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ESR-Reit and VIT merger could lead to more industrial Reit deals
WITH the proposed merger of ESR-Reit and Viva Industrial Trust (VIT) to create Singapore's fourth-largest industrial Reit, more mergers and acquisitions (M&As) in the industrial Reit space could be on the way, say analysts.
This marriage - creating a combined S$3 billion in assets - could become the first in the history of Singapore Reits (S-Reits). If it goes through, it will happen by way of a trust scheme of arrangement, under which ESR-Reit's manager will become the manager of the enlarged trust; VIT will be de-listed from the Singapore bourse.
The move raises questions of whether private equity firm Warburg Pincus, which owns e-Shang Redwood (ESR), will continue to build up its presence in S-Reits, with Reit investor Tong Jinquan as a potentially ally. The Chinese property tycoon is a substantial unitholder in both Reits that are planning to merge. If the merger is successful, he would own 33.8 per cent of the enlarged trust structure.
But even if it doesn't come to pass, other small industrial Reits could look to it as a case study for their own potential mergers. The acquisition cost of S$1.5 billion comprises a scheme consideration of S$936.7 million and a refinancing of VIT's existing debt of S$525 million among other expenses.
The scheme consideration payable to VIT Stapled Securityholders is S$0.96 per Stapled Security on an ex-distributions basis. Based on the issue price of S$0.54 per new ESR-Reit unit, VIT Stapled Securityholders can expect to receive S$9.60 in cash and 160 new ESR-Reit Units for every 100 Stapled Securities held.
A CGS-CIMB note, describing the consolidation of managers as "a critical bottleneck for Reit mergers", said it was overcome in this case. ESR-Reit's manager will pay S$62 million to acquire VIT's manager.
"Such arrangements could pave the way for future Reit M&As," said CGS-CIMB.
CGS-CIMB analyst Yeo Zhi Bin told The Business Times: "A consolidation theme may be more prevalent among industrial Reits than in other asset classes because of the number of industrial Reits that are independent and sub-scale.... (and may want to) reap the benefits of scale."
A DBS equity research note dated Jan 30 this year - when ESR-Reit first announced merger talks with VIT - said other mid-cap industrial Reits will be accorded an "acquisition premium" post M&A. It said: "Cache Logistics Trust and Soilbuild Reit are interesting targets, given similar sponsor and shareholder structures respectively.
"However, the timing and certainty of any deal is tough to identify." Justin Tang, head of Asian research at United First Partners, said the proposed merger announcement adds to an "alive-and-kicking" Reits market, which has had a recent flurry of activity.
This month, Manulife US Reit announced a preferential offering of 22 new units for every 100 held at US$0.865 per unit to raise some US$197.2 million; CapitaLand Commercial Trust (CCT) announced it was buying a majority stake in a prime Frankfurt property for 342.7 million euros (S$542.5 million), partially funded through an equity placement of at least S$212 million.
Managers of ESR-Reit and VIT told reporters on Friday that the enlarged trust will see market capitalisation grow to S$1.7 billion, and free float will increase to S$977 million, which they said would result in higher trading liquidity, a large investor base and potential index inclusion.
Adrian Chui, chief executive officer and executive director of the ESR-Reit manager, said: "This merger is not being done just because we want size. We think our portfolios are complementary... and when we become bigger, it becomes better for us in terms of our market position."
In particular, VIT's focus on industrial parks with assets such as Viva Business Park, and its track record in asset enhancement initiatives (AEIs) would complement ESR-Reit's focus on high-spec and general industrial spaces, he said. When asked about other possible M&A partners down the road, he said: "We're always open to that but... we dont want to get ahead of ourselves." Derek Tan of DBS Equity Research pointed out the possibility of the enlarged trust having a positive re-rating "closer to the large caps", as well as the possibility of repricing its debt, which could shave off some of the interest costs and lead to better distribution per unit (DPU) for investors.
In a research note, CLSA called this a win-win for unit holders. It said: "We see investment merits from both sides, with VIT shareholders exiting above book valuation and gaining access to sponsor and pipeline. "On the other hand, ESR Reit shareholders can gain access to business parks and hi-specs buildings with better demand supply outlook and potential yield compression that comes with having a bigger portfolio." But CLSA also flagged some risks: "VIT's FY17 distributable income includes income support that is expected to fall off over the next two years and have shorter land tenures."
Amendment note: Due to an editing error, an earlier version of this story incorrectly said that the proposed merger would create a combined S$33 billion in assets. It is in fact $3 billion. The article above has been revised to reflect this.