Primaris REIT chief financial officer Louis Forbes, left, and chief executive officer John MorrisonSami Siva/The Globe and Mail
When a major takeover is announced, the acquirer typically checks two boxes. Will the deal add value to shareholders? And is it accretive, meaning will it boost earnings per share?
H&R REIT is apparently only checking one of the two.
To start the conference call for its multi-billion dollar friendly takeover of Primaris Retail REIT, management said off the top that it believes the deal adds value to both sets of unitholders. Check. But when asked about accretion shortly after, it tried to skirt the issue.
The takeover is "not a story of accretion," said chief executive officer Tom Hofstedter. "It's a story of getting better, getting stronger."
Ten Primaris properties will house Target stores when the finally open in Canada, and H&R argues that adding mall assets uniquely positions them to welcome more U.S. retailers who want to cross the border. Plus, the combined balance sheets should be better able to support the bigger portfolio of properties.
But most of that is a long-term story riding on hope. What if the U.S. economy suddenly heats up and U.S. retailers decide to invest more at home, rather than Canada? In that scenario, what will shareholders be left with? H&R's press release has one short line about the deal being accretive, but the company won't explain it, making some people scratch their heads particularly because Primaris trades at a higher multiple.
The accretion issue is so crucial for H&R's bid because the majority of the offer comes in the form of shares (the cash portion is capped at $700-million). Kingsett's offer, however, was fully-funded and all cash.
At the start of the call, H&R said it went looking for a better deal because some of its shareholders weren't pleased with the premium the Kingsett consortium offered. Yet by the end of the Q&A session, some very vocal shareholders argued the exact opposite.
The H&R bid comes at only a 5 per cent premium to the Kingsett consortium's, yet there isn't nearly as much cash on the table. "I'm sure there were other shareholders who preferred an option with all cash," argued one investor.
When pressed on the issue, Primaris's management simply resorted to saying that their board determined this was the top choice. "This was the best proposal for us to accept," CEO John Morrison said.
That didn't do much to appease the angry shareholders, who argued the break fee more or less locks Primaris into a transaction that in their eyes isn't much better (and is arguably worse) than the Kingsett deal.
What enraged them even more is that Primaris acknowledged they didn't go back to Kingsett to ask if there was a higher offer. Management said their advisers reached out to Kingsett right when they opened the books to prospective bidders, but had no communication with the original hostile bidder since.
(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
Tim Kiladze