As a result of perhaps coincidence or back-testing, both the ERM Masterclass portfolio and my personal portfolio contained a large number of Frasers Logistics & Industrial Trust (FLT) and Frasers Commercial Trust (FCOT) shares.
Both positions have been mildly profitable at the time of writing but, generally speaking, they have not been particularly stellar compared to other counters selected by the alumni of the program.
As Goh Kah Kiat has already written an excellent article on the merger that can be found here. This article merely builds on the firm foundation that Kah Kiat has already built in the past.
For retail investors who read Kah Kiat’s article, there are basically two questions you will need to ask yourself to assess a REIT merger:
- How does one REIT convert to another?
In this case one share of FCOT converts to 1.233 x FLT shares and $0.151. We use the equation to express the fair price of FCOT as follows:
Price(FCOT) = 1.233 x Price(FLT) + $0.151
- What is price of the stock post-merger?
In this case, the price of FLT post-merger was estimated to be $1.24. This is obviously not binding and investors can trade at a price lower than the book value of the merged entity.
The theoretical price of FCOT is therefore, 1.233 x $1.24 + $0.151 or about $1.68.
Observing prices traded on the exchange today on 17 December 2019 at around 9.30am, prices are as follows:
| Bid | Ask | |
| Frasers Logistics & Industrial Trust (FLT) | $1.19 | $1.20 |
| Frasers Commercial Trust (FCOT) | $1.63 | $1.64 |
This means that since both REITs are trading before their supposed theoretical values, it is quite fine to hold onto these shares. The shares may even trend towards these higher numbers as the deal reaches its conclusion.
Next, we need to ask ourselves whether it is profitable to convert one share to another so we need to apply the equation established earlier:
If (Price(FCOT) > 1.233 x Price(FLT) + $0.151), sell FCOT and buy FLT, else sell FLT and buy FCOT.
We always take the most disadvantageous price based on what we intend to do and, on the surface, FCOT looks mildly overpriced so we might want to consider selling FCOT and buying FLT. This has been subtly hinted at in Kah Kiat’s article.
To consider selling FCOT, we value the left part of the inequality at the lower bound or $1.63.
Now, for the right side of the inequality, we value FLT at the upper bound or $1.20 and plug this into our equation, 1.233 x $1.20 + $0.151 or $1.63.
Since both numbers are the same, we can conclude that there is no advantage in selling FCOT or buying FLT. Brokerage fees will rapidly eliminate all the possible gains from this arrangement. And this makes sense because there is no real free lunch in REIT mergers, investors will move the stock value of both REITs in such a way as to hold a share of FCOT to be equivalent to 1.233 shares of FLT plus $0.151.
The only remaining possibility would be to bet that the REITs will trend towards the fair value which is eventually $1.24 for FLT and $1.68 for FCOT and this is the current state of the ERM Masterclass portfolio.
Sometimes, the best thing to do is to simply do nothing.
You can find out more about the Early Retirement Masterclass live.
This is detailed analysis. But i was looking for soliciting consent for the bond holders as advertised in the news paper yesterday. What does that imply ?
I don’t have the details with me but in a situation like a merger between two REITs, a scheme of arrangement may require the approval of creditors so this may involve consent from bond holders who may face the possibility that their bond issuer may have a change of identity. This should not be material for retail REIT investors as bond holders are unlikely to disagree to this arrangement.