If H&R Real Estate Investment Trust wants to lock down its takeover of Primaris Retail REIT it needs to get out and sell the story fast, because rival KingSett Capital is signalling that if investors balk it will be there to catch them.
The only thing standing between H&R and victory is H&R's weak stock, which is hampering the value of its cash and share bid. KingSett offered $26 in cash, while H&R's combo bid is worth a bit more than $27.
Now KingSett is strongly hinting that if investors vote down the H&R bid, the company could exploit a loophole in the big break fee on the H&R agreement to bring in a higher offer later. KingSett can't say now it would bid more without triggering the fee, so it requires a leap of faith on the part of Primaris shareholders to vote down H&R and trust that KingSett will pay a buck or so more later to take care of them.
KingSett basically told the world Thursday where its new bid could be by saying it would buy shares in the open market – in effect stating that the current market price of $27.23 for Primaris is no problem.
Investors would rather not take a leap of faith. H&R can save them the risk if it can get its stock up so the bid is near $28, which is what most people think bidding for Primaris will top out at.
That means getting H&R's management out to sell the merits of the deal (there are many for H&R, including size, diversification and an improvement in some leverage metrics.) It's not without risk, as H&R's chief executive Thomas J. Hofstedter can rub people the wrong way. Just have a listen to the conference call from when the Primaris-H&R deal was announced. But he has a good story to tell.
He could make it even better by increasing the cash component – with a promise to delever later with equity sales to appease creditors and bond raters. That would boost the appeal of his bid and might prompt a virtuous cycle in his stock by causing traders who have shorted H&R to buy Primaris to cover their shorts.
So H&R has a window here to make its bid a knockout, through communications or cash or both.
On the KingSett side, pinning hopes on a no vote from shareholders on H&R or a challenge of the break fee is risky. The break fee looks questionable to some, but courts are not in a habit of throwing out such agreements in Canada.
Should KingSett have a chance to make a higher bid – partner RioCan REIT could well play a bigger role. Now RioCan is in the background, waiting to buy some Primaris assets when and if KingSett succeeds.
RioCan could be a not-so-secret weapon in any increased KingSett bid. A litte RioCan paper, which trades at a premium, would go a long way to creating a higher bid that would be attractive to investors, while keeping the cost of capital down for the KingSett group.
RioCan should be motivated here, as H&R is threatening its crown as Canada's biggest REIT. There's ego, but there are also some tangible benefits to being biggest such as financing capacity.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)