Johannesburg - Will a R19bn merged property fund deliver performance superior to that of a specialised commercial portfolio?
This is the question SA investors will need to weigh up as they assess the offer by Redefine Income Fund to buy out unit holders in JSE-listed property unit trusts ApexHi and Madison Fund Managers.
Richard Anderson, a property analyst at Sanlam Investment Managers (Sim), told Fin24.com: "The assumption implicit in consolidation is that scale trumps sector specialisation. It is an open question whether the consolidated general funds will spawn specialised sector funds as the sector matures further in future."
Unit holders have invested in the ApexHi portfolio in the hope that they will have access to profits from rejuvenated properties in the central business districts (CBDs).
Seceral deals have been mooted by industry analysts, including a merger of Pangbourne and the Capital portfolio.
Anderson said: "The main benefit is scale, which offers resilience in the current worldwide downturn, and potentially lower cost of capital as well as tradability. The larger funds can also reduce their asset management costs by internalising management."
To date, sector consolidation has happened on friendly terms but Anderson cautioned that this could change should some of the larger funds turn their attention to the smaller listed ones.
ApexHi unit holders shortchanged?
Shareholders in property unit trust ApexHi may be getting a good strategic fit if they accept the offer from Redefine Income Fund, but the terms they are getting for their units may leave them a little short-changed.
In a note to its clients, stockbroker Barnard Jacobs Mellet said: "While the merger makes strategic sense in our view, our initial impression is that ApexHi shareholders should have been offered a more favourable ratio. We will be undertaking further analysis in this regard."
Investment managers expect the combined entity to be re-rated upwards as it would improve the liquidity in the joint portfolios, reduce risk due to diversified property assets and lower the cost of managing the enlarged joint portfolio.
A local market commentator, who declined to be named, pointed out that should CBD properties enjoy a significant revival, ApexHi shareholders might find themselves "robbed" of more direct access to quality assets. As part of the bigger Redefine portfolio unit holders would not be able to target this segment of the SA property market directly.
Redefine has offered 202 of its units for every ApexHi A unit held, 246.8 units for every 100 ApexHi B units and 104 Redefine units for every 100 ApexHi C units held.
Anderson said: "It is early days to judge the proposed terms. Respective management teams are yet to sell their stories to unit-holders. There is always devil in the detail, but our bigger picture view is that this merger proposal does make strategic sense for all the parties involved."
A back-of-a-matchbox calculation shows that at current levels, ApexHi A and B unitholders are better off holding their shares rather than converting to Redefine units.
ApexHi has three classes of its units listed on the JSE, with the B and C units introduced to offer holders access to higher preference dividends, depending on the performance of the underlying portfolio.
ApexHi unitholders may also be questioning the short-term impact on their distribution yield from the deal.
Historically, holders of A units enjoy a 9.8% yield and B units a yield of 10%. In comparison, Redefine unit holders have only seen a yield of about 8.4%.
In its announcement, the company said: "The boards of Redefine, ApexHi and Madison estimate that income distributions by the enlarged Redefine after the effective date of the merger would be 75c per unit for the 12 months to June 30 2010, subject to no unforeseen deterioration in prevailing circumstances."
That would push the dividend yield (at current Redefine levels) to about 11%, excluding any of the anticipated "re-rating" that may be attributed to the merger.
Another issue for Redefine shareholders to consider is the dilutionary effect of the transaction. Redefine will be issuing approximately 2.5bn units to buy out holders of ApexHi and Madison.
* The author holds shares in ApexHi and will be voting against the transaction.
- Fin24.com