Hudson's Bay Co. is buying luxury U.S. retailer Saks Inc. in a friendly deal worth $2.9 billion US.

The Bay says will pay $16 US per Saks share and assume all the latter's outstanding debt as part of the deal. Saks shares closed Friday at $15.31 on the Nasdaq stock market, but the $16 offer is 30 per cent above where Saks shares were in late May, before takeover speculation pushed the price higher.

HBC has been kicking the tires on its U.S. rival for the past few months. The Canadian company isn't alone in that, however. A report in the New York Post suggested HBC could face competition from several other unnamed buyers for Saks, including numerous private equity groups. HBC was the largest retail name to emerge, however, and that interest was confirmed by the release of the formal offer on Monday.

'It's great news for the competitive marketplace'—Marketing professor Ceren Kolsarici

Saks has a 40-day window in which it is allowed to solicit other offers, but HBC declined to offer details of what the break fee might be if the deal falls apart.

"While we serve different markets, we have a lot in common," HBC's chief executive Richard Baker said on a conference call to discuss the deal. "I’ve had a long connection with Saks over the years, and am thrilled to bring one of the world's most recognized luxury retailers into the HBC family."

The HBC executive team says it hopes to bank $100 million in cost savings from streamlining operations, but cautioned that HBC shareholders can expect a significant dividend cut — from more than nine cents per share, down to five cents — once the company has digested the debt required to process the transaction.

That's likely bad news for HBC stock, but it could be offset by another piece of information: that the company is looking into forming a real estate investment trust (REIT) out of the combined company's extensive real estate holdings, Baker confirmed.

"We believe this transaction delivers compelling value to our shareholders and that Saks Fifth Avenue is an excellent fit within the HBC organization," Saks chairman and CEO Steve Sadove said.

HBC shares gained about seven per cent to $17.64 on the TSX following news of the offer. Saks shares were up 3.5 per cent in New York, changing hands at $15.86 US per share on the NYSE.

Retail battles

The U.S. retailer operates 42 stores, including its flagship Saks Fifth Avenue in New York. HBC has 48 Lord & Taylor department stores in the U.S. northeast. In Canada, it has 90 Bay department stores and 69 Home Outfitters housewares stores.

In the call, Baker suggested the company hopes to open as many as seven full-line Saks stores and 25 Saks Off Fifth locations in Canada. The latter is the name for Saks's discount outlet stores.

Some of those new stores could come in the form of rebranding and relaunching existing Bay stores, the company said.

Saks in Canada would be a key weapon HBC could use in a coming high-end retail war in Canada. Nordstrom is set to launch a number of locations within the year, and the arrival of an iconic name such as Saks could help HBC compete.

"It's great news for the consumer, it's great news for the competitive marketplace," Queen's University marketing professor Ceren Kolsarici said in an interview with CBC News.

Kolsarici said the move is a savvy one by Canada's oldest company to head off Nordstrom and stake a claim on the high end of Canada's retail landscape while it still can. "There is enough room on the high end of the market," she said.

HUDSON'S BAY SAKS FACTS