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Sabana REIT issues clarifications on proposed merger

Felicia Tan
Felicia Tan • 4 min read
Sabana REIT issues clarifications on proposed merger
The statement, dated August 28, says the board of directors of Sabana REIT’s manager went through a “thorough” process to evaluate the terms of the merger, and that the merger is the only formal offer that the manager has received.
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The manager of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana REIT) has issued clarifications on its proposed merger with ESR-REIT.

The statement, dated August 28, says the board of directors of Sabana REIT’s manager went through a “thorough” process to evaluate the terms of the merger, and that the merger is the only formal offer that the manager has received.

It added that independent Sabana unitholders should consider the “compelling transaction rationale” and other factors including the premium gross exchange ratio over historical exchange ratios, distribution per unit (DPU) accretion, the property portfolio of both Sabana and ESR REITs, well as the “challenges of continuing as a smaller standalone REIT”.

As such, the manager of Sabana REIT believes that the scheme is a “fair and equitable” way of effecting the merger.

The scheme requires the approval by at least 75% in value of the Sabana units held by independent unitholders. The manager added that the scheme will require court sanction before it can become effective, as an “additional protection” for the independent Sabana unitholders.

The manager of ESR-REIT, its concert parties, as well as the common substantial Sabana unitholders and ESR-REIT unitholders including ESR Cayman Limited will abstain from voting on the scheme.

The statement reiterated that there are no conflicts of interest resulting from the merger, that there are no overlap of management teams between both REITs. Sabana’s manager added that “information barriers” have been in place to ensure that information relating to Sabana REIT’s business strategy or operations is not made privy to ESR-REIT and vice versa. No information is also shared with ESR Cayman.

Following the merger announcement on July 16, activist investor Quarz Capital emerged as a new substantial shareholder at Sabana REIT on July 30.

See: Quarz Capital emerges as new substantial shareholder at Sabana REIT

On August 6, the manager of ESR-REIT says it does not intend to increase the scheme consideration for Sabana REIT. Sabana REIT’s unitholders are being offered 0.94x the price of ESR-REIT.

See: ESR-REIT's manager says price for Sabana REIT is final, minority unitholders plan to vote against scheme

On August 7, Quarz Capital along with Hong Kong-based Black Crane Capital which also owns 5% of Sabana REIT, announced they intend to vote against the scheme proposal during the EGM in Oct. Together, Quarz Capital and Black Crane hold 10% of Sabana REIT.

See: Quarz, Black Crane plan to vote against ESR-REIT Sabana REIT merger

On August 18, Quarz Capital, Black Crane, and other Sabana REIT unitholders penned an open letter to the Monetary Authority of Singapore (MAS) and the Singapore Exchange Regulation (SGX RegCo) on the “potential severe conflict of interest” in issues concerning the REIT.

See: Quarz Capital and other Sabana REIT unitholders pen letter to MAS, SGX RegCo on 'severe conflict of interest issues' related to merger with ESR-REIT

With regard to Sabana REIT selling its assets at a discount to net asset value (NAV), Sabana’s manager clarified that the transaction is a unit-for-unit merger and not a sale of assets.

It added that the relevant metric for such mergers is the gross exchange ratio and that ESR-REIT unitholders may not approve a NAV-NAV merger between the REITs, which would have been DPU and NAV dilutive for ESR-REIT.

“The discount to NAV in respect of the Merger is reflective of Sabana REIT’s unit trading price at the time of the Joint Announcement, which is similar to historical REIT mergers that had largely been priced at around the market price (and implied price-to-NAV) of the respective REITs at the time of announcement of those mergers,” says the manager.

The manager added that unitholders should also consider the pro-forma DPU accretion, which, at 12.9% “is the highest among prior S-REIT mergers”.

Instead of cash, the Sabana’s manager explained that due to the “current economic environment”, the REIT’s current debt structure, and potential future asset enhancement initiative (AEI) plans for the enlarged REIT, it would be “prudent” to have an “all-unit” merger to conserve cash and preserve debt headroom.

On ESR Cayman’s role during the negotiations, Sabana’s manager stressed that it received a letter of interest from ESR-REIT proposing a merger, and there were no ESR Cayman representatives at any of its meetings.

It adds that there is “not much excess land” for most of Sabana REIT’s properties, and that to make use of the “untapped gross floor area (GFA)”, the manager will need to first tear down the existing property to redevelop to a bigger one.

As at 9.50am, units in Sabana REIT were trading 0.5 cent higher, or 1.4% up, at 37.5 cents.

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