Commentary: Sabana-ESR-Reit merger: Minority unitholders should make voices heard

Date: November 30, 2020

First published in Business Times on 30 November 2020

It is not often that minority shareholders get the chance to determine the outcome of a significant corporate deal, but the proposed merger between Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) and ESR-Reit is one such instance since substantial shareholders, both managers and concert parties will abstain from voting.

It is crucial to note that although Sabana Reit’s and ESR-Reit’s extraordinary general meetings will be held on Dec 4, these are online meetings. This means that voting will be by proxy, which in turn means that the relevant forms have to be submitted by 10am on Dec 1.

A key point of contention has been the scheme consideration, which implies a discount to Sabana Reit’s net asset value (NAV) per unit. Some have said that it undervalues the Reit. But both Sabana Reit’s and ESR-Reit’s managers say that the discount is reflective of how the market has valued Sabana Reit over the years, and that the implied offer price actually represents a premium to Sabana Reit’s last traded price prior to the announcement of the deal.

Whilst NAV is an important metric, the managers argue that unitholders should consider the transaction rationale and distribution per unit (DPU) accretion as well.

They have added that the 12.9 per cent DPU accretion Sabana Reit unitholders will get from the merger, on a historical pro forma basis, is the highest among all S-Reit mergers to-date.

On the other hand, activist investors Quarz Capital and Black Crane Capital contend that the discount to NAV is substantial when compared with all Reit transactions in the past 18 years.

Sabana Reit has said since it conducted a strategic review in 2017, the ESR-Reit merger is the only offer it has received. Quarz and Black Crane, however, have described Sabana Reit’s current portfolio as having a “sizeable footprint in the attractive Singapore industrial property sector” while adding that they are optimistic of finding another buyer.

Quarz and Black Crane have proposed internalising Sabana Reit’s management function and to set this up along the lines of NetLink Trust. Sabana Reit, on the other hand, said internalisation could put unitholders at real risk.

From the above, unitholders would rightly conclude that the issue boils down to whether they should place their faith in the existing management or go with Quarz and Black Crane who believe their way offers everyone better prospects.

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