When luxury-fashion retailer Saks (UNKNOWN:SKS.DL) agreed to be bought by retail giant Hudson's Bay, it was not so much a vote of faith in the luxury retail market (though that would not be a flawed thesis itself), but instead, a vote of faith in the vast real estate portfolio Saks holds, including an iconic large retail space on Fifth Avenue in New York. Hudson Bay plans to combine the real estate assets of both companies and spin them off into a REIT -- a move that has sparked some curiosity, and, in other cases, animosity. Should investors support the Hudson buyout?

The deal
In a $2.4 billion deal, Saks' board agreed to go under the wing of Hudson Bay -- the Canadian owner of another large department store chain, Lord & Taylor. Hudson's agreed to an all-cash deal, which equates to $16 per share, and assumes a large amount of debt.

As mentioned, Hudson's then plans to take both companies' substantial portfolios of real estate and combine them into a REIT, while keeping the retail operations separate. It sounds fair enough on the surface; but what is the real impetus behind the REIT conversion?

For one thing, Hudson's will likely earn a quicker and bigger payday by immediately monetizing its real-estate interests -- more so than keeping the companies as they are. REITs command larger valuation multiples than your average retailer, and thus would debut on the market with an attractive valuation -- at least for Hudson's Bay, which is wisely trying to keep its cost of equity as low as possible. The thing is, though, neither Saks nor Hudson's Bay are real estate companies -- they are both pure plays on retail that have been largely successful at doing so, and just so happen to own priceless real estate as a byproduct and insurance policy. Why put that secondary to a real estate operation? Given that those real estate properties will only thrive if the businesses inhabiting them thrive, doesn't it make sense to prioritize the retail operation?

Secondly, there are other options that could be explored (and likely were behind closed doors), such as selling the real estate upon closing of the acquisition to one or all of the existing retail real-estate firms, such as General Growth Properties, Simon Property Group, or Vornado Realty Trust. As mentioned in an article from The Street, Simon Property already leases eight stores to Saks. This would give a similar quick payday to Hudson's Bay and shareholders, and the company could then resume doing what it does best -- retailing.

Flag on the play
Whatever the case, there are some asking questions about the deal. A shareholder rights firm has announced that it is investigating whether the Saks board was too quick to sell out, and possibly undersold the company, which was recently given a price target $2.50 more than the offer.

Luckily, Saks investors have enjoyed 12-month gains of more than 50%, so it is hard to feel too poorly about the decision to sell. If the sale goes through, investors could look at the OTC listing for Hudson's Bay and consider an investment, which would be in the operating retail businesses of both Lord & Taylor and Saks.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.