ESR-Reit, ARA Logos propose $1.4 billion merger

SINGAPORE (THE BUSINESS TIMES) - The managers of ESR-Reit and ARA Logos Logistics Trust (ARA Logos) have proposed a $1.4 billion merger, where ESR-Reit will acquire all of ARA Logos’ units in exchange for a combination of cash and new units.

The proposed merger, which will result in the merged entity being named ESR-Logos Reit, will be effected by way of a trust scheme of arrangement. ARA Logos unitholders will receive a scheme consideration of $0.95 per ARA Logos unit - comprising $0.095 in cash and 1.6765 new ESR-Reit units, to be issued at $0.51 apiece.

For illustrative purposes, this means an ARA Logos unitholder will receive $95 in cash and 1,676 units for every 1,000 ARA Logos units held by the books closure date, to be announced. This implies a gross exchange ratio of 1.863 times.

Based on pro forma estimates, the proposed deal will be accretive on both ESR-Reit and ARA Logos’ FY2020 distribution per unit (DPU), assuming the merger had been completed on Jan 1, 2020. ESR-Reit’s DPU will rise 5.8 per cent to 2.935 cents from 2.775 cents, while ARA Logos’ DPU will increase by 8.2 per cent to 5.512 cents from 5.094 cents.

What the combined entity looks like

If the merger is approved, ESR-Logos Reit will contain $5.4 billion in total assets across 87 portfolio properties in Singapore and Australia, as well as 41 properties owned via investment funds in Australia. 

ESR-Reit owns 58 properties that includes business parks, logistics and warehouses, with an aggregate property value of $3.2 billion. ARA Logos has 29 logistics warehouses in Singapore and Australia valued at around $1.8 billion.

The managers expect ESR-Logos Reit to be among the top 10 S-Reits based on a free float market capitalisation of $2.5 billion, and within the top 5 industrial S-Reits.

Adrian Chui, the chief executive officer (CEO) of ESR-Reit’s manager, will become CEO of ESR-Logos Reit’s manager, while Karen Lee - chief executive of ARA Logos’ manager - will become deputy CEO. 

As ARA Logos will become a wholly-owned sub-trust of ESR-Reit, it will be delisted from the Singapore Exchange. Moreover, APAC real estate fund manager ESR Group will be the sponsor of the merged Reit - providing an initial US$2 billion (S$2.7 billion) of visible and executable pipeline. 

Other benefits from the potential merger include increased exposure to what the managers dub as “in-demand new economy real estate” which will account for 65.7 per cent of ESR-Logos Reit’s total portfolio.

Such real estate includes logistics and high-specs industrial space focused on e-commerce growth, high value-added manufacturing such as precision engineering, data centres and cold storage facilities.

The merged entity will also have an enlarged tenant base of 437 across a range of industries. No single tenant will account for more than 4.6 per cent of ESR-Logos Reit’s gross rental income, reducing tenant concentration risks.

With a larger capital base, increased debt headroom and potentially lower cost of capital, ESR-Logos Reit will also be better positioned to pursue growth opportunities.

The enlarged scale and increased free float of the combined portfolio will also enhance ESR-Logos Reit’s visibility among S-Reits, allowing it to attract a wider base of institutional investors. It will also see greater representation on the FTSE ERPA Nareit Global Developed Index and potentially be included in other major indices. 

What’s next?

ESR-Reit unitholders, representing more than 50 per cent of the total number of votes, will need to greenlight the transaction in order for the proposed merger to go through.

Meanwhile, ARA Logos unitholders, holding 75 per cent of votes cast, will need to agree to the Reit’s trust deed amendments in order to implement the scheme. 

The trust scheme will also need an order from the Singapore court to convene the scheme meeting and sanction the trust scheme if approved. 

Citigroup Global Markets Singapore and Maybank Kim Eng Securities are the financial advisers to ESR-Reit, while BofA Securities and DBS were the financial advisers to ARA Logos for the proposed merger.

Trading halts for both ARA Logos and ESR-Reit’s units were called on Friday (Oct 15) morning before the market opened. On Thursday, ARA Logos units closed 1.6 per cent or $0.015 higher at $0.935, while ESR-Reit closed flat at $0.465.