ESR-REIT - OCBC Investment 2020-08-13: Opposition From Minority Unitholders Of Sabana REIT?

ESR-REIT (SGX:J91U) | SGinvestors.io ESR-REIT (SGX:J91U)

ESR-REIT - Opposition From Minority Unitholders Of Sabana REIT?

  • Offer price of 0.94x of ESR REIT is final.
  • ~10% of minority holders of Sabana REIT plans to vote against the merger.
  • DPU and NAV accretive to ESR REIT’s unitholders.

No change to offer price

  • ESR REIT (SGX:J91U) announced that it does not intend to adjust the gross exchange ratio of 0.94x for its proposed merger with Sabana REIT (SGX:M1GU). Each Sabana REIT unitholder will receive 94 ESR REIT consideration units for every 100 Sabana REIT units held.
  • The announcement came after the argument from Quarz Capital Management, an activist fund who owns 5% of the units of Sabana REIT, that the implied offer price was too low for Sabana REIT.
  • Based on the illustrative issue price of S$0.401 for ESR REIT and gross exchange ratio of 0.94x, the implied scheme consideration of Sabana REIT unit is S$0.377, which represents a 26% discount to Sabana REIT’s NAV as at 30 Jun 2020. We do not cover Sabana REIT but we note that Sabana REIT has been constantly trading below its book value over the past few years.

Criticism from Quarz Capital Management on merger terms for Sabana REIT

  • In an open letter addressed to the board and management of Sabana REIT, Quarz highlighted five reasons for them to vote against the merger. Quarz noted that the offer price is at a steep discount of 26% to Sabana REIT’s NAV, which would be the highest among the mergers or takeovers that has ever occurred in the S-REITs space.
  • In addition, Quarz pointed out that Sabana REIT’s properties have significantly higher potential upside in terms of increased occupancy and undeveloped GFA as compared to ESR REIT. Given Sabana REIT’s strong balance sheet, Quarz argued that the merger should not proceed unless there are better terms which are fair to Sabana REIT’s unitholders.

Pending approval at EGM in October

  • The proposed merger is pending approval at a court hearing in Sep and EGM in Oct. We deem the merger to be largely positive for ESR REIT which could benefit from a larger market value, enhanced portfolio diversification, and potential inclusion to EPRA Index and would recommend voting in support of the merger at ESR REIT’s EGM. The scheme will require the approval of unitholders of both REITs i.e. more than 50% of the total number of votes cast for ESR REIT unitholders and more than 50% in number of total votes cast representing not less than 75% in value for Sabana REIT unitholders.
  • Quarz Capital and Black Crane Capital which owns ~10% of Sabana REIT announced that they intend to vote against the merger. ESR REIT’s Manager, its concert parties as well as the common substantial ESR REIT unitholders / Sabana REIT unitholders will abstain from voting. There is potential risk that the minority holders of Sabana REIT will vote against the merger.
  • We reduce our FY20/21 DPU estimates by 10%/18% as we adjust our expenses and capital distributions assumptions. After adjustments, our fair value estimate for ESR REIT decreases from S$0.49 to S$0.45.
  • See ESR REIT Share Price; ESR REIT Target Price; ESR REIT Analyst Reports; ESR REIT Dividend History; ESR REIT Announcements; ESR REIT Latest News.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-08-13
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