The rival bidders that were engaged in a heated battle for shopping-mall owner Primaris Retail Real Estate Investment Trust have joined forces and divided the spoils.
The new offer, valued at nearly $28 per Primaris unit, will see H&R Real Estate Investment Trust pick up Primaris's operating platform and 25 of its shopping centres, while a group led by KingSett Capital will take 18 properties.
It's not the outcome KingSett had originally been hoping for.
When KingSett, the Ontario Pension Board and RioCan REIT teamed up to quietly plot a surprise takeover of Primaris late last year, they code-named their plan Project Hoover, after the household device that leaves nothing in its path.
The group was seeking to grab a premier portfolio of dozens of malls and shopping centres in one swoop, in what could have been the biggest takeover of a real-estate investment trust in Canada. That wasn't the only reason the move was unusual. Real estate is a relatively cozy industry, but rather than talking to Primaris, which might have caused the company to canvass for other bidders, the KingSett group blindsided the REIT with its offer in December.
Less than two months later the group has agreed to walk away with less than half of Primaris's portfolio, ceding the majority of it to H&R, which had joined the fray in January by coming to Primaris's rescue with an offer that topped that of KingSett.
The two competing bidders managed to come together over the past 10 days and strike a deal with one another, as well as Primaris, even though tensions had been running high ever since Primaris swiftly rejected KingSett's offer and went hunting for a competing bid.
Executives at each of the companies involved say they are happy with the outcome.
When KingSett surprised the market with its initial offer shortly before Christmas, it was feeling confident. Analysts were skeptical that any other bidder would top its bid, even though a number of Primaris's shopping centres stand to benefit when Target Corp. stores come to Canada shortly. So KingSett was caught off guard when its plans were derailed by H&R's cash-and-share bid in mid-January, which came in above KingSett's all-cash $26-per-share offer. And, with that bid, H&R had negotiated an unusual break fee – if Primaris ultimately accepted an unsolicited bid that topped H&R's, then H&R would receive about $70-million in cash as well as the chance to buy Toronto's Dufferin Mall and other downtown properties at a discount.
Primaris had not given KingSett any notice of H&R's intentions nor allowed the KingSett group a chance to boost its bid before agreeing to the break fee. The fee dealt a particular blow to RioCan because the KingSett group had been planning to divide Primaris's malls among themselves, and Dufferin Mall was one of the assets that RioCan wanted most.
KingSett was initially at a loss to determine its next move. It thought its best strategy might be to wait and hope that Primaris's shareholders would vote against H&R's offer. Not only was the break fee controversial, but so too were potential fees that H&R's property manager stood to take if its bid succeeded. If H&R's deal was voted down, that would negate the break fee and clear the way for the KingSett consortium.
But when H&R and its property manager, which is partially owned by H&R CEO Tom Hofstedter's family, agreed to waive acquisition and management fees on Jan. 24, KingSett's hopes faded and its founder and managing partner Jon Love decided to reach out to Mr. Hofstedter, concluding that the best approach would be to ask if the two rivals might be able to work together, according to sources.
Mr. Love and Mr. Hofstedter met on the final weekend in January, and Mr. Love proposed that KingSett consortium take some of the assets, enabling a higher total bid. The two started negotiating, with the KingSett group eventually conceding the prized Dufferin Mall to H&R, and quickly involved Primaris's CEO, said sources.
Terms of the deal came together as the week ensued, with Primaris seeking more money from the KingSett group. By the end of this past weekend the deal was largely in place.
"From an H&R perspective, we're actually acquiring the vast majority of what we originally wanted," Mr. Hofstedter said in an interview. While RioCan, which focuses on retail, is Canada's largest REIT, Mr. Hofstedter's firm is now billing itself as the country's largest diversified REIT.
For its part, RioCan will be taking a 50-per-cent stake in Burlington Mall and full ownership of Oakville Place, both west of Toronto, for about $362-million. The malls fit into its strategy to concentrate on areas in and around large cities.
"We are delighted to be able to work with H&R and Primaris to end up with a solution that is better for H&R unitholders, better for Primaris unitholders, and works for the KingSett consortium," Mr. Love said.