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The owner of Zellers and the Bay is in talks with American retailers about selling stores to them, underscoring the growing desire of U.S. chains to expand here.

U.S. real estate magnate Richard Baker, who controls Hudson's Bay Co., is in discussions to unload some of his Canadian locations, particularly Zellers properties, according to multiple sources. The negotiations could result in an announcement of a deal as early as this week, these people said, although they cautioned that nothing has been finalized.

HBC, which Mr. Baker purchased in the summer of 2008, owns or leases some of the best retail property in Canada. It isn't clear which companies would be the front-runners to acquire some of those stores, but the negotiations come at a time of unprecedented interest among U.S. chains in setting up shop in Canada. Retailers here have outperformed their counterparts south of the border, especially during the recession.

Foreign merchants face a challenge in finding attractive retail space to move into in Canada. Among American chains that are known to be scouting out locations in Canada are discounter retailers Target Corp., Kohl's and Marshalls, a sister chain to Winners Corp.

Wal-Mart Stores Inc. and some Canadian players are also said to be part of the talks.

If a deal went ahead, "it would change the playing field," said Tony Grossi, owner of retail/real estate consultancy Grossi NorthBound, which advises U.S. retailers. "That would definitely shift the marketplace."

Edward Sonshine, chief executive officer of RioCan REIT, whose malls include many Zellers locations, declined to comment when asked about a possible HBC deal, saying only: "If everything that I hear about actually happens, then a year from now the whole face of Canadian retail will be changed."

Mr. Baker has been intent on reviving the tired retailer and taking it public later this year. While his executive team has made progress in turning around its Bay outlets, it has struggled to make gains at its Zellers discount chain, industry watchers say. Zellers competes head-on with giant Wal-Mart Canada Corp; it will face mounting competition from cheap-chic Target Corp., a popular U.S. retail destination. Target has been looking for Canadian sites for months.

On Tuesday, Mr. Baker declined to comment on any talks or their nature. Amy Reilly, a spokeswoman for Minneapolis-based Target, also wouldn't comment on conversations it may be involved in. "We believe Target has opportunities for expansion outside the United States," she said. "We're focusing our efforts on the immediate term on Canada."

Alex Avery. executive director and REIT analyst at CIBC World Markets, said any foreign retailer that would like an immediate presence in the country is more likely to seek space that is already built. Some, such as home improvement specialist Lowe's Cos., have expanded one store at a time, but that tends to be the exception.

"There's some current new development going on, and we could see more in response to these new entrants, but for a retailer eager to enter the Canadian market, the best way to do it might be to buy a retailer," he said, adding occupancy rates of existing space are near 96 per cent.

"The Canadian retailing market isn't that big relative to the U.S., so retailers don't want to spend years slowly building what would be to them a small part of their businesses. But if a retailer can gain critical mass quickly, Canada can be a fantastic new market, with a common language, integrated economies, and close proximity to their home market."

John Morrison, chief executive officer of Primaris REIT, which owns shopping malls in many smaller Canadian cities, said the addition of Target would put a great deal of pressure on Zellers, one of Primaris' largest tenants.

"You have to ask yourself - if and when Target gets established in this country, where does that leave Zellers in the long term?" he said, adding he believes Target can successfully compete with Wal-Mart.

"Zellers over the past many years has built up quite a compelling real estate portfolio. It would be difficult for anyone to come in on their own volition and replicate that."

Industry sources said a deal with HBC could involve one or more U.S. public companies. "There are multiple parties that have interest," a source said. "That interest has been more active lately than it has been over the last five years."

The source cautioned, nevertheless, that if a deal was closed, it would be very complicated and that a straight takeover of Zellers by Target was not on the table.

Mr. Sonshine said Canadian consumers would ultimately benefit from the influx of U.S. retail. "As the president of Canada's largest landlord, I think it will be very good for us."

Kohl's spokeswoman Vicki Shamion said it doesn't comment on real estate speculation but it runs a number of successful stores on the Canadian border. It "will continue to assess opportunities to best serve our customers in markets where we have backfill opportunity and in markets not currently covered by the existing Kohl's store base. Kohl's recently announced plans to open approximately 40 stores in 2010 as real estate prices remained favourable, and we will continue to explore opportunities to gain market share through expansion when and where it makes sense."




Number of stores under the Zellers brand, Hudson's Bay Co.'s mass merchandise retailer.


Number of square feet of Zellers' new prototype stores.


The year Walter P. Zeller renamed Schulte-United's 14 Canadian stores Zellers after U.S. retailer went bankrupt due to the Depression. Those first stores were located in southwestern Ontario, Quebec and Ontario.

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