(Reuters) - Hudson’s Bay Co has made a takeover approach for struggling retailer Macy’s Inc, people familiar with the matter said, trying to push further into the U.S. market where it already owns the Lord & Taylor and Saks Fifth Avenue chains.

FILE PHOTO: People line up at the entrance of Macy's Herald Square ahead of early opening for Black Friday sales in Manhattan, New York, U.S., November 24, 2016. REUTERS/Andrew Kelly/File Photo

While the Toronto-based company faces major financing and operating challenges in completing a deal to buy Macy’s, which is trying to overhaul its operations, it could use its existing foothold in the U.S. to save on administrative costs and have more negotiating power with its vendors.

Shares of Macy’s closed up 6.4 percent at $32.69 on Friday. Hudson’s Bay rose to C$10.39.

Talks between the companies are at an early stage, one of the people said. The sources asked not to be identified because the negotiations are confidential. Hudson’s Bay said it does not comment on rumors or speculation, while Macy’s declined to comment.

Macy’s, the host of New York’s annual Thanksgiving Day parade, is in the midst of a turnaround engineered by Chairman and Chief Executive Officer Terry Lundgren, who assumed leadership of the company in 2004.

Lundgren is set to step down this year, and could earn $80.24 million if there is a change of company control, according to a filing.

Macy’s has also been under pressure from activist hedge fund Starboard Value LP since 2015 to separate its real estate from its retail business to better monetize its real estate assets. Starboard estimated those assets to be worth $21 billion.

Starboard held around 1 percent of Macy’s stock as of Sept. 30 last year, making it the company’s 15th largest shareholder.

Starboard founder Jeff Smith did not return calls seeking comment.

PRIME REAL ESTATE ASSETS

Cincinnati, Ohio-based Macy’s has around 900 stores in the U.S., which includes its Bloomingdale’s outlets and its flagship store in New York City’s Herald Square.

Hudson’s Bay is well known for making money off its real estate assets. After buying Saks for $2.9 billion in 2013, it secured a $1.25 billion 20-year mortgage for its Fifth Avenue flagship location in New York, valuing the property at $3.7 billion.

Should Hudson’s Bay acquire Macy’s, it will likely bring similar real estate prowess to the jewel locations owned by the retailer. Still, should Hudson’s Bay opt to sell some of Macy’s less desirable locations, it would have to compete with a flood of properties for sale, as other struggling retailers also shed properties.

Hudson’s Bay has traditionally financed deals through its joint ventures, giving it the ability to pull off deals that many peers might struggle to do without impacting their credit rating.

It has a partnership with Canada’s RioCan Real Estate Investment Trust and with U.S.-based Simon Property Group Inc.

Hudson’s Bay could raise equity and debt against its real estate portfolio to fund the deal, according to the Wall Street Journal, which first reported the news.

Cowen and Company said in an analyst note that Macy’s has attractive qualities for a buyer, including a low price to earnings valuation of 10 times, $2.8 billion of free cash flow and a large real estate portfolio. But chances of a deal were dim, the note said.

Macy’s struggling turnaround and the continued pressure it faces from Amazon make a deal unlikely, Cowen said in the note, adding that Amazon itself could be a potential buyer of the company, given its expansion into physical stores.

Amazon did not immediately return a request for comment.

Founded in 1670, Hudson’s Bay began as primarily a fur trading business and once owned more than 40 percent of what is now Canada, and also a significant portion of Minnesota and North Dakota.

It was acquired in 2008 by mall developer NRDC Equity Partners, headed by Richard Baker. The company, which is still run by Baker, went public in 2012.