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* Unsolicited bid offers 12.8 pct premium to Tuesday's close
* Move comes as U.S. retailers look to expand in Canada
* Primaris' unit price surges on the TSX
* Primaris urges unitholders to sit tight act on offer (Adds background, analyst comment; updates share price move)
By Euan Rocha
TORONTO, Dec 5 (Reuters) - A consortium led by Canada's KingSett Capital will offer about C$2.6 billion ($2.62 billion) to acquire Primaris Retail REIT to bolster its portfolio of Canadian shopping malls at a time when U.S. retailers are looking to expand northward.
The unsolicited offer, announced by the private equity firm on Wednesday, would give KingSett control of mid-market retail centers in major cities across Canada and dominant shopping malls in secondary cities. The Ontario Pension Board is one of the consortium's members.
The consortium, which includes the Ontario Pension Board, is set to make a cash bid worth C$26 per unit. The offer represents a premium of 12.8 percent to Primaris Real Estate Investment Trust's Tuesday closing price of C$23.04 on the Toronto Stock Exchange. Including the assumption of debt, the transaction is valued at about C$4.4 billion.
Primaris units, which previously touched an all-time high of C$24.93 in August on the TSX, surged about 15 percent to C$26.50 in early trading, indicating that investors were expecting a sweetened offer or rival bid to emerge.
Volumes in the typically thinly traded units surged more than 60 times above average and Primaris was the most actively traded name on the TSX, with its units closing C$3.36 higher at C$26.40 on Wednesday.
"This is round one of the negotiations," said Raymond James analyst Ken Avalos, who advised unitholders to hold out for a bid of C$28 or higher.
The offer comes as U.S. retailers, looking to expand into Canada, vie for prime real estate assets. Last year, Target Corp , the second-largest U.S. discounter, agreed to take over Canadian leases for some Zellers stores owned by Hudson's Bay Co in a deal worth some C$1.8 billion.
RioCan Real Estate Investment Trust, Canada's largest REIT, last year signed a C$1 billion joint venture to develop outlet malls in Canada with U.S.-based Tanger Factory Outlet Centers.
The KingSett proposal is supported by a C$1.1 billion side deal with RioCan, which has agreed to buy some of the Primaris assets after the close of the proposed transaction.
"We are not surprised to see the REIT in play, nor to see RioCan participating in the transaction, as it has been selectively increasing its exposure to fashion/malls ahead of Target coming to Canada next year," said BMO analysts Karine MacIndoe and Pauline Alimchandani in a note to clients.
KingSett, which focuses its investments on real estate, said the deal has the support of Alberta Investment Management Corp, Ivanhoé Cambridge and other top Canadian institutional investors that are invested in its funds.
"This is a strong and compelling offer, providing unit holders with a premium price at a time of peak valuations in the sector," said Jon Love, KingSett's managing partner.
Love said he met with Primaris CEO John Morrison on Tuesday night and informed him of KingSett's plan to make an offer to unitholders of Primaris. Love declined to provide any details of Morrison's response to the offer, but described the meeting as "very courteous."
"This is a very large transaction and there were a number of parties at the table and going directly to unitholders was simply the most effective and practical way forward," said Love, who formerly headed Oxford Properties from which Primaris traces its origins.
Primaris, in a brief statement, strongly advised its unit holders to take no action at this time, as it has yet to receive a formal offer. The REIT said its board and advisers would make a recommendation after reviewing an offer.
"Real estate has had a nice run and we believe the price offered is fair," the BMO analysts said, adding that a higher price of about C$28 a unit may still be needed to get Primaris's board to agree to a friendly deal.
Euro Pacific Canada analyst Rob Sutherland believes that some U.S. such as Simon Property Group or General Growth Properties may be compelled to take a look at Primaris.
"REIT portfolios of this magnitude so rarely come to market that any entity thinking about moving into Canada will have to look at this as a once in a decade opportunity," he said.
Primaris, formed in 2003, owns more than 30 properties in cities across Canada, including the Dufferin Mall in Toronto, the Cornwall Centre in Regina, Saskatchewan, the Tecumseh Mall in Windsor, Ontario, the Woodgrove Centre in Nanaimo, British Columbia, and the Cornwall Centre in Regina, Saskatchewan.
Its tenant list includes household names such as Hudson's Bay, Canadian Tire, Reitmans, Sears Canada , Target, Shoppers Drug Mart Corp and others.
KingSett said it had secured the financing required to close the proposed transaction and to provide for any post-closing refinancing and liquidity requirements.
The firm said full details of the offer will be included in a formal offer and take-over bid circular, which will be filed with Canadian securities regulators in the coming days. The bid will need the backing of at least two-thirds of the unitholders.
KingSett and its affiliates own about 6.88 million units of Primaris, representing about 7 percent of issued and outstanding units, making them one of the top unitholders in the company.
RioCan did not disclose the properties it is targeting in the side deal but said it planned to acquire full control of six and a 50 percent interest in two others.
Chris Damas, who owns positions in Canadian REITs like First Capital Realty and Calloway, believes that RioCan is aiming to acquire some of the Primaris properties that will have Target locations on them.
"Let's face it, there is a horse race to get those Target stores between them and Calloway and First Capital," said Damas.
Primaris owns about ten Zellers outlets that are now being converted into Target stores. RioCan is already Target's biggest landlord in Canada and last year RioCan's CEO said he hoped that their relationship with the retailer would expand.
$1 = 0.9927 Canadian dollars Reporting by Euan Rocha; Editing by Frank McGurty, Leslie Gevirtz and Bernard Orr