PAG returns with hostile offer for HK-Listed Reit

The fund manager's unsolicited offer dangles a 62% premium in front of unit holders. Its latest attempt to unseat the management of Spring Reit looks like it could succeed.

Fund manager PAG Real Estate has made a cash offer of HK$4.85 for each unit of Spring Real-Estate Investment Trust, the first ever voluntary general takeover offer for a Hong Kong-listed Reit.

PAG Real Estate, part of Asian alternative investment management firm PAG, said the offer had not been negotiated with Spring Reit's manager or its board.

The offer, representing a 61.7% premium over the closing price of HK$3 per unit on September 24, is well above the highest price Spring Reit has ever traded, and some 27% above its IPO price, according to a filing with the Hong Kong stock exchange.

The offer comes as Spring Reit is seeking to buy a shopping mall in Huizhou, Guangdong province, which PAG Real Estate says will significantly dilute minority unit holders’ interests and further increase the relative ownership of insiders.

PAG also tabled a measure in 2017 to remove management due to the units’ long-term underperformance and over Spring Reit’s acquisition of UK-based Kwik Fit car repairs. That move was voted down by other unit holders.

PAG Real Estate said it was necessary to replace Spring Reit’s existing manager and conduct a strategic review to address Spring Reit’s continued underperformance. It said that Spring Reit is the worst performing Reit among the constituents of the Hang Seng Reit Index. 

Spring Reit is managed by Spring Asset Management, which is owned by Tokyo-listed Mercuria Investment Co. 

Spring Reit unit holders may have to wait eight years or more for the cumulative value of their distributions to exceed the immediate cash premium now available to them under PAG’s offer, according to PAG Real Estate’s calculations.

“We’ve taken this step after no longer being able to tolerate the persistent inability of the Spring Reit’s current manager to address the ongoing poor unit price, and a failure to take concrete steps to improve this, or even adopt a clear strategy or coherent business plan, despite our numerous attempts over several years to effect positive change,” said PAG Real Estate partner Broderick Storie.

PAG Real Estate and parties acting in concert with it hold approximately 14.818% of Spring Reit’s issued units.

The offer is subject to two conditions: firstly that the offer is accepted by holders of more than 50% of the units, and secondly that the proposal by Spring Reit to acquire the shopping mall in Huizhou is not approved by independent unitholders at an extraordinary general meeting on October 31.

Announcing the Rmb1.65 billion purchase of the Huizhou mall on September 19, Spring Asset Management said the mall offered an annualised gross property yield of 9.4% and net property yield of 7.5%, and was well positioned to benefit from Beijing's plan to develop the Pearl River Delta area. 

 “The acquisition of this high-quality asset represents an important strategic step for Spring Reit to tap the vast potential of the Greater Bay Area, diversifying and boosting the value of
its property portfolio," said Toshihiro Toyoshima, chairman of Spring Asset Management. "We believe the acquisition will prove accretive and bring improved earnings, and accordingly enable us to deliver quality, long term cashflow to unitholders.”

However PAG's Storie said: “The questionable attempt to acquire a Guangdong shopping mall is just the latest demonstration of how Spring Reit’s current manager has failed to improve governance and decision making.”

PAG intends to finance the offer with internal cash, a standby letter of credit issued by Sumitomo Mitsui Banking Corporation and an equity commitment. UBS is PAG's financial adviser.

PAG has more than $20 billion in funds under management.

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