H&R Real Estate Investment Trust (REIT) (TSE:HR.UN) has agreed to buy Primaris Real Estate Investment Trust (TSE:PMZ.UN) for about $27.33 in cash and stock - trumping a hostile bid of $26 a share from a consortium led by Kingsett Capital.
In December, KingSett offered C$26-per-unit in cash for Primaris, which the company rejected, saying it undervalued the REIT, which runs malls across Canada, including Toronto's Dufferin Mall. The KingSett-led group includes the Ontario Pension Board.
H&R said it would become Canada's largest real estate investment trust (REIT) by enterprise value, forming a "fully diversified" commercial portfolio in terms of geography, asset class and tenant base.
"This is a unique opportunity to acquire an irreplaceable and much sought-after enclosed shopping centre portfolio. It permits us to expand into a new and exciting asset class in Canada with an existing infrastructure having an experienced and dedicated professional team," said H&R CEO Tom Hofstedter.
"This acquisition will solidify H&R's position as Canada's leading diversified real estate investment trust and is complementary to our existing low risk, high quality and conservative philosophy."
Under the terms of the deal, unitholders of Primaris will be able to choose to receive 1.13 stapled units of H&R or $28.00 cash per unit, subject to a maximum cash amount of $700 million.
The full proration price of $27.33 also represents a 19.1 per cent premium over the $22.95 volume weighted average price of Primaris units for the 20 trading days up to December 4, the day before KingSett Capital announced its hostile bid for Primaris.
With expected savings from synergies of up to $10 million over the next two years, the transaction is anticipated to add to funds from operations, H&R said.
The company also said the deal, aside from the premium over the hostile bid, offers Primaris unitholders the opportunity for a tax-deferred rollover for substantially all of the unit portion of the consideration.
"We are excited to be able to participate in the U.S. retail expansion into Canada, with Target set to open in 10 Primaris shopping centres within the next few months. This will undoubtedly lead to increased traffic and sales within the Primaris portfolio and ultimately result in an increase in value to our combined unitholders," Hofstedter added.
In connection with the proposed KingSett-led deal, RioCan Real Estate Investment Trust (RIOCF, REI.UN.T) agreed to buy certain Primaris properties on closing of the takeover for about C$1.1 billion.
Chair of the independent committee formed at Primaris, Bill Biggar, said: "We have succeeded in our mandate to attract a financially superior alternative to the hostile offer currently in the market.
"This transaction delivers greater value to our unitholders while allowing them to remain invested in the enclosed shopping centre asset class, and provides our employees with the opportunity to be a part of the largest consolidated REIT in Canada, with excellent growth prospects."
The deal still needs approval from at least two thirds of Primaris units voted at a special meeting and a 50.1 percent majority of H&R units. Both boards have already given their seal of approval to the transaction.
Shares in H&R REIT fell almost 1.5% Thursday, while Primaris stock gained 0.8%.