Observers welcomed Hudson’s Bay Co.’s $2.9 billion (U.S.) takeover of upscale department store chain Saks Inc. Monday calling its a risky but bold move to defend turf in the underserviced luxury brands segment that’s heating up with the arrival of big foreign players.

News of the friendly deal ignited shares in HBC after the company said the combination will boost revenue and operating earnings and could lead to monetization of extensive real estate assets.

The transaction, however, will also add significant debt and HBC warned it could trigger a reduction in dividend payouts to shareholders.

Saks has struggled to recover from a downturn in discretionary spending and was put up for sale this year, attracting a short list of potential bidders. Observers said HBC could not afford to sit still while rivals such as swanky, Seattle-based retailer Nordstrom Inc. expanded into Canada.

“It’s a risky move but it’s necessary,” said Ceren Kolsarici, a Queen’s School of Business marketing expert. HBC will pay a 30 per cent premium over the value of Saks’ share price before it ran up on anticipation of a deal, partly for the value of Saks brand, she said.

Kolsarici said the transaction allows HBC to cash in on pent up demand for luxury goods, noting that Canadians are big shoppers at the Saks e-commerce site, a platform that will be opened up in Canada duty free.

HBC also said it expects streamlining will lead to $100 million in savings and analysts said the hope is that the deal will help HBC move up from the lower end of the profit margin and sales per square foot rankings.

“While we serve different markets, we have a lot in common,” HBC’s chief executive Richard Baker said on a conference call with analysts. “I’ve had a long connection with Saks over the years, and am thrilled to bring one of the world’s most recognized luxury retailers into the HBC family.”

The catalyst for the nearly 7 per cent gain in HBC stock was an indication the company will establish a real estate investment trust to unlock the value of combined real estate assets that an analyst said could be worth between $3.5 billion and $4 billion.

Hudson’s Bay said it will open up to seven full-line Saks stores in Canada and about 24 locations under a discount banner. A spokeswoman said it’s possible the Bay store in the so called Mink Mile on Bloor Street will be replaced probably after 2014 with a full line Saks outlet.

She said stores could be built from the ground up, depending where new entrant luxury retailers locate, or some of the existing The Bay stores could be transformed.

“We’re going to move as quickly as we can,” Baker said.

The portfolio of The Bay stores, Lord & Taylor in the U.S. and Saks locations comprise more than 32 million square feet of retail space, Baker said. The combined entity will have about 320 stores and $7.2 billion (Canadian) in annual revenue. Saks operates 42 stores, including Saks Fifth Avenue in Manhattan.

HBC, which plans to keep Saks as a separate unit headquartered in New York, will pay $16 (U.S.) per Saks share plus assumed debt. It will issue $1 billion worth of equity and $2.3 billion of debt securities.

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The Ontario Teachers Pension Plan will contribute about $500 million and Canadian private equity firm West Face Capital will acquire $250 million of the new HBC equity.

The companies said the agreement will allow Saks a standard, 40-day “go-shop” period during which it can solicit higher bids.