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Investors could sour on Goldhar's sweet deal with Calloway

Calloway REIT was a tiny, two-bit property company before Mitch Goldhar came on the scene. Then Mr. Goldhar began selling his shopping malls to Calloway, the stock price nearly doubled, and it became one of the hot growth stories in Canadian real estate.

Now it's payback time, as far as Mr. Goldhar's concerned. Will Calloway investors let him get what he wants when they vote on the deal? More importantly, will RioCan boss Edward Sonshine?

Calloway's latest deal is a stunner, not only for its size but for the importance it gives to Mr. Goldhar, who became one of the country's wealthiest men by finding and developing Canadian sites for Wal-Mart. Calloway will pay $1.2-billion to buy interests in 36 properties from Mr. Goldhar's privately held FirstPro Shopping Centres and Wal-Mart Canada.

The move will instantly double its size and make it the country's second-largest retail real estate investment trust by market capitalization. That's the nice part. But another view, one that's gaining some currency with Calloway unitholders, is that Mr. Goldhar is using the deal to grab control of Calloway without paying for it.

As part of the bargain, Mr. Goldhar's equity stake in Calloway will rise to as much as 30 per cent from 16 per cent. His voting stake could jump to 40 per cent, thanks to a special class of voting units he'll be given. He gets to install his own chief executive officer (FirstPro executive vice-president Simon Nyilassy). And if anyone else tries to sneak in and acquire more than 20 per cent of the votes, FirstPro can take back the leases on nine of the sites.

You can see why investors are torn. They feel loyal to Mr. Goldhar because he's made them a lot of money. But do they really have to put up with this?

"What FirstPro is offering, really, is a takeover bid with no premium," says John Priestman, managing director at Guardian Capital, one of Calloway's largest shareholders. "We don't like the fact that Mitch Goldhar is not an officer or director and he's getting 40 per cent of the votes . . . We just don't go for [multiple-voting structures]. That's just totally unacceptable in this day and age."

Of the lease provisions, Mr. Priestman says: "It's a great deal for him because most of those are right on the fringe of the GTA [Greater Toronto Area] so that's about as prime a real estate as you can get." At least one analyst has described the clause as a "poison pill."

It's not an academic argument, because some investors hold the belief that Calloway has other options -- such as a takeover by RioCan, king of the retail REITs.

RioCan has a lot going for it -- a solid reputation, a large and diversified set of properties and long-term leases that have captured some of the best tenants. What it doesn't have is much growth. The trust's distributable income has grown about 5 per cent (per unit) over the past three years -- solid but not exciting. And since FirstPro's so tight with Wal-Mart, RioCan has been cut off from enjoying much of the Bentonville Beast's expansion in this country.

Buying Calloway would spice up RioCan's growth profile, but there's just one problem. Mr. Goldhar would rather remove his own eardrum with a butter knife than sell to his No. 1 competitor. The rivalry is partly a reflection of the principal antagonists. RioCan's Mr. Sonshine is a lawyer and professional manager; Mr. Goldhar grew up around real estate, and his father built a small collection of warehouses and strip malls. RioCan's head office is in one of the swankiest office towers on Bay Street; FirstPro's is in Vaughan, a Toronto suburb that redefines boring.

"Mitch is saying, 'I'll sell my properties to this REIT, but I'll be damned if I'll turn around and have RioCan take it over,' " says one analyst, speaking on condition of anonymity. It's understandable he would feel that way. But should that decision belong to him, or to Calloway unitholders?

vox@globeandmail.ca

© The Globe and Mail

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