-HBC JV currently intends to finance the Kaufhof Real Estate Transaction with:

• A real estate term loan secured by at least 40 Kaufhof properties;
• Additional debt secured by the Saks and Lord & Taylor properties that the Simon-HBC JV will own;
• US$179 million (C$220 million) from Simon as per its prior equity commitment to the Simon-HBC JV;
• New investment from HBC using any excess proceeds from the Kaufhof Real Estate Transaction; and
• Up to US$600 million (C$739 million) in equity from third-parties or additional equity from HBC (in which case HBC would draw on its term loan B commitments).

HBC expects to retain a 65% to 85% interest in the Simon-HBC JV, depending on its investment, if necessary, in the Simon-HBC JV, which would be financed using its term loan B commitments.

Continues HBC’s Track Record of Improving Retail Operations and Unlocking Real Estate Value

The acquisition of Kaufhof and anticipated sale of at least 40 Kaufhof properties to the Simon-HBC JV represents another milestone in HBC’s strategy of unlocking real estate value while strengthening its operating business and its balance sheet.

In Canada, this strategy has included the sale of the Zellers’ leases for C$1.8 billion, the sale and leaseback of HBC’s flagship Queen Street property for C$650 million, and the anticipated sale of up to 10 HBC properties to the RioCan-HBC JV for C$1.7 billion.

In the United States, this strategy has included the acquisitions of Lord & Taylor for US$1.2 billion and Saks for US$2.9 billion followed by the US$3.7 billion independent appraisal of Saks’ flagship property in New York (to support the US$1.25 billion mortgage on the ground portion of the property), and the anticipated sale of 42 Saks and L&T properties to the Simon-HBC JV for US$1.7 billion.

In addition to surfacing significant shareholder value from its extensive real estate holdings, the HBC management team has demonstrated an ability to improve retail operations by consistently generating positive same-store-sales and sales-per-square-foot growth, maintaining stable gross margins and building a world-class all-channel experience through HBC Digital.

HBC Financial Community Conference Call to Discuss Transaction

HBC’s management team will discuss the transaction during a conference call for the financial community today, June 15, 2015, at 8:30 am EDT. The conference call will be accessible by calling (877) 852-2926 or the international dial-in number (253) 237-1123. A live webcast of the conference call will be available on HBC’s website at: http://investor.hbc.com/events.cfm. An audio replay will be available at this link through July 15, 2015.

Presentation slides for the conference call will be made available on the Company’s website located at www.hbc.com.

Advisors

BofA Merrill Lynch acted as exclusive financial advisor to HBC on the transaction. Willkie Farr & Gallagher LLP acted as M&A legal counsel, and Stikeman Elliott LLP served as company legal counsel.

ABOUT HUDSON’S BAY COMPANY

Hudson’s Bay Company, founded in 1670, is North America’s oldest company. Today, HBC offers customers a range of retailing categories and shopping experiences primarily in the United States and Canada. Our leading banners – Hudson’s Bay, Lord & Taylor, Saks Fifth Avenue and Saks Fifth Avenue OFF 5TH – offer a compelling assortment of apparel, accessories, shoes, beauty and home merchandise. Hudson’s Bay is Canada’s most prominent department store with 90 full-line locations, two outlet stores and thebay.com. Lord & Taylor operates 50 full-line locations primarily in the northeastern and mid-Atlantic U.S., four Lord & Taylor outlet locations and lordandtaylor.com. Saks Fifth Avenue, one of the world’s pre-eminent luxury specialty retailers, comprises 39 U.S. stores, five international licensed stores and saks.com. OFF 5TH offers value-oriented merchandise through 83 U.S. stores and saksoff5th.com. The Company also operates Home Outfitters, Canada’s largest kitchen, bed and bath specialty superstore with 67 locations. Hudson’s Bay Company trades on the Toronto Stock Exchange under the symbol “HBC”.

FORWARD-LOOKING STATEMENTS

Certain statements made in this news release, including, but not limited to, statements relating to the Kaufhof acquisition and the Kaufhof Real Estate Transaction, the financing, timing and benefits that are expected to result from these proposed transactions, and other statements that are not historical facts, are forward-looking. Often but not always, forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "expect", "believe", "estimate", "plan", "could", "should", "would", "outlook", "forecast", "anticipate", "foresee", "continue" or the negative of these terms or variations of them or similar terminology.

Although HBC believes that the forward-looking statements in this news release are based on information and assumptions that are current, reasonable and complete, these statements are by their nature subject to a number of factors that could cause actual results to differ materially from management's expectations and plans as set forth in such forward-looking statements for a variety of reasons. Some of the factors - many of which are beyond our control and the effects of which can be difficult to predict – include, among others (a) the failure to obtain, on a timely basis or otherwise, required approvals for the proposed transactions; (b) the risk that a condition to completion of either proposed transaction may not be satisfied; (c) the risk that definitive agreements are not settled and/or that acceptable debt or equity financing is not secured for the anticipated Kaufhof Real Estate Transaction; (d) the possibility that the anticipated benefits from the proposed transactions cannot be realized; (e) the ability of HBC to retain and attract key Kaufhof personnel and for Kaufhof to maintain relationships with customers, suppliers and other business partners; (f) credit, market, currency, operational, liquidity and funding risks generally, including changes in economic conditions, interest rates or tax rates; and (g) risks and uncertainties relating to information management, technology, supply chain, product safety, changes in law, competition, seasonality, commodity price and business. The proposed transactions could be modified, restructured or terminated.

We caution that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect our results. For more information on the risks, uncertainties and assumptions that could cause HBC’s actual results to differ from current expectations, please refer to the "Risk Factors" section of our Annual Information Form dated April 30, 2015, as well as HBC’s other public filings, available at www.sedar.com and at www.hbc.com.

The forward-looking statements contained in this news release describe our expectations at the date of this news release and, accordingly, are subject to change after such date. Except as may be required by applicable Canadian securities laws, we do not undertake any obligation to update or revise any forward-looking statements contained in this news release, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements.

PRO FORMA AND NON-IFRS MEASURES

Unless otherwise indicated, figures in this news release assume €1 = C$1.387 and US$1 = C$1.231.

The pro forma information set forth in this news release should not be considered to be what the actual financial position or other results of operations would have necessarily been had the Kaufhof acquisition and the Kaufhof Real Estate Transaction been completed, as, at, or for the periods stated.

We have included Adjusted EBITDAR and Adjusted EBITDA to provide investors and others with supplemental measures of our operating performance pro forma the proposed acquisitions. As other companies may calculate EBITDA, Adjusted EBITDAR and Adjusted EBITDA differently than we do, these metrics are not comparable to similarly titled measures reported by other companies.

EBITDA means net earnings before finance costs, income tax, non-cash share based compensation expense, depreciation and amortization expense, impairment and other non-cash expenses, and non-cash pension expense.

Adjusted EBITDAR means EBITDA before rent expense to third-parties, the RioCan-HBC JV, and the Simon-HBC JV, adjusted to exclude (i) business and organization restructuring / realignment charges; (ii) merger / acquisition costs and expenses; and (iii) normalizing adjustments, if any, related to transactions that are not associated with day-to-day operations.

Adjusted EBITDA means Adjusted EBITDAR less rent expense to third-parties, less cash rent to the RioCan-HBC JV, less cash rent to the Simon-HBC JV, plus cash distributions to HBC.

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