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Cominar Real Estate Investment Trust (CUF.UN-T), aiming to create one of Canada's largest diversified property portfolios, has offered to buy Canmarc REIT (CMQ.UN-T) in a hostile bid that values its rival at $838 million.
Canmarc's office and retail properties would increase Cominar's asset base by 42 percent and position it for further growth. Cominar, already the largest commercial property owner in the province of Quebec, would trail only H&R Real Estate Investment Trust as Canada's biggest diversifed REIT if the deal is completed.
Canmarc on Monday rejected the offer, saying it was not given enough time to look at the proposal carefully.
After the deal was announced, Canmarc units jumped on the Toronto Stock Exchange as the company was effectively put into play in a market seen ripe for acquisition activity.
"Conditions for M&A are prime in the real estate world," said Alex Avery, an analyst with CIBC World Markets. "You've got abundant, cheap debt, strong property fundamentals and huge demand for stable income, particularly as the 10-year government of Canada bond hovers around 2 percent.
Canadian REITs benefited from market turbulence following the global financial crisis as investors looked to them as a high-yield haven for retirement savings and other capital.
15 PERCENT PREMIUM
Cominar will buy Canmarc units for $15.30 in cash each, a 15 percent premium on the closing price on Friday. As an alternative, it offered 0.7054 of a Cominar unit for each Canmarc unit.
Cominar said it had already raised its stake in Canmarc to 15.1 percent through a private agreement to buy about 3 million units. That made it the second-largest unit holder in the REIT.
Canmarc, established 18 months ago, changed its name in September from Homburg Canada Real Estate Investment Trust, reflecting its broadening strategic focus.
The board of trustees of Canmarc rejected Cominar's initial approach in part because of Cominar's demand that Canmarc respond to the bid within two days.
"Given the REIT was not for sale and that it continues to successfully execute on its business plan, it is unreasonable to ask the REIT to respond to their proposal within a 48-hour window," said Karen Prentice, chairwoman of the Canmarc board as well as a special committee formed to evaluate the deal and look at other options.
Under the non-cash alternative on offer, Canmarc shareholders would see an increase in monthly cash distributions of about 6.9 percent, Cominar said, as well as participating in the growth of the company.
The Canmarc transaction would add immediately to Cominar's distributable income, funds from operations and adjusted funds from operation, the company said.
"It's very difficult seeing them being able to get shareholders to pass on a premium in exchange for the status quo," said the CIBC's Avery.
Cominar said that National Bank of Canada, Bank of Montreal and Caisse Centrale Desjardins have committed to funding the cash offer for Canmarc units.