Mall brawl starts with $4.4-billion bid

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A deep-pocketed consortium is trying to scoop up dozens of shopping malls in a $4.4-billion bid, aiming to carve up the spoils in what the bidders say is the largest takeover battle that Canada's real estate investment trust sector has seen.

The group, led by KingSett Capital, has launched a hostile offer – rare in the sector – for Primaris Retail Real Estate Investment Trust, but analysts say that bid is unlikely to be successful unless KingSett sweetens its offer.

However, KingSett managing partner Jon Love said the bidders have put their best price forward, and went on to suggest the chances of a rival offer emerging are extremely rare.

Primaris owns more than 30 malls and shopping centres across the country, such as the Dufferin Mall in Toronto, the Northland Village Mall in Calgary and Place Vertu in Montreal. The bid for it is making waves not only because of its size, but also because of its hostile nature. No potential acquirer has ever taken over a Canadian REIT without first bringing that company's board and management onside, said Alex Avery, an analyst at Canadian Imperial Bank of Commerce.

The bid would see KingSett, a large private equity firm that invests in real estate, team up with the Ontario Pension Board at a time when pension funds are hungering for real estate because of meagre returns from stock and bond portfolios. RioCan REIT, Canada's largest shopping mall manager, would pick up a $1.1-billion slice of the portfolio, including five regional malls and three open shopping centres anchored by grocery stores.

"I think that they're really looking to the future and the fact that you're going to be able to redevelop these assets and earn a return by doing so, and you're also going to take advantage of the fact that a number of U.S. retailers are probably going to announce greater expansion plans into Canada and these malls are probably going to be the best locations for them to operate in," said Michael Missaghie, a portfolio manager at Sentry Investments, which owns a stake in Primaris. "It's tough to get these assets in one fell swoop the way they're getting them here."

Mr. Missaghie said it's too early to say whether he might tender to the offer, but analysts are skeptical that the all-cash bid will succeed at its current level of $26 per unit. That is about 13.3 per cent higher than the volume-weighted average trading price of the units over the 20 trading days up to Wednesday.

"In our view, KingSett's offer is simply too low," Macquarie Securities analyst Michael Smith wrote in a note to clients.

"I think they'll have a difficult time getting the deal done at $26. The premium is relatively skinny," Mr. Avery said.

But analysts also feel that it's unlikely a rival bidder will emerge, meaning the most likely scenarios are that KingSett raises its offer or the deal doesn't get done. Of the Canadian REITs, RioCan would have been the most likely bidder for all of Primaris, they said. And the real estate arms of the Canadian pension funds are unlikely to jump into the fray because they have been selling the types of malls that Primaris owns in favour of other types of real estate. Insurers or American players might be outside contenders as possible bidders.

"I think to actually be able to pay a premium to the market price you really have to have lightning strike, and having lightning strike is being able to assemble a team of institutions who all have their individual strategic imperative and that the assets in the portfolio meet their needs," said Mr. Love, managing partner at KingSett.

"It is a bit of a work of art to be able to create this premium, and we elected to put our best price forward," he said. "And it's a substantial premium when you consider that it's a time of peak valuations."

REITs have been on a tear of late because of factors including cheap debt, investors' quest for yield and distribution increases. The demand for real estate by pension funds and insurers has also been playing a role. KingSett stressed Wednesday that Alberta Investment Management Corp. and Ivanhoe Cambridge are limited partners of certain KingSett funds, suggesting that indicates the two firms support the transaction. Both declined to comment.

Mr. Love played down the notion that the bid is hostile. "We met with [Primaris CEO John Morrison] last night to tell him of our intention," Mr. Love said Wednesday. "But because it's a large deal with several parties at the table, going directly to the unitholders was simply the most practical way to move forward."

Mr. Love noted that he has known Mr. Morrison a long time and that he has a lot of respect for him. Mr. Love's father founded Oxford Properties Group in 1960, and after his father left, Mr. Love became its CEO, in 1992. He remained in that role until 2001, when the Ontario Municipal Employees Retirement System (OMERS) struck a $4-billion deal to buy Oxford. Mr. Love co-founded KingSett after that.

Around that time, in 2002, Mr. Morrison began working at Oxford and went on to become president. In the meantime, OMERS and Oxford decided in 2003 to spin off six smaller shopping malls into a public REIT, giving birth to Primaris.

"A lot of the folks that work at Primaris used to work for Jon Love," Mr. Smith said.

While he used to preside over some of the assets, Mr. Love noted that Primaris's portfolio is now very different from the one that his father built up and that he once ran.

KingSett once held a 12 per cent stake in Primaris, which it sold in the fall of 2010 as it concentrated its resources on buying a swath of industrial properties as part of a $2-billion joint venture with AIMCo. The bidders in the KingSett consortium now hold about 7 per cent of Primaris's units.