Target buys Zellers leases for $1.8B

U.S. retailer Target saidThursdayit is buying the store leases ofCanadian discount retail chain Zellers from the U.S. investor who owns the Hudson's Bay Co. assetsfor $1.8 billion.

Underterms of the deal, Minneapolis-based Target willmake two payments of $912.5 million in cash, in May and September 2011, to acquire the leasehold interests of 220Zellers locations in Canada.

The Zellers locations will continue to exist under that brand name for "a period of time," HBC said in a release. But Target will convert 100 to 150 of those Zellers locations to Target stores in 2013 and 2014 andpossibly sell the rest of the current Zellers networkof store leasesto other retailers.

"I think there would be a number of U.S. retailers that would feel that there is opportunity to make some inroads in Canada," said Paul Taylor, chief investment officer at BMO Harris Private Banking.

But the fate of the 70-odd Zellers stores that aren't destined to become Targets is far from clear. "The company still has plans to operate a portfolio of Zellers stores in some communities across the country," HBC spokeswoman Freda Colbourne told The Canadian Press.

"The company is still going to run a chain of Zellers stores, it just might be a little bit different than today, but for the next 12 months nothing is changing," Colbourne said.

"This transaction provides attractive long-term value and will allow us to invest substantial capital into our department store and specialty store businesses to continue to drive growth," HBC governor Richard Baker said in a news release.

A typical U.S. Target location employs between 100 and 200 people, so the dealshould see the creation of somejobs. And Target estimates it will make anaggregate investment of more than $1 billion updating and renovating Zellers locations.

The Target chain currently has 1,752 stores in 49 states across the United States.

Baker's company bought all of HBC in 2008 for $1.1 billion. Selling the underperforming Zellers unit at a profit allows the company to focus on the iconic Bay brand, an initial public offering of which is much anticipated.

Target has long held ambitions in Canada, but the company was waylaid by the economic slowdown. A dearth of good locations for potential stores was a problem and the economic slowdown reined in consumer spending. Buying the Zellers infrastructure now helps it work around some of those issues, experts said Thursday.

"The Canadian consumer went into the recession in much better shape than the U.S. consumer," Taylor said.