Proxy advisers give cautious nod for ALog Trust unitholders to accept merger offer

Singapore

PROXY advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have recommended that unitholders of Ara Logos Logistics Trust (ALog Trust) vote in favour of the merger with ESR-Reit, based on the revised terms of the offer.

Both ISS and Glass Lewis had in January recommended that unitholders vote against the merger on grounds that the process had been "questionable" and that the offer price was unfair to ALog Trust unitholders.

Following the initial proxy advisory reports, the managers of ESR-Reit and ALog Trust quickly postponed their respective extraordinary general meetings (EGMs) to vote on the merger, which were scheduled to be held around end-January.

They also revised the terms for the scheme consideration for the proposed merger to sweeten the deal for ALog Trust unitholders.

The scheme consideration was raised to S$0.097 in cash and 1.7729 in ESR-Reit units for every ALog unit, from S$0.095 in cash and 1.6765 in ESR-Reit units previously.

Based on the 1-month volume-weighted average price of S$0.4716 per ESR-Reit unit up to Oct 14, 2021 - being the last trading day prior to the announcement of the proposed merger - the consideration per ALog Trust unit would be S$0.933. This is 5.3 per cent higher than the value of S$0.886 previously.

The proxy advisers, however, do not seem too excited about the recommendation to vote "for" the merger. "While the revised scheme consideration does not present an attractive premium to the closing price of the ALog Trust units on the announcement date of the proposed merger, the revised scheme consideration is at least closely in line with the valuation of ALog Trust and represents a premium based on analyst estimates for both companies," ISS said in a fresh report. "The transaction does not represent an attractive premium when considering the improvement in ALog Trust's valuation over the past year," it added.

ISS also reiterated concerns that the deal will be made between related parties without considering alternative transactions.

"From a process perspective this related party deal is questionable, as ALog Trust is not controlled - the manager owns close to 13 per cent of ALog Trust - and could have, if seeking an exit or increase in size, shopped around for alternative transactions. Instead, the independent committee was satisfied with negotiating one-on-one with the ESR-Reit manager," ISS said. "A cautionary vote for (the approval of the scheme of arrangement) is warranted," it added.

The other proxy advisory firm, Glass Lewis, said the revised scheme consideration represents "a sufficient improvement" in value to ALog Trust unitholders compared to the original deal terms.

It pointed out that the revised illustrative issue price of S$0.4924 per ESR-Reit unit - down from S$0.51 apiece in the original offer - is "a bit more in line" with ESR-Reit's closing prices before the merger was announced on Oct 15, 2021.

However, Glass Lewis noted that this still represents premiums of between approximately 4.5 per cent and 10.1 per cent to ESR-Reit's volume-weighted average prices (VWAPs) for the 1, 3 and 6-month periods up to Oct 14 - the last trading day prior to the announcement of the proposed merger.

"We continue to take issue with the merger parties' insistence of applying an above-market value to ESR-Reit's units and using such value as the basis for determining the value of the revised scheme consideration," Glass Lewis said.

However, it added that the underlying strategic rationale behind the scheme remains "compelling".

"The enlarged real estate investment trust (Reit) should benefit from having greater scale, improved tenant diversification, and greater access to capital at a more competitive cost," Glass Lewis said, adding that the proposed merger will be accretive to ALog Trust's distribution per unit (DPU) and net asset value (NAV).

"Taking these factors together in the aggregate, and absent a superior competing offer, we believe the scheme warrants unitholder support at this time," it said.

Analysts, too, are supportive of the merger to create ESR-Logos Reit, which will have S$5.4 billion in total assets and rank among the 10 largest Reits in Singapore by market capitalisation.

"ESR-Reit is inching closer to its merger with ALog Trust, with proxy advisers who opposed previous deal terms now recommending to vote in favour of the revised offer," said RHB analyst Vijay Natarajan in a report on Mar 8.

"We maintain that a sizeable, well-diversified portfolio with unwavering backing from its sponsor is crucial for the Reit to navigate increasing market uncertainties. Operationally, it remains resilient, benefiting from the increase in industrial sector demand," he added.

RHB is maintaining its "buy" call on ESR-Reit ahead of the "crucial merger" but trimming its target price to S$0.53, from S$0.54 previously.

ESR-Reit and ALog Trust will hold their respective EGMs to vote on the proposed merger on Mar 21.

Units of ESR-Reit closed flat at S$0.42 on Tuesday (Mar 8), while units of ALog Trust closed 0.6 per cent or S$0.005 lower at S$0.81.