Primaris Investors Say H&R to Win as Break Fee Deters Rival Bids
H&R Real Estate Investment Trust’s offer for Primaris Real Estate Investment Trust (PMZ-U) to form the largest REIT in Canada will probably win approval from investors as a C$106.6 million ($108.1 million) break fee deters rival bids.
The C$2.68 billion friendly cash and stock offer is expected to pass because the odds of a superior bid are low, Ken Avalos, an analyst at Raymond James, said in a note yesterday. Toronto-based H&R said its bid announced yesterday worth about C$27.33 a share tops a hostile C$26 a share cash offer last month from a group led by KingSett Capital Inc.
“We are happy to see Primaris recognized at full value,” Steven Burton, managing director of CBRE Clarion Securities LLC, said in a phone interview. He did not speculate on whether H&R would win the bid. The Pennsylvania-based firm manages more than $20 billion and is the second-largest holder of Primaris shares, according to data compiled by Bloomberg. “Primaris has always been an attractive investment and it’s good to see the bids showing that.”
Primaris, the third-largest mall owner in Canada, was little changed at C$26.58 at 9:34 a.m. in Toronto, for a market value of C$2.6 billion. H&R, which operates office, retail and industrial properties in the Toronto area, rose eight cents to C$23.22. It dropped yesterday to C$22.87, the lowest since March.
About 40 percent of hostile bids are successful in Canada, according to Bloomberg data, setting a low precedent for KingSett’s unsolicited offer.
KingSett yesterday extended its offer to Primaris shareholders until Feb. 4 to allow time for it to review H&R’s offer, the company said in a statement. Louise Kozier, a spokeswoman for KingSett, said KingSett is not reviewing its own offer.
H&R’s offer is likely to go through, Dennis Mitchell, chief investment officer of Sentry Investments Inc. said in a phone interview yesterday. The Toronto-based firm is the fifth-largest holder of Toronto-based Primaris and also holds H&R shares. The H&R bid needs the support of two-thirds of Primaris holders.
“When everything settles, you’re going to get more economic value out of this deal than you will out of the KingSett bid,” said Mitchell, who said his firm bought 130,000 shares on Jan. 16, a day before the deal was announced.
KingSett had partnered with the Ontario Pension Board, which manages about C$17 billion, and RioCan REIT (REI-U) to acquire Primaris in an unsolicited offer in December.
Break Fee Unique
The C$106.6 million break fee is unique, said shareholder Chris Damas of independent research firm BCMI Research, tempering shareholder incentive to vote against the H&R takeover.
“The break fee seems designed to thwart a follow-up bid from KingSett or its partners,” Damas said in a note to clients and called it a “hit and run” deal. He holds Primaris shares.
The fee, which includes an option on Primaris’ Dufferin Mall and certain Yonge Street development properties in Toronto, is payable to H&R if Primaris accepts a superior hostile bid. To trump H&R’s offer, a potential investor such as RioCan would need to offer an C$29 all-cash bid -- enough to compensate for the fee, according to Mitchell.
“We are confident that the deal will get done and the business can be successfully integrated,” Primaris CEO John Morrison said in a conference call Jan. 17.
The takeover would yield savings of C$10 million over two years and deleverage H&R’s balance sheet, the company said. Primaris would boost shareholder payouts by 20 percent.
The REIT market in Canada is booming, raising about $440 million in five initial public offerings last year, more than any other industry, according to data compiled by Bloomberg. The Standard & Poor’s/TSX Capped REIT Index (SPRTRE) has climbed 8.9 percent in past 12 months, compared with a 3.3 percent gain for the S&P/TSX Composite Index.
Agellan Commercial Real Estate Investment Trust raised C$134.6 million ($136.4 million) this week in the first initial public offering of the year.
RioCan, the largest REIT in Canada by retail space, could still bid for Primaris, Damas at BCMI Research said, with the end goal of selling retail units to KingSett. RioCan, which operates 79 million square feet of retail real estate, had agreed to buy six properties and a 50 percent stake in two additional properties as part of the KingSett consortium.
Primaris, which had its initial public offering in 2003, operates retail real estate in urban centers and secondary cities to companies including Wal-Mart Stores Inc., Sears Canada Inc., and Canadian Tire. Their 33 mall properties include Zellers Inc. leases, which will be turned over to Target Corp. when the U.S. retail giant opens its doors this year.
The transaction would boost H&R’s retail side to 39 percent from 17 percent and cut its exposure to office space to 48 percent from 65 percent.
The Target store openings this year will drive foot traffic to the malls, raising tenant rents and occupancy rates. That means investment value for shareholders, said John Crombie, national director of retail real estate at Cushman & Wakefield.
“These aren’t the primary malls but they’re the workman’s malls -- it’s a good collection across the country,” he said in a phone interview from Toronto. “A lot of Primaris malls will be rejuvenated by Target with retailers getting ready by improving their space.”
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