Creating an iMPACT

■ MCT and MAGIC have proposed a merger. MAGIC unitholders to receive S$1.1949/unit consideration comprising MCT units or cash plus units.
■ With its larger debt headroom and asset under management (AUM), the merged entity could deliver accelerated growth and return in the longer run.
■ Reiterate Hold on MCT and Add on MAGIC.

Mapletree is creating a larger REIT

MCT and MAGIC have proposed to merge via a trust scheme of arrangement, with MCT acquiring all MAGIC units in exchange for new MCT units or a combination of cash and MCT units. MAGIC unitholders will receive a scheme consideration of S$1.1949 for each MAGIC unit, to be satisfied by either (i) 0.5963 new MCT units at an issue price of S$2.0039 per MAGIC unit or (ii) a combination of 0.5009 consideration units and S$0.1912 in cash. This implies a gross exchange ratio of 0.5963x and values MAGIC at 1x P/NAV, 7.6% premium over its trading price as of 27 Dec 2021. MCT intends to fund the acquisition with debt, issuance of new units and perp depending on the option chosen by shareholders. The transaction is subject to approval and delisting of MAGIC is slated for mid-Jun 2022.

A larger and more diversified portfolio accelerates inorganic growth

Post the merger, the combined entity will be named Mapletree Pan Asia Commercial Trust (MPACT) and it will be Asia’s 7th largest REIT by market cap (from the current no.13 for MCT and no.29 for MAGIC), securing its position as a flagship commercial REIT in Asia with one of the broadest Asia mandates. The enlarged entity will be more diversified, with access to 18 commercial properties across five key gateway markets across Asia. With a larger AUM of S$17.1bn (SG 51%, HK 26%, China 11%, Japan 10%, Korea 2%; retail 46%, office 34% and business parks 21%) and expertise in more markets, MPACT will be better positioned to explore growth opportunities. The merged entity will adopt MAGIC’s fee structure (base fee: 10% of distributable income; performance fee: 25% of yoy growth in DPU), which is more aligned to shareholders’ interests. Trading liquidity should also improve post the merger due to the higher free float and stronger index representation.

DPU accretive to MCT but dilutive to MAGIC

According to management’s pro forma estimates based on 1HFY22, the deal will be 7.5- 8.9% DPU accretive and 6.5-7.1% NAV accretive. For MAGIC, pro forma estimates based on 1HFY22 show ed the deal w as 17-18% DPU dilutive. Post-merger gearing will remain healthy at 39.2%, with higher debt headroom of S$3.785bn (based on 50% gearing limit).

Reiterate Hold on MCT and Add on MAGIC

We think the benefits of the merger could be felt in the longer run when the enlarged entity delivers accelerated growth prospects. MCT’s shareholders will benefit from immediate DPU and NAV accretion. While the transaction is DPU dilutive for MAGIC, the deal provides shareholders a definite offer, a premium of 8.49 Scts vs. the trading price as of 27 Dec 2021, which is more than enough to offset the pro forma DPU dilution of 0.58 to 0.62 Scts (based on 1HFY22). We also see stronger returns in the future given the better and larger portfolio of the merged entity. Downside risks for both include accretive acquisitions; upside risks include slower recovery from the pandemic.