The Dufferin Mall in TorontoRyan Enn Hughes/The Globe and Mail
Primaris gave friendly bidder H&R REIT a pretty creative package of protection to prevent rival bidder KingSett Capital from coming back with a bigger hostile bid, and in doing so appears to have upset a lot of investors and analysts.
The break fee drew fire for its size, at $106.6-million or about 4 per cent of the equity value of Primaris, which seemed big to some investors, given that H&R is only planning to pay about 5 per cent more than KingSett.
But that's not all that raised eyebrows. A buyer topping H&R would not get two of Primaris's key assets, the Dufferin Mall in Toronto, and a package of property on Yonge Street in Toronto, because they will be handed over to H&R as part of the break fee. The break fee is $70-million plus the right to buy those properties at a $36.6-million discount to the appraised value. If Primaris shareholders don't approve the sale to H&R, and then accept another deal within the following nine months, the break fee would also be payable.
Investors and analysts were not impressed.
Those sites are "strategic assets desired by other potential bidders," in the eyes of Macquarie analyst Michael Smith, who said he was "disappointed" to see the properties included in the break fee, which he called "obstructing a competing bid."
There were a lot of testy questions from investors about the break fee on the conference call, and management was clearly on its heels, shutting down one questioner when he pushed at length on the subject.
Management defended the fee by saying on the conference call that there are precedents for doing break fees like this. Management wouldn't comment on whether investors would be able to challenge the break fee in court.
This has the feel, given the angry shareholders and the odd structure, of a fee that could end up facing significant scrutiny and perhaps a challenge in front of regulators.
(Editor's note: On a conference call regarding the deal, executives initially said that the break fee would be payable if Primaris shareholders didn't approve the sale to H&R. The companies later clarified to say that the fee would only be paid if Primaris shareholders voted down the transaction and then accepted another competing bid. This item has been updated to reflect that.)
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)