For the biggest takeover profits in North America, investors are betting on Canadian real estate.
Canmarc Real Estate Investment Trust of Montreal closed yesterday 4.1 percent above a C$15.30-a-share hostile bid from Cominar Real Estate Investment Trust (CUF-U) after rejecting the offer. The gap between the shares and the proposal indicates traders who profit from acquisitions are wagering on a steeper price increase than any other pending deal in North America greater than $1 billion that includes cash, according to data compiled by Bloomberg.
With office vacancies in Canada at half the U.S. rate, Canmarc’s office buildings may lure rival bids from property trusts including Dundee (D-U) and Whiterock, according to Canadian Imperial Bank of Commerce. Its 84 retail properties may also interest RioCan (REI-U) or Crombie, said Canaccord Genuity Inc. Canmarc could command as much as a 30 percent premium to its net asset value, according to Canaccord, equal to about C$17.71 a share, based on the average of five analysts’ estimates for the value of its underlying assets compiled by SNL Financial.
“Clearly the market is pricing in a higher bid,” Alex Avery, a Toronto-based analyst at CIBC, said in a telephone interview. “With a very strong demand for property and a scarcity of portfolios available for sale, it’s not unreasonable to expect a slightly larger premium. It’s logical that at the very least they would pursue alternatives.”
Cominar, Quebec province’s largest commercial-property owner, offered on Nov. 28 to buy the 85 percent of Canmarc that it doesn’t already own for C$15.30 a share in cash. Shareholders may also choose 0.7054 share of Cominar for each Canmarc share, up to 16 million Cominar shares. The deal valued Canmarc at almost C$1.6 billion ($1.55 billion) including C$713 million of net debt, data compiled by Bloomberg show.
Canmarc’s board rejected the “opportunistic” bid and said shareholders should expect a “substantial” premium, according to a Dec. 13 statement. It also adopted a so-called poison pill to help prevent unwanted takeovers and allow time to “explore and surface all other strategic alternatives.”
Michel Dallaire, chief executive officer of Quebec City- based Cominar, said a day later he was “highly confident” that investors would accept the bid, which he noted is the only offer on the table, according to a statement.
Dallaire didn’t return a voicemail left with his assistant. Melanie Tardif, a spokeswoman for Canmarc, said in a phone interview that the company appointed a committee to look at all alternatives with the goal of ensuring that unit holders are fully compensated. She declined to comment on whether the company has been approached by other potential bidders.
While Cominar’s proposal was 15 percent higher than Canmarc’s 20-day stock trading average, the bid values the property trust at only a 12 percent premium to its average net asset value of C$13.62 a share, based on five analysts’ estimates compiled by research firm SNL.
Canadian property trusts have typically been acquired at a 15 percent to 30 percent premium to analysts’ consensus net asset value, according to Shant Poladian, an analyst at Canaccord in Toronto.
“It’s a steal,” Poladian said in a phone interview. “It was a premium to Canmarc’s share price, but it wasn’t a premium to the types of valuations that we saw across the rest of Canadian commercial REITs.”
Canmarc owns 115 properties and 67 percent of its real estate is in Quebec, according to its website. Cominar, with about a third of its leasable space in Quebec City, is trying to get a hold of Canmarc’s buildings such as the CN Central Station Complex in downtown Montreal and a 50 percent stake in Scotia Centre, a 42-story office tower in Calgary.
Even after climbing 33 percent since its initial public offering in May 2010, Canmarc traded at a 2.5 percent discount to the estimated value of its underlying real estate as of Nov. 25, before the offer was disclosed.
To give Canmarc “full credit” for its diversified portfolio amid a rising Canadian real estate market, the price may reach C$19.50 a share, based on his estimated net asset value of C$15.10, said Canaccord’s Poladian. CIBC’s Avery is projecting the takeover price could increase to C$16.50, about a 22 percent premium to his estimated asset value of C$13.50.
Since the transaction was announced, Canmarc’s shares had gained 20 percent through yesterday. The stock fell 8 cents to C$15.93 yesterday, 4.1 percent higher than the value of the cash offer. No other pending deal in North America greater than $1 billion including cash payment was trading further above its offer price, data compiled by Bloomberg show.
Canmarc gained 2.1 percent to C$16.26 today, the highest level since the deal was announced and 6.3 percent more than the bid. Cominar rose 0.8 percent to C$22.03.
“It’s trading through because there’s an expectation, for sure, in the market that there are other bids being prepared and that it’s a portfolio that will be attractive to a variety of bidders,” Heather Kirk, an analyst with National Bank Financial in Toronto, said in a phone interview.
Property trusts bidding on separate pieces of Canmarc’s holdings may deliver the best return for investors, said CIBC’s Avery. Canmarc’s 2.9 million square feet of office space may attract Toronto-based Whiterock (WRK-U) Real Estate Investment Trust, Artis Real Estate Investment Trust (AX-U) of Winnipeg, Manitoba, or Toronto-based Dundee Real Estate Investment Trust, said Avery and Canaccord’s Poladian.
While Toronto-based RioCan Real Estate Investment Trust or Crombie Real Estate Investment Trust (CRR-U) of Stellarton, Nova Scotia, may consider offers for the 4.2 million square feet of retail property, Canmarc’s entire portfolio may also draw bids from pension funds or life-insurance companies, said Poladian.
Kursat Kacira, Whiterock’s chief financial officer, declined to comment on whether the company is interested in Canmarc. Representatives for Artis, Dundee, RioCan and Crombie didn’t return phone calls or e-mails seeking comment.
Cominar has an advantage over potential outside bidders because it already ranks as Canmarc’s second-biggest shareholder with a 15 percent stake, Sachin Shah, a Jersey City, New Jersey- based merger arbitrage strategist for Tullett Prebon Plc, said in a phone interview.
“It may make a white knight suitor think twice,” Shah said. “The chances are higher that Cominar has to increase its offer” to as much as C$17 a share to win over investors, he said.
The real estate market in Canada has been “exceptionally good” because there wasn’t overbuilding, making Canmarc’s assets more valuable than the current bid, said Canaccord’s Poladian.
Canadian Real Estate
The U.S. office vacancy rate in the third quarter was 16.2 percent, down from 16.7 percent a year earlier, according to CBRE Econometric Advisors, a unit of Los Angeles-based CBRE Group Inc. The rate for Canada declined to 8.1 percent from 9.9 percent, CBRE said.
“Commercial real estate remained healthy and office demand picked up while new supply didn’t keep pace, so the fundamentals have been really good,” Poladian said. “There’s a good chance that, because it’s a high-quality asset, there’d be a reasonable amount of competition” for Canmarc, he said.