Assessing FLT and FCOT’s Merger
Frasers Logistics and Industrial Trust (FLT) announced that they will be merging with Frasers Commercial Trust (FCOT).
The benefit of this deal looks rather straightforward to me, but I thought sometimes it is good to exercise some investing brain juice. If you failed to use it, you will lose it faster.
This article will be rather short (hopefully).
How the Acquisition Will be Done
The merger will be done by FLT acquiring FCOT through a combination of issuing new FLT shares for FCOT and paying cash to FCOT shareholders.
For each FCOT shares, FLT will swap 1.233 FLT shares at an issue price of S$1.24. FLT will also pay FCOT shareholders a sum of S$0.15 per share in cash.
The entity will be managed by FLT’s management team.
The joint entity will then acquire the other 50% interest of Farnborough Business Park from Frasers Property Limited that FCOT did not own.
This deal looks straightforward until I considered this acquisition. Was it meant as a sweetener so that this deal will appeal to both FLT and FCOT’s shareholders?
Let us examined.
FLT and FCOT’s Current Situation
Here is how both company looks like before this acquisition. The dividend yield is pretty similar. What is not shown here is that FCOT is less leveraged and also closer to fair value (in terms of Mkt Cap/Total Equity) than FLT.
Deals like these may benefit both parties or one side. The way I would look at this is to assess from both FLT and FCOT’s perspective to see if each of them got the better part of the deal.
FCOT Unitholder’s Perspective
As an FCOT unitholder, you will now be an FLT shareholder.
Suppose you own $100,000 worth of FCOT units. You will have 59,880 units.
After this deal, you will own 73,772 FLT units at $1.24. Your $100,000 becomes only $91,478.
Sounds like a bad deal at this point. But wait.
For each FCOT units, FLT will pay you $0.15 in cash. So for this unit holder, the difference between $100k and $91.5k is $8.5k.
This is equivalent to $0.142 per unit. So this $0.15 per unit is to make up for the difference.
As a unitholder, you swapped a portfolio with a lower dividend yield. At this point, on a long term basis, it does not make a lot of sense as an FCOT shareholder.
Perhaps that is where the Farnborough Business Park acquisition comes in. This will boost the DPU of FLT so that it make sense.
FLT Unitholder’s Perspective
From the FLT Unitholder’s perspective, they were diluted, but some new investors were brought on board, together with a portfolio of assets.
We can treat this as a placement for new shareholders. What you wish to know is whether this acquisition is accretive to the DPU or dividend yield.
Unfortunately, the information on the acquisition is very short in the announcement. I could look up FCOT’s existing Farnborough Business Park’s results to see how much additional income the acquisition will bring in.
No matter how I think the effort is not quite worth it. FLT says that this acquisition of FCOT and asset acquisition will be accretive.
Why FCOT Needed This Deal
FCOT’s current portfolio is more concentrated.
Their WALE is part long part short.
However, what many feel is that the REIT is not sturdy enough. The short leases are in Singapore. The rent is close to the market rent and demand Dynamics is ok but not good for this segment.
Merging and exchanging for this FLT portfolio reduces the vacancy impact of a single FCOT property. When HP left Alexander Technopark, the vacancy created uncertainty over whether FCOT could successfully leased out a large part of the spaces.
Google eventually took over. And the Microsoft terminated their long 5 year lease.
Numbers-wise, FCOT will be converting to a REIT that is quite above its book value. Some will view it as exchanging a fair value company with a pricey company. FLT gearing is higher.
The yield looks almost equal, so you do not lose much income.
But whether this is a good deal, you cannot just evaluate the dividend yield.
My assessment is always based on
- the economy/ market outlook for their operations going forward
- management quality
You can read about these 3 criteria in this article.
This deal I feel helps their operations by providing more diversification and risk management. Valuation will improve due to greater stability. I don’t think we can detect any significant difference in management.
Why FLT Needed This Deal
Honestly other than currency diversification, I do not see many advantages.
FLT is already diversified across Euro and AUD. FCOT is mainly SGD and AUD. Not much significant help there.
What works for both is that if they have the size, they can have more capital to do development, AEI, step by step acquisition without impacting debt to asset ratio and distributable income too much. With scale, they can also get a better deal when it comes to financing.
Numbers-wise, FLT shareholders is acquiring a portfolio that yields almost the same. This is like a placement of their shares to the third party. They get diluted but gain an asset with similar net property income.
The gearing of FCOT is much lower after the sale of market Street. We can say this is attractive to FLT in that they acquired a less geared portfolio.
This is one of the reason that they could gear up and pay the shareholders $0.15 in cash. Fcot shareholders can take this as a special div or capital reduction to you, then purchase of FLT shares.
In terms of the three evaluation category, FLT perhaps gets poorer in their exposure to an office portfolio that do not have visible upside, but the new portfolio looks cheaper and more asset trading potential, management is the same.
Ultimately, this deal might be to just get bigger.
The main advantages are:
- Save on personnel
- Potentially easier in raising capital and at a more attractive borrowing rate
- Greater room for AEI and development without impacting existing DPU
For both sets of unitholders, they will have to think. There are unitholders who held both REITs. I think this does not change much. In fact, this synergy might be better for both.
If you own only one REIT, the reason you did not invest in the other now may be that it is unattractive to you. This could be due to valuation or the quality of the portfolio or the manager.
If that is the case, you might not like this deal. The appropriate action is to see if you want to sit with this for a period of time to assess. If not you should just sell it because this is not what you wish to own.
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