H&R REIT (TSX: HR-U, OTC: HRUFF) and its affiliate H&R Finance Trust have reached an agreement to acquire Primaris Retail REIT (TSX: PMZ-U, OTC: PMZFF), one of the biggest owner/operators of Canadian shopping malls, in a cash and stock offer that values the target at approximately CAD2.74 billion.

The boards of H&R and Primaris have both unanimously agreed to vote in favor of the transaction and to recommend that unitholders vote “yes” on the deal as well. This friendly tie-up follows a hostile, CAD26 per unit offer for Primaris made in December 2012 by KingSett Capital. Primaris rejected the KingSett offer because it undervalued the REIT.

The H&R offer provides Primaris unitholders an option to be cashed out or to maintain a stake in the REIT that will result from the deal. Primaris unitholders may elect to receive either CAD28 in cash, subject to a maximum amount of CAD700 million, or 1.13 units of H&R per Primaris unit held.

Should Primaris unitholders choose to max out the cash option, it will represent approximately 25 percent of the total consideration. Should Primaris unitholders elect more cash than is available the cash consideration will be prorated among unitholders electing cash, with the balance being settled in H&R units at the 1.13 exchange ratio.

The cash price of CAD28 for each Primaris unit represents a 22 percent premium over the CAD22.95 volume-weighted average price for the 20 trading days up to and including Dec. 4, 2012, the day before KingSett Capital announced its hostile bid.

In connection with the proposed KingSett-led deal Canadian Edge Portfolio Conservative Holding RioCan REIT (TSX: REI-U, OTC: RIOCF) had agreed to buy certain Primaris properties upon consummation of the now-trumped takeover for about CAD1.1 billion.

It’s possible but not likely that RioCan could proffer a bid to rival H&R’s for all the Primaris assets. Standing in the way, however, is a rather onerous breakup fee payable to H&R should Primaris accept a competing offer.

H&R is entitled to about CAD106.6 million, structured as a cash payment of CAD70 million and an option to acquire Dufferin Mall and certain properties on iconic Yonge Street owned by Primaris, priced at an aggregate CAD36.6 million discount to the appraised value of these Toronto-based assets. H&R also has the right to match any superior proposal.

According to a statement released by H&R, the deal represents “a unique opportunity to acquire a professional retail platform, with an irreplaceable Canadian enclosed shopping centre portfolio.” The combined H&R-Primaris will be the largest Canadian REIT by enterprise value.

A bigger market capitalization will boost liquidity for unitholders in the combined entity, and broader portfolio diversification–by geography, asset class as well as tenants–will help stabilize cash flow. Assuming the cash option is exercised in full by Primaris unitholders H&R’s balance sheet will be stronger too, with debt-to-fair value reduced to 51.9 percent.

Management of H&R also forecast savings from synergies of up to CAD10 million over the next two years and said the transaction will be accretive to funds from operations.

Tom Hofstedter noted that the deal allows H&R “to expand into a new and exciting asset class in Canada with an existing infrastructure having an experienced and dedicated professional team.”

He described the Primaris portfolio as “complementary to our existing low risk, high quality and conservative philosophy.”

H&R also hopes to benefit from the expansion of US retail giant Target Corp (NYSE: TGT) into Canada. Target will open stores in 10 Primaris shopping centers over the next few months, which will “undoubtedly lead to increased traffic and sales within the…portfolio and ultimately result in an increase in value to…unitholders.”

Primaris unitholders now have the option to keep their ownership interest in shopping malls as well as the broader H&R portfolio of office and industrial assets or to receive at least some cash up front.

And they’ll also get a 20 percent distribution increase from the current Primaris annualized payout rate of CAD1.27 to CAD1.53, based on H&R’s CAD1.35 annualized cash rate and the 1.13 exchange ratio.

During a conference call to discuss the deal with analysts Mr. Hofstedter stressed that though it will boost funds from operations due to synergies the deal is about creating scale. He noted that the transaction “is going to increase H&R’s size by CAD2 billion market cap, create liquidity, create a much larger company.”

