OUE Commercial Real Estate Investment Trust (SGX: TS0U) and OUE Hospitality Trust (SGX: SK7) are proposing a merger to form a S$6.8 billion diversified real estate investment trust. Here is everything minority shareholders need to know about the proposed deal.
Structure of the merger
OUE Commercial REIT will acquire all of the issued and paid-up stapled securities of OUE Hospitality Trust in exchange for a combination of cash and units in OUE Commercial REIT. In essence, this means OUE Commercial REIT unitholders will now own a smaller piece of a larger pie, while OUE Hospitality Trust stapled security owners will get cash and units in the enlarged OUE Commercial REIT.
The chart below shows the ownership structure and assets under management once the deal is completed.
Source: OUE Commercial REIT and OUE Hospitality Trust Merger slides
As you can see, the combined REIT will be made up of the four assets in OUE Commercial REIT’s existing portfolio and the three assets from OUE Hospitality Trust. OUE Group will have a 48.3% stake in the combined REIT.
Under the proposed scheme, OUE Commercial REIT will pay OUE Hospitality Trust holders S$0.040705 in cash plus 1.3583 new OUE commercial REIT units. This translates to a deal valuation of S$1.49 billion, with S$74.6 million in cash and the remaining balance paid by the issue of new OUE Commercial REITs at S$0.57 per unit. OUE Hospitality Trust unitholders will receive total compensation of S$0.8149 per unit based on the proposed scheme.
Reasons for the merger
In a joint announcement, management from the two REITs said the proposed merger will benefit unitholders in a few different ways:
- The enlarged REIT will have a larger volume of free float and drive higher trading liquidity. Management is hopeful that the enlarged REIT will be included on an index, which should boost the value of its units.
- The combined REIT will have greater ability to raise funds (assuming unitholders agree to general unit issue mandate) and, as such, will be able to seize potential investment opportunity and asset enhancements.
- Distribution per unit-accretive. According to pro-forma calculations, the merger will result in OUE Commercial REIT’s 2018 adjusted DPU increasing by 2.1% from 3.41 Singapore cents to 3.48 Singapore cents.
- The enlarged REIT will be diversified and have reduced concentration risk. The combined REIT will consist of a total of seven properties with no single property representing more than 27% of the total portfolio.
Before the merger can proceed, the two REITs will need to gain approval from the respective minority shareholders. OUE Commercial REIT will require approval from at least 50% of the total number of votes cast. OUE Hospitality Trust will require more than 50% votes from stapled security holders, representing at least 75% in value of the stapled securities that are voting in person or by proxy.
If all proceeds as planned, the effective date of the trust scheme will be in late July, with the payment made in August.
The Foolish bottom line
This is the second major merger between REITs listed in Singapore, following the merger of ESR-REIT (SGX: J91U) and Viva Industrial Trust in 2018. The key advantage of mergers is to create an enlarged REIT with more diversified assets and to increase the liquidity of trading. This could boost unit prices and lower the cost of capital so that the REIT can raise funds to expand.
However, mergers are complicated to process, even for the most experienced analysts. Investors should continue to look out for more updates on the proposal to get a clearer idea of whether the deal is good for unitholders of both trusts.
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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 Jeremy Chia doesn't own shares in any companies mentioned.