Recently there was another huge merger deal happening in the REIT sector, Ascott REIT has been looking to acquire 100% of Ascendas Hospitality trust in a 95% stock 5% cash deal. This follows the news of the buyout of Ascendas-Singbridge by Capitaland, which is not surprising as they seek to consolidate their assets and gain economies of scale. Such as better access to cheaper funding, institutional interest and becoming more diversified.
I have decided to quickly analyse this merger deal to see the impact on both current Ascott and A-Htrust unitholders and also to explore the potential for exploiting an arbitrage opportunity.
Pre-deal Situation
Ascott REIT plans to acquire 100% of Ascendas Htrust in a 95% stock 5% cash deal
Ascott REIT
Market share price (3rd July) = $ 1.28
Pre-deal NAV = $ 2,725,213,059
Pre-deal Dividends paid = $ 154,941,987.37
Pre-deal Shares outstanding = 2,174,777,000
Pre-deal DPS = $ 0.071245
Pre-deal NAV = $1.2531
Ascendas Htrust
Market share price (3rd July) = $ 1.04
Pre-deal NAV = $ 1,153,684,530
Pre-deal Dividends paid = $ 68,441,263.38
Pre-deal Shares outstanding = 1,136,747,000
Pre-deal DPS = $ 0.060208
Pre-deal NAV per share = $ 1.0149
The deal
“The consideration for the proposed merger is about S$1.2 billion, comprising S$61.8 million in cash and 902.8 million new units of the new enlarged entity, Ascott Reit-BT.
Through a trust scheme of arrangement, Ascott Reit will acquire all A-HTrust units for S$1.0868 per unit, comprising S$0.0543 in cash and 0.7942 Ascott Reit-BT units issued at a price of S$1.30.”
Source: https://www.businesstimes.com.sg/companies-markets/capitaland-to-merge-ascott-reit-ascendas-unit-to-form-asia-pacs-largest
Premium paid on Ascendas HTrust (3rd July price) = [($1.0868 / $1.04) – 1] * 100 = 4.5% premium
Price of Ascendas Htrust less cash portion of S$0.0543 per share = $1.0868 – $0.0543 = $1.0325
Exchange ratio = 1.0325/1.30 = 0.794231 = 0.7942 Ascott shares for 1 A-Htrust share
Total shares outstanding for Ascott Reit-BT (Newly merged entity) = (0.7942* 1,136,747,000) + 2,174,777,000 = 902,804,467+ 2,174,777,000 = 3,077,581,467
DPS of Newly merged entity = ($ 154,941,987.37 + $ 68,441,263.38) /3,077,581,467= $ 0.07258
NAV of Newly merged entity = ($ 2,725,213,059 + $ 1,153,684,530) /3,077,581,467 = $1.2604
Post-deal situation
Ascott REIT unitholders
DPS of Newly merged entity increased from 7.12cents to 7.26 cents (1.97% increase)
NAV per share of Newly merged entity increased from $1.25 to $1.26 (0.8% increase)
Therefore this is an accretive deal for Ascott REIT unitholders as both DPS and NAV increased post-merger.
Ascendas H-trust unitholders
Since the exchange ratio is 0.7942, for Ascendas H-trust unitholders, it must be scaled back by the same factor for equal comparison with per share Ascendas H-trust:
Pro forma DPU = 0.7942 * $0.07258 = $0.05764
Pro forma NAV = 0.7942 * $1.2604 = $1.0010
Pre-deal DPS = $ 0.060208
Pre-deal NAV per share = $ 1.0149
Comparing the pro forma DPU and NAV with the pre-deal numbers, it seems like it is not accretive for Ascendas H-trust unitholders.
DPS decreased from 6.02cts to 5.76cents (4.32% decrease)
NAV decreased from $ 1.0149 to $1.0010 (1.37% decrease)
However, if we factor in S$0.0543 in cash consideration into the NAV, we get $1.0553 which is accretive. Along the same vein, assuming we put in S$0.0543 cash in the newly merged entity – we would get 0.0431 more Ascott Reit-BT shares per Ascendas Htrust share which translates to 0.313 cents more in Pro forma DPU, bumping the DPU up to 6.08cents per Ascendas Htrust share. This assumes that the newly merged Ascott Reit-BT could be purchased at P/B of 1.
Cash consideration
For the $61.8 million in cash consideration, I believe it would be likely for Ascott to raise debt money for this and would see the leverage of the newly merged entity increasing slightly. Small money compared to the asset base of over $7 billion SGD, approximately 0.8% increase in debt/asset ratio.
Was there an Arbitrage opportunity?
I am currently not vested in these REITs, so I approach this as a potential buyer of both REITs before the merger is executed.
Ascott REIT
Market share price (3rd July) = $ 1.28
Market share price (5th July) = $ 1.30
Ascendas Htrust
Market share price (3rd July) = $ 1.04
Market share price (5th July) = $ 1.05
If my calculations were done right, the NAV we get per Ascendas H-trust share would be $1.0553 ($1.0010 in Ascott-BT + S$0.0543 cash) post-merger. Assuming the newly merged REIT were to trade at fair value of P/B = 1, it would seem like there would barely be any arbitrage opportunity in this instance, after accounting for transactional costs.
However, since the deal for Ascott REIT is accretive for both NAV and DPU, it would be better to buy Ascott shares pre-merger rather than post-merger assuming the price of Ascott pre and post-merger remains the same. Realistically, we would never know, so purchase Ascott REIT only if you are happy with the assets post-merger and don’t mind getting 5.76% yield on riskier and cyclical hospitality assets.
As for me, the arbitrage opportunity is sadly not possible (it might have been possible if I had been faster in my analysis – the price was 98.5cents previously) and I would not feel comfortable putting my money in a hospitality REIT for 5.76% yield.
Thanks for reading!
