Hong Kong's ESR to buy ARA for US$5.2b to create world's third-largest listed real estate asset manager

HONG KONG-LISTED logistics real estate company ESR Cayman is set to acquire the entire share capital of real estate fund manager ARA Asset Management for US$5.2 billion to create the world’s third-largest listed real estate asset manager.

Following the acquisition, the combined entity will have assets under management (AUMs) of US$129 billion.

The consideration for ARA, still subject to adjustment, will consist of US$4.7 billion in new ESR Cayman shares and vendor loan notes, and another US$519 million in cash.

The consideration shares will be issued at HK$27.00 per share, representing a 2.5 per cent discount to ESR Cayman’s last closing price of HK$27.70 on Wednesday before the acquisition was announced. It also represents a 1.9 per cent premium to the average closing price of HK$26.50 from July 5, which marks the 30-day period prior to the announcement.

Terence Wong, founder of fund management firm Azure Capital, noted that the amount ESR Cayman is paying for ARA is “not chump change”.

“It’s not going to go down well with investors of (ESR Cayman),” Mr Wong told The Business Times. “Investors would probably think that they overpaid for it.” In addition, he said, there would be a “huge dilution” to ESR Cayman’s shares.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

Shares of ESR Cayman fell 7.6 per cent in Hong Kong on Thursday to close at HK$25.60, a reaction that Mr Wong said was not overly surprising.

But he said ESR Cayman could have had to pay a “scarcity premium” as it is “rare to have mergers of a decent size”. “There are also merits to the deal given that ARA founder John Lim has very wide contacts,” Mr Wong added.

Ontario pension fund Omers is currently the largest shareholder of ESR Cayman with a 14.9 per cent stake, according to ESR Cayman's announcement. Following the completion of the deal, Omers' stake will fall to 10.2 per cent. The largest shareholder will be entities affiliated with US private equity firm Warburg Pincus, with a stake of 13.2 per cent. Warburg Pincus had led the buyout of ARA when the latter was previously listed on the Singapore Exchange (SGX).

Mr Lim will own 4.5 per cent of the enlarged company.

Gabriel Yap, chairman of investment firm GCP Global, noted that the trend has been for larger entities to handle bigger asset management deals. To this end, the former stockbroker-turned-Reits guru said: “The writing has been on the wall for ESR to go in big.”

The proposed deal with ESR Cayman could be seen as a way for ARA to go public. The group was earlier this year said to be eyeing a dual listing in Hong Kong and Singapore that could raise upwards of US$1 billion.

In May this year, ARA had announced that it was raising US$500 million in a financing round led by Sumitomo Mitsui Banking Corp (SMBC) as it sought a public listing. Judy Tan, director of group corporate development and investor relations at ARA Asset Management, told The Business Times that “the IPO plan would not be applicable anymore” as the proposed acquisition involves ESR stock consideration.

SMBC currently has a 10 per cent stake in ARA, and will end up with 4.6 per cent of ESR Cayman.

ARA had listed on SGX in 2007. In 2017, Mr Lim had been part of a consortium to take the group private. At the time, he had said that his company was “undervalued”.

“When they delisted, John was adamant that they would grow to US$100 billion before relisting,” said GCP Global’s Mr Yap.

The way Azure Capital’s Mr Wong sees it, the reason ARA chose to merge with Hong Kong-based ESR instead of re-listing on SGX could “just boil down to dollars and cents”.

“Hong Kong is a big market,” Mr Wong said. “I can’t speak for John, but it might be just for a better valuation.”

In a bourse filing, ESR Cayman noted that ARA has raised over US$16 billion in equity capital group-wide since 2016. In the same period, ARA has also supported a gross transaction volume of acquisitions, divestments and development activity of almost US$20 billion.

ARA owns a controlling stake in Logos, a logistics and data centre real estate developer and fund manager. Similar to ESR, Logos manages logistics and data centre real estate, covering land sourcing, design and development, leasing, operations and asset management.

Logos’ total AUM has nearly doubled to US$17 billion over the last two years, including the Singapore-listed ARA Logos Logistics Trust. ESR Cayman noted that it also has a strong following with 22 institutional capital partners, 14 of which will be new to the enlarged ESR group. 

Aside from ARA Logos Logistics Trust, ARA is also the sponsor of ARA US Hospitality Trust and Suntec Reit. ESR sponsors both ESR-Reit and Sabana Shari'ah Compliant Reit. All are listed on the Singapore Exchange (SGX). 

ESR Cayman said that 80 per cent of the combined entity will be in "new economy" real estate such as logistics and data centres, while more than 50 per cent of its AUM will come from perpetual and core capital vehicles including 14 listed real estate investment trusts.

Chairman of ESR Cayman Jeffrey Perlman said that the real estate sector is seeing a "once in a generation change" as investors rebalance their portfolios towards "new economy" real estate. 

"By creating a one-of-a-kind closed loop solutions ecosystem for capital partners with the addition of ARA, we can leverage our perpetual capital vehicles to help them divest these assets and captively redeploy back into 'new economy' real estate via ESR and Logos, the largest new economy real estate platform in Asia-Pacific with over US$50 billion of AUM,” he said. 

As part of the acquisition, SMBC will subscribe to a US$250 million placement of new ESR shares and a representative from the Japanese bank will sit on ESR’s board of directors.

ARA’s Mr Lim, together with a representative from CK Asset Holdings, will also be appointed to ESR’s board of directors.

Units of ARA Logos Logistics Trust fell 0.6 per cent or half a Singapore cent to close at 88.5 cents, ARA US Hospitality Trust units fell 3.8 per cent or 2 US cents to close at 51.5 US cents, and Suntec Reit closed flat at S$1.44 on Thursday. ESR-Reit units closed down 2.2 per cent or S$0.01 at S$0.44, while Sabana Reit gained 1.1 per cent or 0.5 Singapore cent to close at 44.5 cents. Shares of Straits Trading, which owns a stake in ARA, jumped 13.8 per cent or S$0.39 to close at S$3.22 on Thursday.

READ MORE:

• Taking charge of the family's wealth
• Hot stock: Straits Trading soars 15.9% on news it will receive US$845.3m from ARA Asset Management sale