Primaris REIT chief financial officer Louis Forbes, left, and chief executive officer John MorrisonSami Siva/The Globe and Mail
KingSett Capital's $4.4-billion bid for Primaris Retail REIT looks skimpy on some measures, but the buying group may not have much competition that forces the price higher.
KingSett's hostile offer is $26 a share, which represents about a 13 per cent premium to Primaris' trading price lately. That's pretty slim relative to recent precedents. Looking at purchases in the real estate business in North America in the past three years, in deals worth more than $500-million, the average announced premium has been 19 per cent, according to data from Bloomberg. Another way of looking at it is that investors could hold Primaris for about 2 1/2 more years and collect the equivalent of that premium in distributions.
What's more, analysts from firms such as BMO Nesbitt Burns and Macquarie Capital Markets are saying that Primaris is worth more, probably closer to $28 a share.
That's all good, but it may not matter. KingSett has set up the playing field, so it may not have to go that far to win.
What KingSett has going for it is that there are not a lot of other potential acquirers to compete for Primaris. KingSett has tied up many possible rivals in its own bidding group, including shopping centre giant RioCan REIT, and a group of pension funds. In Canada, there are a handful of pension funds, and a few rival real estate firms. Some dealmakers have mentioned U.S. mall owners such as Simon Properties and CBL & Associates as potential white knights. But all feel like long shots. Primaris has a nice collection of mid-market malls in mainly mid-sized cities, but it is not a flagship portfolio.
In addition, KingSett already has 7 per cent of Primaris, giving it a head start on anybody else who wants to take a shot.
And when it comes to arguing the premium, the KingSett side can point to a capitalization rate on the deal of 5.6 per cent, based on expectations for coming earnings, which is in the range where Canadian real estate has been trading. KingSett can also argue that there is heightened market risk in Primaris, given the run that REIT stocks have been on.
All of that goes a long way to explaining why investors are not pricing in very much of a bump in the bid. The stock finished Wednesday 40 cents above the bid price. Considering Primaris would likely pay at least one and maybe two monthly distributions of 10 cents a share before KingSett's group could close a deal, that's not much expectation of a higher offer at all.
Analyst Michael Smith of Macquarie said in a report on Wednesday that, even though $28 would be a better price, the most likely outcome is that KingSett walks away the winner after bumping its offer up by about $1 to around $27 to get investors on side.