A union may be on the cards for ESR-Reit and Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit).

The two trusts announced a proposed merger yesterday, by way of a trust scheme of arrangement. This would involve ESR-Reit acquiring all Sabana Reit units in exchange for new units in ESR-Reit.

This comes eight months after activist fund Quarz Capital Management argued that ESR Cayman's cross ownership of the managers of both Reits puts Sabana at a disadvantage when their investment mandates overlap. Quartz called for a merger to resolve this issue.

The new entity will become the fourth-largest industrial S-Reit by market share based on gross floor area (GFA), the managers said.

If the scheme becomes effective, each Sabana unit holder will receive 94 new ESR-Reit consideration units for every 100 Sabana units.

Sabana unit holders would get an implied scheme consideration of 37.7 cents per Sabana unit, and the implied aggregate scheme consideration is about $396.9 million.

Sponsor ESR Cayman is expected to hold about 12.2 per cent of the total units in the enlarged Reit.

Mr Adrian Chui, chief executive of ESR-Reit's manager, said the merger is in line with its strategy to establish ESR-Reit as a leading pan-Asian industrial Reit.

The enlarged Reit will have a market capitalisation of about $1.8 billion and a free float of $1.3 billion.

This larger market cap and free float will help to facilitate its potential inclusion in key indices, which will in turn provide access to a wider investor base and increased analyst coverage, Mr Chui added.

"Moreover, the greater scale of the enlarged Reit diversifies our portfolio, reduces risks and enhances our resilience, especially in view of the Covid-19 pandemic."

The potential merger also offers the possibility of "significant" operational synergies through portfolio lease-up, asset renovation and redevelopment, Mr Chui said.

The enlarged Reit will have an expanded network of 75 assets with a total GFA of about 19.2 million square feet across Singapore.

The proposed merger will be accretive to the distribution per unit on a pro forma basis for ESR-Reit unit holders by 3.5 per cent and for Sabana unit holders by 12.9 per cent.

ESR-Reit's trustee has entered into a $460 million unsecured loan facility for the deal.

The scheme will require backing from Sabana and ESR unit holders at an extraordinary general meeting.

THE BUSINESS TIMES