CMT, CCT sweeten merger deal for unitholders

Singapore

CAPITALAND Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) on Friday announced deal sweeteners for their proposed merger, such as higher accretion to their respective distribution per unit (DPU), and the decision of CMT's manager to completely waive the acquisition fee of S$111.2 million.

Perhaps the market was holding out for a better gross exchange ratio (GER) for CCT which did not materialise. At the closing bell, CMT units were down 3 Singapore cents or 1.5 per cent to S$1.93, while CCT units lost 3 cents or 1.8 per cent to S$1.65.

At a briefing on Friday, CEOs of both managers said that the pro forma DPU for the last 12 months ended June 30, 2020 for CMT would have increased 4.1 per cent, while that for CCT would see an accretion of 7.6 per cent. This was up from accretion of 1.6 per cent and 6.5 per cent that were provided in January, based on the Reits' FY19 DPU.

Additionally, CMT is waiving the acquisition fee "in recognition of the unprecedented circumstances brought about by the Covid-19 pandemic" - an increase from the 50 per cent that it said it would waive in January.

Citi analyst Brandon Lee said: "The waiver of acquisition fee, resulting in higher DPU accretion, is the major positive in CMT's revised terms, in our view, which reflects management's commitment towards the merger.

"However, given the ongoing Covid-19, investors' uncertainty over the work-from-home trend and the outlook for downtown retail...we understand some CCT shareholders were expecting a higher implied offer price for CCT via an adjusted GER."

The proposed merger was to be effected by a trust scheme of arrangement with CMT acquiring all the units in CCT using 88 per cent equity and 12 per cent debt. CCT unitholders will receive 0.72 new CMT unit and S$0.259 in cash in exchange for every CCT unit.

Asked why the GER was not tweaked in favour of CCT unitholders given that the office sector is performing better than retail amid Covid-19 challenges, Kevin Chee, CEO of CCT's manager, said this was because the market price of both Reits have largely traded in tandem from January up till now, even including the March trough.

"We think that the overall metrics of this scheme consideration remain fair because it reflects the market conditions...as what we are seeing today."

DBS Bank senior vice-president for group equity research Derek Tan said that it may be that the GER is capping the performance of both Reits and keeping their prices moving in pace with each other.

"The original price was struck pre-Covid. Certainly the Covid-19 outbreak has brought significant disruption to CMT. As a CCT unitholder, you might be thinking, 'Am I getting the shorter end of the stick?'. But the accretion is there. And Reits and investors are all beginning to catch onto the idea that 'big is good'."

Recent Reit mergers have been done with the goal of index inclusion, for instance.

Both managers continued to extol the merits of the deal, in light of the trend towards mixed-use precincts and integrated developments which is expected to accelerate post-Covid-19.

They also said that both sets of unitholders will continue to receive permitted distributions for the period from July 1, 2020 up to the day before the trust scheme becomes effective. Mr Chee said: "There will be a clean up as part of this merger and appropriate distributions accruing to each (set of unitholders) will be distributed accordingly."

They added that it was premature to discuss management changes, and will give updates in due course.

The long-stop date for the proposed merger has been extended to Nov 30 from Sept 30. Both Reits will hold their respective unitholder meetings on Sept 29 to seek approval for the proposed deal.

CMT will hold its extraordinary general meeting (EGM) at 10.30am, while CCT will convene its EGM at 2pm and its trust scheme meeting at 2.30pm. Due to the Covid-19 situation, unitholders will participate via a live audio-visual webcast, or a live audio-only stream. Questions can be submitted in advance.

The independent directors of the managers have recommended that unitholders vote in favour of the proposed merger, on the advice of their respective independent financial adviser who say that the deal is on normal commercial terms and not prejudicial to the interests of CMT unitholders, while also "fair and reasonable" for CCT unitholders.

Mr Lee from Citi said that if anything, the publication of circulars and notices of timelines relating to the merger helps to dispel any possibility that the merger may not proceed, given the long silence that followed the initial January announcement, mostly because each Reit was busy battling the challenges faced by their portfolio amid the "circuit breaker".