TORONTO – A consortium led by KingSett Capital said Thursday that it hasn’t given up on buying Primaris Retail REIT (TSX:PMZ.UN) but won’t outbid a counter-offer for the national shopping mall owner because it would be “economically prohibitive.”
Instead, the group, led by KingSett and also comprised of the Ontario Pension Board, RioCan REIT (TSX:REI.UN), Canada’s largest shopping mall estate owner, and others, announced it will turn its efforts to “directly or indirectly” acquiring more Primaris units on the Toronto Stock Exchange to build its holdings.
In December, KingSett offered $26 per unit in a $4.4-billion cash takeover bid for Primaris, which owns 35 properties across Canada, including retail outlets in Manitoba, Quebec, Ontario and Alberta.
The board at Primaris rejected the deal, calling it an undervaluation of shopping centre real estate trust and began pursuing other potential buyers.
Last week, H&R REIT (TSX:HR.UN) offered a friendly takeover proposal of cash and equity valued at $28 per Primaris unit, with the cash component subject to a cap of $700 million.
Under the agreement, H&R would also be entitled to a $106.6-million break fee if Primaris accepts a superior proposal under certain circumstances.
The break fee includes 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 properties’ appraised values.
KingSett’s founder and managing partner, Jon Love, says the group has been prevented from putting in a higher offer because it does not want to risk triggering, what he called an “abusive and preclusive” break fee.
“The general market reaction has been very critical of both the quantum and the structure of the (break) fee,” he said in an interview Thursday.
“It is preclusive, highly unconventional and inconsistent . . . well beyond market practice and precedent transactions.”
Love says Primaris unitholders should vote down the H&R deal, which would void the break fee.
In the meantime, the KingSett group says it plans on purchasing up to five per cent of the Primaris units that were outstanding when it made its takeover proposal on Dec. 10, as permitted under securities laws.
KingSett already holds nearly 6.9 million units, or seven per cent interest in Primaris.
“Our takeover bid always contemplated that we would be permitted to make purchases in the market subject to, and in accordance with, security laws,” said Love.
“We’re taking this step to potential purchases in the market as we continue to examine our options.”
Primaris declined to comment on KingSett’s statement, but urged unitholders on Thursday to accept the H&R offer.
For the deal to go ahead, it needs to be approved by two-thirds majority vote of Primaris unitholders and by a 50.1 per cent majority vote by H&R unitholders. The company is holding a meeting with unitholders in March.
Kevin Chu, an analyst with independent equity firm Accountability Research Corp., said he thinks KingSett is trying to “make noise” to try to entice Primaris unitholders with hopes of of possibly a better deal if they reject the H&R bid.
Chu said the consortium will also find themselves in a better negotiating position with other investors if it does purchase those additional units.
“When it comes down to it, we don’t know if they are buying more (units) for sure. The intent is to do that,” he said. “If they can somehow convince one or two of the larger unit holders (to reject H&R)… then they’re really close.”
KingSett is in a tough spot because the break fee is so “unconventional,” because it includes real estate holdings instead of just a financial penalty, he added.
If it is triggered, KingSett has the potential to lose the Yonge Street properties and Dufferin Mall portfolios in Toronto, properties which are of value to its consortium partner RioCan.
Although the Primaris properties currently have a 97 occupancy rate, most of them are not in major metropolitan areas, said Chu.
Ten of the properties will also house U.S. retailer Target (NYSE:TGT) when the No. 2 discount retailer in the U.S. after Walmart opens its first wave of Canadian stores later this year.
H&R units traded closed up 48 cents at $23.98 Thursday on the Toronto Stock Exchange, while Primaris units remained below H&R’s offer but hit a 52-week high of $27.31 following the KingSett announcement before closing at up 37 cents at $27.27.