Frasers Logistics and Industrial Trust has proposed to acquire Frasers Commercial Trust in a shares plus cash deal. In essence, Frasers Commercial Trust unitholders will receive 1.233 Frasers Logistics and Industrial Trust units and S$0.151 in cash for every unit of Frasers Commercial Trust they own.
In light of the proposed deal, I had previously shared my thoughts on what it means for Frasers Logistics and Industrial Trust’s unitholders. Below are my thoughts on what the merger means for Frasers Commercial Trust’s unitholders.
Scenario 1: The proposed deal goes through
Existing unitholders of Frasers Commercial Trust can accept the offer tabled to them. In exchange, they will receive cash and units of the new REIT. This outcome could be fairly rewarding.
For one, there are reasons to believe that the new REIT can provide solid returns for unitholders. If the deal does go through, Frasers Commercial Trust unitholders will be able to participate in the new REIT’s potential upside.
The new REIT is expected to provide a 6% distribution yield (if you consider the market price at the time of writing of S$1.23 per unit). The enlarged REIT will benefit from a diversified portfolio with the potential to grow its rental income organically.
The deal will also enable Frasers Commercial Trust’s unitholders to cash out a portion of their holdings, due to the cash portion of the acquisition.
Scenario 2: The proposed deal gets rejected
If the deal gets rejected by either party, it will not go through. In that case, Frasers Commercial Trust unitholders get to keep their stake in the existing REIT.
I think the main reason why Frasers Commercial Trust unitholders may reject the deal is that they may not view the purchase price to be high enough. They will also be receiving new units of the enlarged REIT at fairly high prices. Based on current market prices, the new units will be issued at a 29% premium to book value.
Scenario 3: Unitholders can sell their units now
Unitholders of Frasers Commercial Trust can also sell their units before the results of the deal. By selling your units, you can get the cash out immediately and reinvest elsewhere.
This option is for unitholders of Frasers Commercial Trust who do not want to hold on to the units of the newly formed REIT.
This is a reasonable action to take if you have found an investment that is better suited for your portfolio.
Scenario 4: Looking for arbitrage opportunities
The fourth option is to make use of the deal as an arbitrage opportunity.
Although I encourage long-term, buy-and-hold investing, mispricings in the market, especially after a deal has been proposed, can result in the opportunity to make an immediate profit.
To understand how to do this, we must first look at the mechanics of the deal. Frasers Commercial Trust unitholders will be getting 1.233 Frasers Logistics and Industrial Trust units plus 15.1 Singapore cents.
At the time of writing, Frasers Logistics and Industrial Trust shares trade at $1.23 per unit. As a result, the market value of what Frasers Commercial Trust unitholders will receive ($1.667 per unit) is slightly lower than the current market price of $1.67.
As such, investors can instead choose to sell their holdings in Frasers Commercial Trust and purchase Frasers Logistics and Industrial Trust. Of course, they should factor in whether it still makes sense after including any transaction costs (it might not, depending on the broker you use).
The Good Investors’ Conclusion
The proposed acquisition of Frasers Commercial Trust has given its unitholders a lot to think about. Should you simply wait for the deal to pass and enjoy the upside of the enlarged REIT? Or should investors take active steps to achieve a better return by seizing the current arbitrage opportunity? The risk of trying to maximise returns through arbitrage is that the deal falls through.
Additionally, unitholders who do not want a stake in the enlarged REIT can also choose to encash their units now.
Personally, I think trying to make an arbitrage profit is too much effort for too small of an upside (this may change if either REIT’s unit price moves dramatically, which is unlikely as arbitragers will force the price to equilibrate). So for now, I think it is best for Frasers Commercial Trust unitholders to simply wait for the outcome of the deal.
There are potential pros and cons to either outcome. If the deal goes through, exiting Frasers Commercial Trust unitholders can enjoy distribution per unit-accretion, if they reinvest the cash portion of the deal into Frasers Logistics and Industrial Trust. The new trust will also enjoy potential economies of scale, access to cheaper debt, and potentially trade at higher valuations. The downside is that the new units are being issued at a fairly high valuation of 1.29 times book value and the purchase price is fairly low.
Conversely, if the deal falls through, unitholders will continue to hold onto their Frasers Commercial Trust units, which also has a good portfolio of properties, low gearing, and could potentially pay out higher distribution per unit in the future. However, unitholders will miss out on the yield-accretion and the potential to participate in the growth opportunity of a larger, more liquid REIT with access to cheaper debt and equity.
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