(Updates with share price in 3rd paragraph, details throughout)
Oct 24 (Reuters) - Canadian department store operator Hudson's Bay Co agreed to sell its Lord & Taylor building for $850 million to SoftBank-backed WeWork Cos and shrink the flagship store on New York's Fifth Avenue to a quarter of its current size, HBC said on Tuesday.
HBC also reaffirmed a commitment to its European operations despite opposition from activist investor Jonathan Litt, who is considering seeking the removal of some directors.
HBC shares jumped as much as 8.7 percent in Toronto, their biggest intraday gain in two months.
Hudson's Bay also said private equity firm Rhone Capital will invest $500 million in HBC, with the transactions reducing its debt by C$1.6 billion ($1.3 billion) and increasing liquidity by C$1.1 billion.
"As we've said and done in the past multiple times, if there's an opportunity for someone to give us a very high valuation on one of our assets, we'd be willing to sell it," Richard Baker, HBC executive chairman and interim chief executive officer, told Reuters.
He added that WeWork, which provides shared workspace for entrepreneurs and startups, is paying a 30 percent premium to the Lord & Taylor building's last appraised value.
The Lord & Taylor store in New York will operate through the 2018 holiday season, then be reduced in size to 150,000 square feet from the current 650,000 square feet, with the building converted to WeWorks' headquarters.
HBC, which also owns the Saks Fifth Avenue chain, faces pressure to extract more value from its real estate assets at a time when brick-and-mortar retailers lose market share to more nimble online operators.
Litt, founder of hedge fund Land & Buildings, has valued HBC's real estate at C$35 a share, and has called for HBC to sell some stores, convert them to alternate uses or go private.
He said on Monday he would call a special shareholder meeting to potentially remove directors. The abrupt departure of CEO Gerald Storch, announced on Friday, was an attempt by the board to "buy time and placate investors to address underperformance and undervaluation," he said.
Land & Buildings holds about 5 percent of HBC shares.
Following the CEO announcement, Baker sought to ease concerns about potential cuts at its struggling German department store chain Kaufhof.
"Were very committed to our HBC Europe enterprise, we've no interest, no discussion, no need of changing our strategy in any way, or selling the business to anybody," he said on Tuesday.
WeWork will also lease space at Hudson's Bay stores in Toronto and Vancouver and Galeria Kaufhof in Frankfurt. It could also add 20 WeWork locations in HBC businesses around the world, Baker said.
WeWork Cos said on Aug. 24 it received an additional $3 billion investment from Japans SoftBank Group and its Vision Fund to ramp up its expansion globally. SoftBank had already invested $1.4 billion to fund expansion in China, Japan, South Korea and elsewhere in southeast Asia. ($1 = 1.2640 Canadian dollars) (Reporting by Nichola Saminather in Toronto and Yashaswini Swamynathan in Bengaluru; Editing by Bernard Orr and Jeffrey Benkoe)