This morning, Cambridge Industrial Trust (CIT) announced that its manager has sought to be the manager of a Singapore-listed peer, MacArthurcook Industrial REIT. By lunch time, the stock of Macarthurcook REIT had shot up 4 cents to 40 cents. NextInsight asked two value investors to give their on-the-spot take of how the story will unfold. They are REIT investors, and here are their views:
There hasn't been a REIT takeover in Singapore. This could be interesting because MAS only recently pushed out guidelines for takeovers / mergers of REITs.
Whilst take overs between REITs are fairly common in overseas markets such as Australia, this is possibly the first "hostile" action taken in the S-REIT market. It closely follows a recent move in Japan where Japan Retail Fund is proposing a merger with LaSalle REIT.
Today's announcement represents an opportunisitic move by Cambridge REIT which has accumulated 10% stake in MI-REIT. Both REITs have similar mandates to invest into the industrial sector. If the other minority MI-REIT shareholders agree to vote to remove AIMS as MI-REIT's manager and appoint CITM (Cambridge REIT's manager), a combination of the two REITs into one could well be on the cards.
However, MI-REIT shareholders probably still need clarity on how Cambridge REIT will secure refinancing for MI-REIT. In addition, management of Cambridge REIT has to assure its shareholders that it is not biting off more than it can chew as it has debt re-financing obligations of its own too.
What could happen in the short term
* CIT could build up a further stake in MI-reit to consolidate its voting power and ensure that its plans go through. Currently, it holds 10% (just 5% shy of the 15%, at which MAS will consider it a controlling unitholder).
* CIT's 10% level is enough for it to requisition an EGM calling for the removal of the Manager. Removal of Manager need only be approved by a simple majority.
* Given that CIT itself has gearing problems, I doubt they would further spend their cash resources in building up a bigger stake. But of course, if they do so, I'll be more than happy to see a bidding up of MI-reit.
* Of course, the general market would very likely not think so much into this, and may assume that CIT will run a bidding war for the units of MI-reit.
What could happen in the long term - Merger via trust scheme
* My guess is if CIT succeeds at getting itself voted in as Manager, it'll try to effect the merger of CIT and MI-reit. Might not make sense for them to maintain separate listings when they share a common manager and very similar asset base.
* The merger can be done via a trust scheme, subject to unitholder's approval. There must first be an amendment to the trust deed to allow such a scheme to take place. The trust scheme is very very similar to the current Scheme of Arrangements that is available to companies under s210 of the
Companies Act.
* The trust scheme is still subject to the takeover's code unless a majority in number representing 3/4 in value of the unitholders approve the trust scheme; and trustee or trustee manager obtains Court approval for the trust scheme.
Note that 'majority in number representing 3/4 in value of unitholders' is in fact a twofold requirement. At the meeting, there must be a majority of the physical number of unitholders present that approves the trust scheme.
AND, this said majority must represent 3/4 in value of unitholders. Hence, if there's a major unitholder having say 26%, this unitholder can block the trust scheme even if every other unitholder votes
in favour. (because the majority in number now only represents 74% in value of unitholders)
* Court Approval: past cases involving companies going for s210 scheme of arrangements have seen the court asking questions such as
(1) whether the required laws have been complied with
(2) whether the scheme was fair and reasonable to creditors (in our case, unitholders) as a whole
(3) whether the actors were bona fide i.e honest and full disclosure of information, and having good intentions?
(4) whether minority was being forced to promote the interest of the majority.
Usually, what tips the case for the courts would be lack of transparency. If the courts discover that the 'actors' have been less than honest in disclosing information to unitholders, the courts will not give
approval.
Other things to check out:
Need to check out the shareholding percentages in MI-reit. This will give a reasonable idea of the likelihood of success of CIT, be it in voting out the manager, or effecting a merger. I assume the
current manager will be dead against their plans.
Interesting thing to note:
National Australia Bank is a sponsor of CIT. If I recall correctly, National Australia Bank is also the proposed bank doing the refinancing for MI-reit. I wonder which option NAB would prefer.
A bunch of announcements have been released today, including:
Cambridge's press release: Cambridge Industrial Trust to vote against AIMS recapitalisation proposal of MI-REIT
Macarthurcook's Letter to Unit holders
