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ESR-REIT and ARA Logos Logistic Trust merger’s improved offer – should unitholders say yes now?

REITs, SG

Written by:

Alex Yeo

Following the announcement on 15 October 2021 for the proposed merger of ESR-REIT (“ESR”) with ARA Logos Logistics trust (“ALog”) to form the new “ESR-LOGOS REIT”, the market sentiment for the merger was tepid.

Many investors took the view that the terms of the merger were unfavourable to ALog’s unitholders as the offer implies a discount against the last traded share price for ALog’s units. The proxy advisor even recommended that ALog’s unitholders vote against the merger based on the original offer.

The initial offer was NAV & DPU accretive for ALog unitholders while it was DPU accretive and NAV dilutive for ESR unitholders. However, investors took the view that the merger benefited ESR unitholders more as compared to ALog unitholders.

This was mainly because the offer was a small premium to the last traded price before the offer. In addition, the offer only looked like a premium because the ESR units to be issued to ALog’s unitholders were priced at a premium to ESR’s share price.

After adjusting the value of ESR units to the last traded price instead of the value determined by ESR, the offer would have been lower than ALog’s last traded price which implies a discounted market valuation. This means that with the initial offer, ALog’s unitholders would have been better off selling in the open market.

As it was clear that the merger was at risk of breaking down due to negative market sentiments, on 22nd January 2022, ESR’s management revised the offer from S$0.95 to S$0.97 as presented in the table below.

Source: ESR-REIT’s announcement on 22 January 2022

The revised offer of S$0.97, which comprise 90% units valued at S$0.873 and 10% cash valued at S$0.097 is an improvement from the initial offer on 2 counts.

Being, the headline price offer at S$0.02 higher and new ESR units to be issued at a lower valuation.

Source: ARA Logos’s announcement on 22 January 2022

ALog’s management presented the revised proposal that it received from ESR to its unitholders, calculating the value of the offer based on ESR’s 1 month VWAP and deriving an illustrative value of S$0.933 which is 5.3% higher than the original proposal.

ALog’s calculation of the revised offer at S$0.933 is S$0.017 lower than ESR’s calculation. The initial offer had a calculated difference of S$0.064 (i.e. ESR’s S$0.95 vs ALog’s S$0.886). This indicates that the difference has been substantially reduced as ESR’s recent share price has been taken into consideration.

In addition, we note that based on a per share value of S$0.46 for ESR at the point of writing, the offer equates to S$0.91 which is higher then ALog’s last traded price of S$0.90.

Rationale of the transaction

Revisiting the rationale of this transaction provided in October 2021 from both unitholders’ perspective, it remains relevant that the merger proceeds successfully as both S-REITs now share the same major shareholder after ESR Cayman’s acquisition of ARA was recently completed on 20th January 2022.

The merger brings scale to the combined ESR-LOGOS REIT with total assets of S$5.4 billion and allows ESR Cayman to focus its resources on supporting a single REIT instead of two REITs with overlapping investment mandates.

Because of the current size of the two REITs, the merger will bring about some sector and tenant diversification. The scale of the combined REIT will also allow it access to a larger pipeline of acquisitions and potential development projects. There will also be more flexibility for the combined REIT to carry out AEIs.

Source: ARA Logo’s announcement on 15 October 2021
Source: ARA Logo’s announcement on 15 October 2021

The scale will enhance its funding flexibility and potentially reduced cost of funds, not only from its added quality but also a potential credit rating upgrade.

Finally, the scale also allows the new ESR-LOGOS REIT to be included in various indices, thus improving liquidity and visibility.        

Source: ESR’s announcement on 22 January 2022
Source: ARA Logo’s announcement on 22 January 2022

Are there any negatives?

Given the current size of both REITs and the common majority shareholder, except for the original offer price for ALog, the merger has fewer negatives than one would have expected.

One negative aspect we have identified is that the offer is NAV dilutive for ESR’s unitholders. This is mainly because ALog trades at a P/B of around 1.4x while ESR trades at 1.15x (with the revised offer valuing ESR at 1.2x ).

We think this is merely due to the nature of the portfolio, mainly because more than 85% of ESR’s assets by value is based in Singapore with only 15% in Australia while ALog has a 60%:40% ratio. As Australian assets generally have a higher capitalisation rate, ALog has historically traded at a wider premium to book. This is further substantiated based on the DPU accretion for all unitholders.

What should unitholders do?

ERS Shareholders

For ESR’s unitholders, while the higher revised offer means that ESR is paying slightly more for ALog and further widens the NAV dilution, the strategic and financial merits of the merger such as the DPU accretion and larger scale means that the proposed merger remains a compelling offer for ESR’s unitholders.

ARA Logos Logistics trust Shareholders

For ALog’s unitholders, while the revised offer is still only a slight premium from last traded prices, the positives mentioned above, combined with the current overlapping investment mandate after ESR Cayman’s merger with ARA means that ALog’s unitholders may have their hands forced.

ALog’s unitholders may find it beneficial to either support the merger or sell their units in search of a better investment as it is unlikely that ALog would fare well in the current market with its smaller scale of S$2 billion in assets and an overlapping mandate.

Closing statement

ESR’s management have taken in feedback received from its investors and came up with a revised offer that is higher in value and reduces the difference between their pricing of ESR’s units and the current share price.

There are few negatives outweighed by many more positives supporting the merger. With the enlarged AUM providing for significant debt and development headroom, the new ESR-LOGOS REIT will be well placed to not only pursue growth opportunities but also has the added flexibility to carry out more AEIs.

The enlarged AUM will also boost its visibility and liquidity, with Mapletree themselves in the midst of a blockbuster merger of its two commercial REITs, forming a flagship Asia commercial REIT that is expected to provide not only stability but also scale, it is clear where the trend is heading.

We also previously listed the combined ESR-LOGOS REIT as one of the best S-REITs to invest in 2022.

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