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· ESR Cayman is set to acquire ARA Asset Management for a consideration of USD 5.19b. However, USD 4.29b will be funded by the issuance of shares and ESR is likely to fork out only USD 269m in cash.
· ARA is virtually expected to call its three perpetual securities due to a 300bps step-up in a change of control event.
· ARA bondholders can also choose to sell the 2024 ARA bonds at par and can look at other investments listed in the article.
· ESR bonds should not be adversely affected as the acquisition is largely funded by the issuance of equity.
ESR Cayman announced they have entered into an agreement with ARA Asset Management Limited (“ARA”) to potentially combine the two entities. The acquisition of ARA is fully subjected to approval during an EGM that will most likely be convened in October. The merger will result in ESR becoming the largest real estate and real asset manager in Asia Pacific.
About ARA Asset Management
ARA is the largest real assets manager in the Asia Pacific (“APAC”) region with USD 95b of gross assets under management as at 30 June 2021. It is a manager of many publicly listed real estate investment trusts (“REITs”), including Fortune REIT, Suntec REIT, Prosperity REIT, ARA LOGOS Logistics Trust, Hui Xian REIT and ARA US Hospitality Trust. They have been operating since 2002 and other than managing REITs, they also manage infrastructure and 63 real estate funds.
About the proposed acquisition
The acquisition will be implemented through either (1) a combination of the sale and purchase of ARA shares, coupled with the merger of ARA and a new ESR subsidiary, where ARA will be the surviving entity, or (2) at the election of ARA Cayman, the sales of ARA shares to ESR. ARA Cayman is a Cayman company owned by Mr. John Lim Hwee Chiang, who has a 20.96% interest in ARA.
The acquisition comes at a consideration of USD 5.19b where USD 519m will be paid in cash, USD 4.29b in the form of 1,234,438,841 shares at a price of HKD 27 per share, and USD 387m through the issuance of 111,459,237 consideration vendor loan notes (“VLN”) at 0% interest and a conversion price of HKD 27 per share. The VLNs will be automatically converted into shares upon certain conversion triggers.
The cash consideration of USD 519m could be adjusted, such that ESR may also issue new shares in the period from now till 7 business days before the completion provided that the shares are issued for cash payable at a price equal or greater than HKD 27; the issuance is made by placement to a number of public markets investors; and the total additional cash arising from the extra shares does not exceed USD 1,038m (“Permitted Issuance”) and will be applied towards part settlement of the total consideration upon completion.
If the Permitted Issuance is made, the additional cash will be allocated to each additional cash consideration recipient on a pro rata basis to the allocation of cash consideration as originally contemplated.
Redwood Investment Company, Laurels Capital Investments Limited, OMERS Administration Corporation and JD Property Holding Limited (formerly known as JD Logistics Holding Limited) who collectively hold an approximate 46.6% stake in ESR have irrevocably undertaken to approve the acquisition at the upcoming EGM. Subject to the satisfaction of the conditions, the acquisition is expected to be completed in 4Q21 or 1Q22.
Changes to ARA
It is expected that on completion, the existing CEO of ARA and co-CEOs of Logos will retain their roles, and other core ARA and Logos management will be retained in appropriate roles. It is also expected that Wealthman Group (an ARA shareholder and investment holding company ultimately controlled by CK Asset Holdings Limited) will be entitled to appoint the chairpersons of the managers of Fortune REIT, Prosperity REIT and Hui Xian REIT as long as it remains the largest unitholder of the relevant REITs.
Similarly, The Straits Trading Company Ltd. (“STC”) will be able to appoint the chairperson of Suntec REIT, as long as STC remains a significant shareholder in ESR. Mr. John Lim Hwee Chiang, co-founder and deputy chairman of ARA, will be entitled to be appointed as a senior advisor to ESR, as long as he is subject to the lock-up undertakings.
As ARA shares will be sold to ESR, this also means that existing shareholders are expected to no longer hold ARA shares. Instead, they will be holding ESR shares. ARA perpetual securities have a change of control call where a “change of control event” means:
(1) Mr Lim Hwee Chiang John, The Straits Trading Company Limited, Cheung Kong Property Limited, Warburg Pincus LLP and/or AVIC Trust, cease to own (whether singly or otherwise) 30 per cent. in aggregate, direct or indirect shareholding interest in the Issuer;
(2) any Person or Persons (acting together with its related corporations) (provided that such Person or Persons (and their related corporations) do not include any of the Permitted Holders) acquires or acquire Control of the Issuer, if such Person or Persons does not or do not have, and would not be deemed to have Control over the Issuer on the Issue Date; or
(3) the Issuer consolidates with or merges into or sells or transfers all or substantially all of the Issuer's assets to any other Person or Persons (acting together with its related corporations) (provided that such Person or Persons (and their related corporations) do not include any of the Permitted Holders), unless the consolidation, merger, sale or transfer will not result in such other Person
Conditions 1 and 2 should be fulfilled and thus, ARA perpetual securities will be subjected to the change of control call at par, or the perps’ coupon rates will see a 300 basis points (“bps”) step-up. We expect ESR to call all the perps as a 300bps step-up means much higher interest expenses for ESR. ARA has secured USD 1b of committed financing which will likely be used to redeeming all ARA debt.
Recommendation
The ARASP 4.150% 23Apr2024 Corp (SGD) also has a change of control put where bondholders can redeem their notes. Using the previous offer price of 102.8, the bond has a yield to maturity (“YTM”) of 3.06%. Figure 1 looks at other possible notes that investors may consider should they decide to redeem their notes.
Figure 1: Indicative yields of other SGD bonds
The OUECT 4.000% 24Jun2025 Corp (SGD) looks like a good alternative for investors,
offering an indicative YTM of 3.53% with a maturity of about 4 years. We have
recently written on the OUECT 3.950% 02Jun2026 Corp (SGD),
but because their spread differences have narrowed to 12 basis points, the 2025
bonds look like a better investment now.
Investors can also consider the ESRCAY 5.100% 26Feb2025 Corp (SGD). ESR may issue new debt to fund its cash outlay for the acquisition and will report pro-forma numbers of the acquisition in September. However, it is likely that its gearing ratios will remain stable as the majority of the acquisition will be funded by the issuance of new shares. Bondholders who are holding on to ESR’s bonds should have little to worry about and the ESRCAY 5.650% Perpetual Corp (SGD) remains an attractive investment.
For
investors who are more risk-seeking, they may use this opportunity to invest in
Oxley’s bonds which offer much higher yields than the ARASP 4.150% 23Apr2024
Corp (SGD) due to its high gearing ratio (its total debt/total equity stands at
254%). Investors may read this article for further information.
Financial impact
The Edge reported that the USD 519m cash consideration will be funded by a USD 250m placement to Sumitomo Mitsui Banking Corporation (one of ARA’s shareholders), and the remaining USD 269m via debt. In our May article on ESR, we estimate cash balances to drop to USD 0.93b. Given the increase in assets and in equity due to the acquisition, gearing ratios for ESR should not be too adversely affected. The pro forma numbers that will be released in September should give us a clearer picture of ESR’s financial situation.
For the year of 2020, ARA made a profit after tax of USD 184.81m while ESR registered USD 314.7m. The acquisition of ARA will likely boost ESR’s earning power while having little effect on its credit profile so far. Furthermore, ESR does not pay dividends to its shareholders.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ARASP 5.200% Perpetual Corp (SGD), ESRCAY 5.65% Perpetual Corp (SGD), OHLSP 6.900% 08Jul2024 Corp (SGD), OUECT 3.950% 02Jun2026 Corp (SGD) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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