By Susan Taylor
TORONTO (Reuters) - Hudson's Bay Co said on Monday that it would sell its flagship downtown Toronto store and neighboring executive offices for C$650 million ($587.09 million) to Cadillac Fairview Corp and open a full-line Saks store in the leased-back space.
The Canadian retailer, which completed its $2.4 billion purchase of U.S. luxury chain Saks Inc late last year, said it expects to open an approximately 150,000 square-foot, multi-level Saks in the fall of 2015, co-located with the current Hudson's Bay store.
HBC shares surged nearly 5 percent shortly after markets opened on Monday before slipping back to C$16.69, or unchanged, on the Toronto Stock Exchange.
Hudson's Bay said it will use cash from the sale of its downtown Toronto retail complex and neighboring Simpson's Tower to reduce debt and invest in growth initiatives.
In a deal expected to close next year, Hudson's Bay will lease the space back for 25 years, with renewal options for a term just under 50 years.
Saks has also agreed to lease space for a full-line store in Toronto's Sherway Gardens mall under the arrangement.
"We continue to explore other options to create additional value through the power and potential of our real estate assets," said Hudson's Bay Chief Executive Officer Richard Baker in a statement.
Hudson's Bay, which traces its roots to the Canadian fur trade in the late 1600s, operates The Bay and Home Outfitters in Canada and Saks and Lord & Taylor in the United States.
It holds a lucrative real estate portfolio, including properties on Fifth Avenue in Manhattan. The company has long said it could spin off some of its property into a real estate investment trust, but declined to provide a schedule.
The announcement of Saks' Canadian entry comes as rival Nordstrom Inc prepares to open its first store in Canada this year, setting the stage for a battle between two top U.S. luxury chains in the heart of the country's most competitive retail market.
Nordstrom recently said it would open a flagship store in Toronto's downtown Eaton Center in 2016, in space soon to be freed up by Sears Canada Inc and just a stone's throw from the planned Saks store on Toronto's Yonge Street shopping strip.
Nordstrom will open its first Canadian store in Calgary this fall and currently plans to open six Canadian full service stores in all. ($1 = 1.1072 Canadian dollars)
(Additional reporting by Euan Rocha and Solarina Ho in Toronto and Phil Wahba in New York; Editing by Nick Zieminski and Phil Berlowitz)