Primaris bid, arrival of Target signals changes in shopping malls

TORONTO – The head of H&R Real Estate Investment Trust says the decision to purchase Primaris Retail REIT was easy to make in a changing shopping mall landscape that will see the arrival of Target stores in the coming months.

“The dynamics of these malls are going to change,” said H&R President and CEO Tom Hofstedter in an interview Thursday.

“They’re going to improve, they are going to have more people in them. It’s going to drive sales up, and drive rents up, and drive value to our unitholders.”

Popular U.S.-based Target (NYSE:TGT), the No. 2 discount retailer in the United States after Walmart, is set to open the first Canadian wave of stores in 10 Primaris properties starting in March or April.

Hofstedter told investors during a conference call that the proposed friendly deal for Primaris (TSX:PMZ.UN) — which will require shareholder approval — will H&R (TSX:HR.UN) for the emerging expansion of Target and other U.S. retailers.

“(This) shouldn’t be a story about accretion,” he said. “It should be a story about getting better, getting stronger, getting in at a time where there is a game changer out there called Target, just being the first of many international retailers invading Canada. And in invading Canada, changing our landscape.”

The deal, announced late Wednesday and unanimously approved by boards at both companies, offers Primaris unitholders 1.13 stapled units from H&R or $28 in cash a unit, to a limit of $700 million.

If the cash ceiling is surpassed, Primaris unitholders would get a combination of cash and H&R equity.

The bid surpasses a hostile offer last December led by KingSett Capital, which had support from RioCan REIT (TSX:REI.UN), Canada’s largest shopping mall real estate owner and the Ontario Pension Board.

The KingSett offer of $26 per share cash was set to expire Thursday.

A KingSett spokeswoman had no comment on the proposed H&R bid.

Primaris owns 33 properties across Canada, including shopping centres in Alberta, Manitoba, Quebec and Ontario comprising some 13.7 million square feet.

Some of their flagship entities include Place d’Orleans in Ottawa, Fleur de Lys in Quebec City and Sunridge Mall in Calgary.

Currently, H&R owns 42 office, 115 industrial and 138 retail properties comprising more than 45 million square feet and two development projects with a fair value of approximately $10 billion.

If the proposed deal is approved by unit holders by late March, it will make H&R one of Canada’s largest real-estate trusts by enterprise value with a total of 330 properties in nine provinces and 28 U.S. states.

“Quite frankly, an opportunity like this never comes by,” he said in the conference call.

“It shouldn’t come by, Primaris is actually a great company. There shouldn’t have been a hostile bid to take it out, period. The real driver (of the deal) is the opportunity that is here that never exists.”

The cash price represents a 22 per cent premium over the $22.95 volume weighted average price of Primaris units for the 20 trading days up to Dec. 4, the day before KingSett Capital announced its hostile bid for Primaris.

The full proration price of $27.33 represents a 19.1 per cent premium over the same reference price. If the maximum cash is elected, Primaris unitholders will own approximately 30 per cent of the combined REIT.

The proposed transaction is subject to approval by holders of two thirds of Primaris units and by a 50.1 per cent majority of H&R units.

Under the arrangement agreement, H&R is entitled to $106.6 million break fee in certain circumstances, including the acceptance by Primaris of an unsolicited superior proposal from a third party.

The break fee is structured as a cash payment of $70 million and an option to acquire Dufferin Mall and certain Yonge Street properties in Toronto owned by Primaris, priced at an aggregate $36.6 million discount to the appraised values of the properties.

H&R has also been granted other typical deal protection provisions including a right to match any superior proposal that is received by Primaris on an unsolicited basis.

Primaris President and CEO John Morrison says several other buyers had come forward with competitive offers following KingSett’s proposal last month.

“Six weeks ago, we embarked on a process to service max value in the face of a hostile bid,” he told investors during the call. “This announcement bears the fruit of that process as we present superior transaction to our unit holders.”

On the Toronto Stock Exchange, Primaris units were trading by mid-day at $26.70 per share, up 19 cents from Wednesday’s market close and close to the company’s peak this year of $26.90 per share.

Meanwhile, H&R units were listed at $23.30 by mid-day, down 49 cents from the close.




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