Sabana Reit's proposed merger with ESR-Reit voted down in rare win for activists

SINGAPORE (REUTERS) - Investors in a Singapore real estate investment trust (Reit) voted down a merger with a larger rival on Friday (Dec 4), in a rare win for shareholder activism in a market dominated by retail investors.

Sabana Reit, which was under pressure from Quarz Capital and Black Crane Capital over the planned merger with ESR-Reit, said shareholders rejected a proposal to amend its trust deed, thus, terminating the merger.

The activists had said the deal between Sabana Reit and ESR-Reit, whose managers are both owned by a unit of Asian logistics giant ESR Cayman, had undervalued Sabana Reit.

"This is the first time in the 18-year history of Singapore Exchange's Reit market that a proposed merger has been voted down," Quarz Capital and Black Crane said in a statement.

Sabana Reit said 66.7 per cent of its shareholders had backed the proposal to amend its trust deed, but this was below the 75 per cent required for a merger vote to proceed. ESR-Reit managers and others holding 24.6 per cent of Sabana Reit were not allowed to vote.

"While we believe the merger has a compelling strategic rationale, unitholders have expressed that they prefer Sabana Reit to remain as a standalone Reit," chief executive officer Donald Han said.

Earlier on Friday morning, ESR-Reit unitholders voted overwhelmingly in favour of the merger.

The activists' victory marks a rare win in Singapore and signal their growing clout with retail investors.

Sabana, one of Singapore's smallest Reits, has said voting down the deal with a rival four times its size would harm its growth prospects amid a lack of alternative bidders.

"When we agreed to the merger process, it was due to a bigger ship sailing past and we wanted to hop onto it so we could continue the journey whatever the weather," Mr Han, who became Sabana Reit's CEO in 2018, told Reuters.

Singapore is home to Reits collectively worth over US$70 billion (S$93.2 billion), making it Asia's largest Reit market. Many investors prefer to own units in trusts mandated to pay 90 per cent of rental income as dividends, seen as a better alternative to bank deposits.

Quarz Capital had proposed Sabana Reit and ESR-Reit merge last year in a cash-plus-stock deal that would value Sabana Reit at 54.5 cents a unit, while Black Crane had voiced concerns about Sabana Reit's market valuations.

When both Reits announced an all-stock deal in July - just as the pandemic pummelled the sector - valuing Sabana Reit at $397 million or 37.7 cents a unit, both activists rejected it.

They said last month that Sabana Reit had failed to close the net asset value discount and had recommended "a value destructive merger with a Reit controlled by its owner."

To press their point, the funds set up a website called "Save Sabana Reit" stacked with presentations against the merger, sent letters to management and held webinars to win over retail investors.

They also sought regulatory intervention to disallow ESR Cayman from managing both Reits if the merger fails, although the central bank has said there are no rules restricting such arrangements.

Quarz Capital, run by a Swiss investment executive along with its Singapore-based research head, has previously campaigned against undervalued Reits and other Singapore firms, though this is its most high profile clash in the city-state.

Its current partner, Hong Kong-based Black Crane, is founded by a former UBS banker. The activists together control over 12 per cent of Sabana Reit, the biggest fund ownership in the firm.

They said an overlapping investment mandate of the two Reits, whose managers are owned by ESR Cayman, has potential to create conflicts of interest, a claim both companies reject.

"The outcome underscores the total lack of confidence that independent unitholders have in the current board and management of Sabana Reit manager," Jan Moermann, chief investment officer at Quarz Capital, said on Friday.

Sabana Reit has said its units were already trading at a discount before the merger announcement. As ESR-Reit has termed its offer as final, it is prohibited from raising its price.

"The activists have pinned themselves into a corner. Is Sabana worth more? Yes, but is there anyone else who can unlock its value in this weak market? No," said Justin Tang, research head at United First Partners.

This is the second merger attempt by both Reits after talks were terminated in 2017.

Proxy advisers Institutional Shareholder Services, and Glass, Lewis & Co recommended the deal.

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