Why Did Forterra Trust Jump By 21% Today?

Editor’s note: This article had made a mistake by regarding the first tender offer price and the total properties under management of Forterra Trust. The mistake has been corrected. The Fool regrets the error.

Earlier this month on 4 November 2014, it was revealed that Nan Fung International Holdings Limited had put in a tender offer to acquire all of Forterra Trust (SGX: LG2U) at S$1.86 S$1.85 per unit. At the time of the announcement, Nan Fung was already Forterra Trust’s single largest owner (with a stake of slightly less than 31%) and the news catapulted the latter’s price from S$1.40 to S$.186 (a 33% gain!) within a week.

However, for unit-holders of Forterra Trust who held on to the trust’s units for a few more weeks since 4 November 2014, even better news had just filtered through this morning. Turns out, Forterra Trust announced it has received an upward revision on Nan Fung’s tender offer. Under the new terms of the deal, Nan Fung would acquire Forterra Trust’s units at S$2.25 per unit – this is what caused the huge spike in Forterra Trust’s price today.

Forterra Trust is a business trust which owns mostly commercial properties in China; its current portfolio consists of six four pieces of real estate. Forterra Trust first came to my attention when it was near a 52-week low back in July this year. You can read more about my views of the trust here.

The trust’s latest financials shows that it has total assets worth S$2.38 billion and a net asset value of S$1.096 billion. Even at the revised price which Nan Fung wants to pay for the takeover, Forterra Trust is still valued only at 0.57 times its book value.

With this as a backdrop, it might seem to cynical investors that Nan Fung is trying to make a low-ball offer and take over all of Forterra Trust’s properties at a very cheap price. But a look beneath the surface shows that the deal might actually be the best option for unit-holders of Forterra Trust.

In 2013, Forterra Trust earned revenue of S$77 million but clocked a staggering S$49.3 million in losses. Turns out, only some of the trust’s six properties are considered as “stabilised assets,” meaning to say that the rest of the properties can’t yet produce revenue efficiently. Because of the losses, Forterra Trust could not produce any distributions for its unit-holders.

It might take a few more years (or longer) for Forterra Trust’s portfolio to reach its full potential – and even so, there is no certainty at all regarding the amount of distributions that unit-holders can expect from the trust.

With Nan Fung currently being the largest unit-holder (with a 51.3% stake) and Manager of the trust, other unit-holders have effectively very little say in the future of the trust, if at all.

Considering all these, Nan Fung’s offer is beneficial for minority unit-holders as the latter group would be able to see some of theiir value in Forterra Trust being unlocked. Meanwhile for Nan Fung, it can benefit as well given that it would have full reign over the trust’s development if the takeover proceeds successfully.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.