On Jan 14 and 15, proxy adviser Glass, Lewis & Co and Institutional Shareholder Services (ISS) had advised unitholders of ARA LOGOS Logistics Trust (ALOG) to vote against a merger with ESR-REIT because of pricing.
Glass Lewis had said, “while Glass Lewis does not question merits [of the merger], we believe the terms of the scheme are unfair to ALOG unitholders because it implies a discounted market valuation for ALOG units.”
Glass Lewis reasons that ALOG’s volume weighted average price (VWAP) was much higher for ALOG than what was used in the ratio. The Scheme terms were not compelling for ALOG unitholders and most of the benefits of the merger would accrue to ESR-REIT, Glass Lewis had indicated.
On Jan 22, the managers of ALOG and ESR-REIT announced that the latter had raised the offer price for ALOG, and have postponed the scheme meetings till mid-March.
The cash consideration has been revised upwards by 2.1% to $0.097, from $0.095 earlier. In addition, the allotment and issuance of new ESR-REIT units for each ALOG unit will be revised from 1.6765 new ESR-REIT unit to 1.7729 new ESR-REIT unit. The consideration units will be issued at $0.4924 per new consideration unit, valuing the portion in units at $0.836 versus $0.791 previously. Hence the price being paid for each ALOG unit works out at $0.933 compared to $0.886 in the earlier offer.
In total ESR-REIT is paying 1.4 times price to net asset value (P/NAV), which is the highest valuation for ALOG, and the level it was trading at when the initial offer was made. So far, as at Jan 21, only three other S-REITs trade at higher valuations - Mapletree Industrial Trust, Keppel DC REIT and (of course) ParkwayLife REIT.
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The accretion to distribution per unit (DPU) works out at 12.8%, and accretion to NAV of 5.3% compared to 8.2% and 2.2% respectively in the earlier offer.
“The proxy advisers recommended unitholders to vote against the merger. We have considered this as one of the points and ESR-REIT decided to improve their offer to ALOG,” says Karen Lee, CEO of ALOG’s manager.
The merits of this merger are the same and still compelling, as both proxy advisers have pointed out, Lee adds. It was the pricing they had an issue with. “I’m happy the proxy advisers picked up on the merits of the merger,” she says.
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“The proxy advisers mentioned certain rationale [for a better offer] and we respect that. We can either walk away or offer something more,” acknowledges Adrian Chui, CEO of ESR-REIT’s manager.
“The benefits are more to ESR-REIT the proxy advisers say, so why don’t we shift the balance a little bit? To come together to get these benefits as a larger entity, both sets of unitholders must approve,” Chui figures.
As a result of the revised offer, ESR-REIT’s DPU accretion falls from 5.8% to 4.7%, and there is an 8.5% dilution to NAV. However, the aggregate leverage would remain unchanged for both offers, at 42.1%.
As an illustration, Chui says, “In previous terms I earn $10, and the other guy earns $15. Now I earn $8 and the other guy earns $17, we have still created value of $25.”
No other offeror has come forward
“We’ve said nothing is stopping anyone from a competing offer. I think the perception is this is a very exclusive kind of discussion. From our point of view, we’ve never said this was an exclusive deal. All the terms are open for anyone to put in a competing deal,” Lee points out. Yet, in the past three months nobody has come up with a better offer, she reiterates.
On the other hand, the potential overlapping mandate is a key concern. ESR Cayman, sponsor to ESR-REIT, completed the merger with ARA Asset Management. As a result, LOGOS is a subsidiary of ESR Cayman.
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“We don’t think it’s in the interest of unitholders to compete for the sponsor’s pipeline. We need to eliminate the conflict of interest and look at the longer term opportunity to grow the REIT for our unitholders,” Lee says.
At 1.4 times P/NAV, an offeror would have to pay a significant (of more than 40%) premium for the assets if it were to better ESR-REIT’s offer. Otherwise it does not make sense to look at other offers, Lee reckons.
Even if there is potential acquirer, it would need funding and this could be limited by valuation of the underlying assets. A direct divestment would incur stamp duties and possibly tax liabilities. In Australia, ALOG has a managed investment trust status which mitigates tax to just 15%. In addition to stamp duty and tax leakages, a buyer would need JTC approval.
JTC imposes certain qualifying criteria on buyers. If the buyer is acquiring a portfolio as a fund, it would need a capital markets license. “The potential pool of buyers could be limited and it’s not that easy to put out a portfolio into the market to divest,” suggests Lee.
“If the sponsor is to sell the ALOG manager to a third party, ALOG unitholders would cease to have the pipeline and the financial support needed to acquire the pipeline,” Lee indicates.
“We are not doing sell out process. We are looking at how we can come together as an enlarged REIT where we can tap on sponsor’s pipeline, network, platform and financial resources to grow the REIT," says Lee.
“Why I didn’t walk away”
Chui, for his part, says he won’t walk away from this transaction in the way that he did for Sabana REIT. In actual fact, in 2020, ESR-REIT had stated that it would raise the price for Sabana REIT if there had been a competing offer, but there wasn’t. “Twelve months ago I walked away from a merger. This time round I don’t want to walk away as the rationale is intact,” he points out.
At any rate, Chui believes in the maths. ESR-REIT is issuing units at 1.22 times P/NAV, and acquiring ALOG 1.4 times P/NAV. That works out to be a 14.7% premium. Is the premium worth it Chui asks. To him the answer is yes.
At that premium, ESR-REIT would be getting more logistics and freehold assets. By gross rental income, ESR-REIT’s logistics assets would rise from 15.6% to 45% on a pro forma basis. By the same token, high-spec properties which contributed 31.4% to GRI would now fall to 20.6%. However, Chui argues that high specs and logistics which together are New Economy assets along with data centres and life science assets, would rise to 65.6% from 47%.
“I can go to Australia. I have Australia accounting for 20% of GRI post merger. I am getting freehold properties and properties with long-term underlying land leases,” Chui says.
At any rate, ALOG’s unitholders and owners cannot call for a tender because JTC has qualified buyers. The unitholder of Sabana REIT who attempted to sell Sabana REIT’s properties would have realised that divesting a portfolio can be challenging.
