Activist Funds Succeed in Blocking Singapore REIT Merger

Activist funds Quarz Capital and Black Crane successfully blocked a proposed merger that would have created Singapore’s fifth-largest real estate investment trust.

The proposed tie-up between ESR-REIT and Sabana Shari’ah Compliant Industrial REIT was rejected by Sabana’s shareholders, quashing a deal that would have given the enlarged entity combined assets of about S$4.1 billion ($3 billion).

While ESR-REIT investors overwhelmingly voted for the merger, Sabana failed to get the 75% support required, with just two-thirds of the votes in favor, according to a statement from Sabana Friday.

Quarz’s success in blocking the tie-up is a rare win for activists funds targeting REITs in Singapore, Asia’s largest market worth more than $70 billion. Dominated by retail shareholders, investors are attracted to REITs as they’re mandated to pay 90% of rental income as dividends.

“Blocking the merger is just the first step, the activists will now have to prove to minority investors and the investor community at large that they are able to increase shareholder value as they said they would,” said Justin Tang, head of Asian research at United First Partners in Singapore.

Sabana last traded Thursday at 36 cents in Singapore before being halted. The company has a market value of S$374 million ($281 million), compared with S$1.46 billion for ESR. Both stocks are down 23% this year.

Overlap Mandates

Since last year, Quarz had been pushing for an ESR-Sabana merger to solve the issue of overlapping investment mandates. When that proposal was announced in July, Quarz argued that the offer for Sabana was too low, and began a months-long push to block the deal unless better terms were offered. Its campaign was later joined by Hong Kong-based Black Crane Capital.

Quarz and Black Crane said they advise investors who collectively own more than 10% of the units of Sabana.

The funds had also argued that the reduced value could be the result of a conflict of interest, since the managers are both owned by a unit of Asian logistics giant ESR Cayman Ltd. Both ESR and Sabana have maintained that the deal terms were fair and mutually beneficial to their investors.

The failed bid reflects the “total lack of confidence that independent unitholders have in the current board and management of Sabana REIT,” Quarz chief investment officer Jan F. Moermann said in a joint statement with Black Crane on Friday.

“We maintain our views that Sabana REIT’s portfolio has substantial upside potential which can be achieved under the right management team,” they added.

While there was a “compelling strategic rationale for the merger,” Sabana respects its investors’ decision to remain as a standalone REIT, Chief Executive Officer Donald Han said in a statement.

The merger could have enabled the enlarged entity “to achieve greater scale,” ESR CEO Adrian Chui said in a statement. The company will focus on enhancing its assets and on redevelopment projects.

©2020 Bloomberg L.P.

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