He also emphasized the philosophical match, noting, “We’re both very conservative.” H&R’s focus is on assets characterized by long-term lease arrangements, as it wants to avoid “the cycle game,” and “Primaris’ assets have been there forever.” H&R’s 97.5 percent occupancy rate will remain 97.5 percent post-transaction.

At the top of the call Mr. Hofstedter described the deal as “game changing” for H&R. As he later explained, it’s noteworthy not because of the accretion but because it’s “a story of getting better, getting stronger and buying it at a time when there’s a game changer out there called Target, just being one of the many international retail players that will be invading Canada.

Target’s move into 10 of Primaris’ properties represents, according to Mr. Hofstedter, “a couple of billion dollars of real estate [that] will be positively impacted by this move.” Target, H&R’s conception, is a CAD300-per-square-foot retailer that will replace Zellers, a CAD125 per-square-foot retailer, and generate more foot traffic, more sales and more rent.

And this, according to Mr. Hofstedter, will create long-term value for unitholders.

Nebraska Gov. Heineman Approves Keystone XL

In a Jan. 22, 2013, letter to President Obama and Secretary of State Hilary Clinton Nebraska Governor Dave Heineman wrote that he approved the new route for TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL pipeline and requested that the evaluation of the Nebraska Dept of Environmental Quality (NDEQ) be included the US Dept of State’s Supplemental Environmental Impact Statement.

Mr. Heineman, echoing the NDEQ’s final report, noted that TransCanada has provided “assurances” it would implement mitigation measures and that the re-routing missed environmentally sensitive areas. TransCanada redrew the proposed path of Keystone XL through Nebraska to avoid the Sand Hills region. The NDEQ, in its Jan. 4 report, concluded that the new route would have “minimal environmental impacts.”

Mr. Heineman also emphasized the economic benefits the NDEQ cited in its final statement on the proposed pipeline, writing “construction of the project would result in USD418.1 million in economic benefits” for Nebraska, that the project would “generate USD16.5 million in use taxes from pipeline construction materials” and that “annual local property tax revenues, for the first full year of valuation, would be between USD11 million and USD13 million.”

Keystone XL still requires a new draft supplemental environmental impact statement from the State Department, referred to in Mr. Heineman’s letter, which will trigger a comment period and then a final environmental statement before the is kicked up to Mr. Obama.

The State Dept has said that it will make a recommendation by March 31.

Here’s when Canadian Edge Portfolio Holdings will report their next sets of numbers. Dates are described as “confirmed” if companies have already announced release dates or “estimate” if we’re making a forecast based on past practice. We’ve linked to analyses of companies that have already posted results.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–March 8 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Feb. 28 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Feb. 28 (estimate)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–March 7 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–March 12 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–Feb. 8 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Feb. 26 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Feb. 7 (confirmed)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–March 6 (estimate)
• Dundee REIT (TSX: D-U, OTC: DRETF)–Feb. 20 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Feb. 22 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–March 14 (confirmed)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Feb. 15 (estimate)
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–March 13 (estimate)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Feb. 15 (estimate)
• RioCan REIT (TSX: REI, OTC: RIOCF)–Feb. 14 (confirmed)
• Shaw Communications Inc (TSX: SJR/A. NYSE: SJR)–Jan. 10 Flash Alert
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Feb. 13 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Feb. 28 (estimate)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Feb. 12 (copnfirmed)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–March 14 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Feb. 8 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Feb. 22 (estimate)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–March 22 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–March 15 (estimate)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–March 1 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–March 26 (estimate)
• Just Energy Group Inc (TSX: JE, NYSE: JE)–Feb. 8 (estimate)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Feb. 15 (estimate)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Feb. 14 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–March 7 (estimate)
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–March 7 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–March 7 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–March 5 (estimate)
• Wajax Corp (TSX: WJX, OTC: WJXFF)–March 6 (estimate)