Commentary: Considering the FLT-FCOT merger holistically

Date: March 7, 2020

First published in Business Times on 7 March 2020

There should be a balance between the interests of both sides, especially when it is a merger of equals which have done well

The consolidation in the S-Reits market that began two years ago looks set to continue in 2020, with two proposed mergers already announced. The proposed merger of Frasers Logistics & Industrial Trust (FLT) and Frasers Commercial Trust (FCOT) will be the first to be voted on this year.

Interest in the proposed merger of FLT and FCOT has picked up ahead of the two Reits’ upcoming EGMs and scheme meeting on March 11, 2020, and a few unitholders have raised a number of questions about the deal. Some FCOT unitholders have raised questions about the scheme consideration they are being offered and the timing of the deal, and some others have asked about the role the two Reits’ sponsor, Frasers Property Limited (FPL), should play.

These are important points that do warrant a closer look. The Securities Investors Association (Singapore), or SIAS, has therefore helped facilitate some discussions between the two Reits’ managers and unitholders, and would like to highlight some of the perspectives shared so that unitholders can make a more informed decision.

Scheme consideration and NAV

Specifically, some unitholders have asked whether the scheme consideration, which is based on historical trading prices rather than net asset value (NAV), undervalues FCOT. These unitholders note that the scheme consideration will be fulfilled mainly via the issuance of new FLT units at a premium of more than 30 per cent over FLT’s NAV per unit whereas it represents a premium of less than 5 per cent over FCOT’s NAV per unit.

From the discussions at the webcast with SIAS, FLT and FCOT, we understand that the use of historical trading prices is in line with the current market practice for Reit mergers. The completed mergers of ESR Reit and Viva Industrial Trust, and of OUE Commercial Reit and OUE Hospitality Trust, as well as the more recently proposed merger of CapitaLand Mall Trust and CapitaLand Commercial Trust, all have scheme considerations based on historical trading prices.

We understand that Reits with different underlying asset classes trade at different multiples. Industrial/logistics S-Reits tend to trade at a significant premium to their NAV per unit – around 1.4 times on average. Those in the commercial space tend to trade at a discount to or around their NAV per unit. This is reflected in the market prices of FLT and FCOT prior to the announcement of the proposed merger.

Timing of proposed merger

Another concern raised by some unitholders is that the proposed merger was announced on the heels of the completion of several asset enhancement initiatives (AEIs) for certain FCOT properties. They find that a merger at this juncture would therefore mean that these properties would be injected into FLT before FCOT unitholders can fully realise the gains from the AEIs.

According to disclosures highlighted during the webcast, the current FCOT NAV per unit is based on independent valuations as at Sept 30, 2019, when the AEIs for Alexandra Technopark and Cross Street Exchange (formerly known as China Square Central) were already completed. This means that gains accruing from these AEIs have already been factored into the valuations of FCOT’s properties.

However, FCOT unitholders can also continue enjoying these gains as unitholders of the enlarged Reit, if the proposed merger is approved. After all, the properties that have undergone AEIs will be part of the enlarged Reit. FCOT unitholders can still receive dividends stemming from these properties’ earnings. In addition, they will get a share of the earnings generated by the properties FLT is bringing to the table.

Role of the sponsor

Unitholders asked what exactly is FPL’s role? It was highlighted at the session that as the sponsor of several Reits, FPL is expected to support the growth of its Reits – often by injecting assets into the Reits. Such injections cannot be done unilaterally though. Its Reits are separately listed with independent trustees and have separate boards which include independent directors. Any potential injections will have to be handled on a willing buyer, willing seller basis; and each board has to consider the interests of each entity’s stakeholders, including minorities. By this token, FPL also cannot be directly involved in the negotiation of the proposed merger’s scheme consideration as that has to be conducted on an arm’s length basis. Any merger of FPL’s Reits will have to be reviewed by the Reits’ boards on commercial terms.

Consider the bigger picture

The proposed merger comes on the heels of three other Reit mergers over the past two years, amid increasing recognition that size matters for Reits. Notably, it will result in the creation of one of the largest S-Reits, with a higher market capitalisation of S$4.2 billion and an enhanced free float of S$3.3 billion. This could potentially lead to higher trading liquidity and greater weightage in key indices, which could then result in a positive re-rating and wider investor base.

Together with the proposed acquisition of the Farnborough Business Park (FBP) in the UK by the enlarged Reit, the merger is also expected to be DPU (dividend per unit) accretive by 2.2 per cent for FLT and 4.2 per cent for FCOT.

The merger represents an opportunity for unitholders to immediately scale up with the enlarged Reit and grow as part of a bigger vehicle.

If the proposed merger is approved, the enlarged Reit will be able to invest in a wider spectrum of asset classes and provide synergistic end-to-end business solutions for tenants. With more properties and tenants, its diversity and thereby resilience will be enhanced as well. Having an enlarged capital base, it will also have the capacity to undertake larger transactions and investment opportunities with greater agility while enjoying access to a S$5.0 billion pipeline of assets currently owned by FPL.

Balance interests

Structuring a merger is not easy especially where it involves pleasing both sets of investors. We note, for instance, that it would be challenging for FLT unitholders to accept a merger priced at NAV given that logistics/industrial Reits typically trade at a higher premium to NAV per unit and most FLT unitholders would therefore have probably bought FLT units at a significant premium.

Most FCOT unitholders, on the other hand, would have bought FCOT units at a discount or close to NAV since the scheme consideration is very close to FCOT’s historical peak price. FCOT unitholders are nevertheless being offered a premium to NAV per unit and to historical trading prices.

There has to be a balance between the interests of both sides, especially in a situation such as this, where it is a merger of equals which have both done well over the years.

Ultimately, every unitholder needs to make an informed decision considering all the facts, as well as his or her investment objectives and horizon. The outcome lies in the hands of minorities as the sponsor will not be able to vote on the proposed merger.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)