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 (REIT). In essence, OUE Commercial REIT will pay OUE Hospitality Trust a cash plus units deal, that will total S$1.49 billion based on OUE Commercial REIT unit price of S$0.57.
Mergers and acquisitions can be difficult to digest, even for the most experienced analysts. With that said, I will attempt to breakdown the key points of the merger in OUE Hospitality Trust’s perspective and whether minority unitholders should accept the deal.
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 2.5 billion new units of OUE Commercial REIT at S$0.57.
Is it a good deal for OUE Hospitality Trust stapled security holders?
There are many aspects of the deal that both sets of existing minority owners should consider.
From OUE Hospitality Trust’s point of view, existing stapled security unitholders need to consider whether the cash plus units deal is attractive, both in terms of market and book values. Here are the important numbers to consider if you are an OUE Hospitality Trust stapled security owner:
Source: Author’s computation from data from the proposed merger
As you can see, the proposed compensation that OUE Hospitality Trust owners will receive varies between S$0.7334 and S$0.89, depending on whether you are using current market price, book value per unit or “offer price” to value OUE Commercial REIT.
The reason why this valuation differs so widely is that as of the time of writing, units of OUE Commercial REIT are trading at a significant discount to its book value. OUE Hospitality Trust, on the other hand, trades closer to its book value.
Keeping things simple and comparing like-for-like, the deal looks favourable for OUE Hospitality Trust’s minority unitholders. OUE Hospitality Trust will receive new units in OUE Commercial REIT and cash for a total value of S$0.7334, compared to the current market price of S$0.72. In other words, they would receive a 1.8% premium based on existing market prices of the two REITs.
The Foolish bottom line
From what I can see, OUE Hospitality Trust stapled security owners stand to make a profit based on current trading prices of both REITs. The merger will also be an 18.7% accretion on book value attributable to the holders of OUE Hospitality Trust. This is due to the relative low price-to-book ratio of OUE Commercial REIT units.
The above is just a simple exercise assessing whether the proposed merger is good for OUE Hospitality Trust based on the consideration of cash and new units. However, investors who plan to hold on the new units of the enlarged REIT will also need to assess if the new REIT makes a good long-term investment. Factors that investors should consider include gearing and distribution per unit after the merger, and potential for growth.
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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.