Should Ivanhoe Cambridge be allowed to vote on ARA Logos' merger with ESR-Reit?

WHEN ESR-Reit and ARA Logos Logistics Trust (ARA Logos) announced their proposed merger on Oct 15, they said an entity called Ivanhoe Cambridge Asia - which holds nearly 126.7 million units in ARA Logos, amounting to more than 8.7 per cent of its total outstanding units - has provided an irrevocable undertaking to support the deal.

This irrevocable undertaking could be crucial to whether the merger goes through - not least because the terms of the deal have not gone down well with many other unitholders of ARA Logos.

The joint announcement did not, however, mention that Ivanhoe Cambridge also owns a stake in Logos - the sponsor group of ARA Logos - for which it is to be handsomely paid as ESR Cayman completes its acquisition of ARA Asset Management for US$5.2 billion.

ESR Cayman said in an announcement earlier this year that Ivanhoe Cambridge's stake in Logos will initially be swapped for ARA Asset Management shares under a reorganisation. These ARA Asset Management shares will then be exchanged for more than 80.2 million ESR Cayman shares.

Shareholders of ESR Cayman approved the proposal to acquire ARA Asset Management on Nov 3.

Shares in ESR Cayman closed Friday (Nov 19) at HK$26.70.

On the face of it, Ivanhoe Cambridge's irrevocable undertaking to support the merger of ARA Logos and ESR-Reit is a much less significant matter than the sale of its stake in Logos.

ARA Logos said in April that it had issued more than 126.7 million units to an entity called Ivanhoe Cambridge China for S$70 million, or S$0.5525 per unit.

Under the proposed merger with ESR-Reit announced last month, ARA Logos unitholders will receive a consideration of S$0.95 per ARA Logos unit - comprising S$0.095 in cash and 1.6765 new ESR-Reit units priced at S$0.51 each.

Units in ARA Logos closed Friday at S$0.895, while units in ESR-Reit closed at S$0.48.

Quid pro quo?

In light of the significant value that Ivanhoe Cambridge is to realise from ESR Cayman's acquisition of ARA Asset Management, some investors may wonder if its irrevocable undertaking to support the merger of ARA Logos and ESR-Reit is a quid pro quo of sorts.

As a small investor myself, I wonder whether the perception of fairness would be enhanced if Ivanhoe Cambridge were to abstain from voting on the merger altogether.

This column has previously said that the proposed merger favours unitholders of ESR-Reit over unitholders of ARA Logos - evident from the sell-off in ARA Logos versus ESR-Reit that followed the merger announcement on Oct 15.

While ARA Logos is smaller than ESR-Reit, it has a higher concentration of in-demand logistics properties and its units are trading at higher valuations.

Under the circumstances, relying on Ivanhoe Cambridge's 8.7 per cent stake in ARA Logos to push the merger through could further irritate minority unitholders of ARA Logos who are already upset about the terms of the deal; and perhaps create a perception that the market is rigged.

To be clear, I am not suggesting that any actual rules are being broken by allowing Ivanhoe Cambridge to vote the ARA Logos units it owns. Yet, when one considers all the other parties that are required to abstain from voting, the exclusion of Ivanhoe Cambridge seems odd.

Required approvals

In order for the merger to go ahead, unitholders of ARA Logos have to approve a resolution to amend its trust deed at an EGM; as well as a "scheme of arrangement" at a scheme meeting.

To pass, the trust deed amendment requires the support of unitholders holding at least 75 per cent of the units voting at the EGM. All unitholders will be allowed to vote on the resolution.

This column previously highlighted that the sponsor and manager of ARA Logos do not hold a particularly large proportion of its units - as at Oct 26, their combined interest was less than 13 per cent.

On top of that, unitholder participation at ARA Logos' last AGM was relatively low, with less than 29 per cent of its units voting on the first three resolutions.

Hence, a strong turnout of disgruntled ARA Logos unitholders could well scupper the whole merger at the trust deed amendment stage.

On the other hand, the scheme of arrangement requires the support of 50 per cent of unitholders, holding at least 75 per cent of the units voting at the scheme meeting, in order to pass. Furthermore, not all unitholders will be allowed to vote.

The joint announcement on the merger states that the manager of ESR-Reit and its concert parties are to abstain from voting on the scheme. In view of ESR Cayman's acquisition of ARA Asset Management, the concert parties include ARA Asset Management and Logos as well as their subsidiaries.

Meanwhile, the manager of ARA Logos is to abstain pursuant to Rule 748(5) of the Listing Manual - which relates to investment managers being prohibited from voting their own shares at any meeting to approve matters in which they have a material interest.

Is it such a stretch that Ivanhoe Cambridge also be excluded from voting at the scheme meeting to foster a sense of fair play?

Lessons learnt

Disgruntled unitholders of ARA Logos probably shouldn't hold their breath though. In the end, the irrevocable undertaking by Ivanhoe Cambridge to support the merger is likely to be just that - irrevocable.

Rather than ruminate on how to block the merger with ESR-Reit, unitholders of ARA Logos should perhaps try to distill useful lessons from their experience.

There could well be many more deals like ESR Cayman's acquisition of ARA Asset Management in the months ahead. If this episode has taught us anything, it is that you probably shouldn't be invested in the Reits of these groups.

While owners of the target groups are likely to be paid handsomely, unitholders of their Reits could find themselves being presented with merger proposals that are less than satisfactory.

More generally, after the big rally we have experienced in asset prices, it's probably safer to be invested in asset managers rather than asset vehicles.