• Terms are “principal-positive”
• Potential upside from synergies
• Accept the offer

Each VIT Unit for 1.6 New ESR-REIT Units and S$0.096 in Cash

Viva Industrial Trust (VIT) has reached an agreement concerning the proposed merger with ESR-REIT. The consideration is to be S$0.96 per VIT unit, 10% of which is to be paid in cash and the remainder to be paid in the form of newly issued ESR-REIT units at an issue price of S$0.54 each. In effect, each VIT unit is to receive S$0.096 in cash and 1.6 new ESR-REIT units.

“Principal-positive” Terms for VIT

We deem the terms are “principal-positive” for VIT unitholders. Ignore the S$0.54 issue price for a moment. The fair value of these new ESRREIT units depends on what the value of the merged entity will be. We estimate that this fair value of the merged entity should lie at ~S$0.53 per unit (and above, assuming that there are positive synergies to be gained from the merger).

Overall, our estimate implies that 1 VIT unit can be traded for an aggregate value of at least S$0.942 (including the S$0.096 in cash). Against VIT’s S$0.89 closing price as at 18 May, we see these as “principal-positive” terms for VIT. See our report appendix for an explanation.

Potential Synergies Provide Room for Further Upside

We see three main benefits to the merger. First, the asset diversification of the enlarged portfolio would mean that the merged entity is less affected by VIT’s fall-off in income support at the end of this year.

Secondly, the potential to refinance at lower costs and access to a greater pool of financing options. Thirdly, higher liquidity and possible inclusion in the investible universe for more institutional funds.

We believe these advantages would outweigh VIT’s dilution of portfolio exposure to business parks, and would provide meaningful uplift to the S$0.53/unit fair value for the merged entity we estimated earlier.

For the merger to go through, approvals need to be sought from both ESR-REIT’s and VIT’s unitholders. Given the favourable terms, we see it in VIT unitholders’ benefit to accept the offer.

Source: OCBC Research - 21 May 2018