Queries raised on Ng Shin Ein' s independence but no credible evidence found showing concert party action

 

SABANA Reit offered new information last Sunday about its independent director Ng Shin Ein' s dealings with ESR group in 2018 and 2019.

 

These have been a sticking point for activist funds Quarz Capital and Black Crane, which are opposed to a merger between Sabana and ESR-Reit.

 

Sabana said Ms Ng had owned 40 per cent of Blackwood Investment, which in turn had a 45 per cent indirect interest in Sabana Reit' s manager. She sold a 35 per cent stake to ESR in 2018 and the rest in August 2019.

 

The Business Times understands that Ms Ng' s 40 per cent shareholding came after she exercised her right of first refusal (ROFR) to buy over fellow shareholder Bobby Tay' s 30 per cent stake when he had attempted to sell it to then-sponsor Vibrant Group.

 

Mr Tay was chief strategy officer and head of investor relations of the Reit manager at the time.

 

The other two Blackwood shareholders - former CEO Kevin Xayaraj and former chief operating officer and head of asset management Aw Wei Been - had declined to exercise their ROFR. They later sold their stakes of 30 per cent each to ESR.

 

ESR also bought Vibrant' s 51 per cent stake in Sabana Reit' s manager in May 2019, for S$20.5 million, and the remaining 4 per cent held by Atrium Asia Capital Partners for an undisclosed sum.

 

BT understands some owners of Sabana Reit' s manager were happy to sell after unitholders had tried in 2017 to oust the Reit manager.

 

ESR, meanwhile, was paving the way for a new deal. It had in 2017 been in merger talks with the manager of Sabana Reit, but those fell through on valuation grounds.

 

According to last Sunday' s disclosures, the consideration paid to Ms Ng for her stake was " in line with and marginally lower" than what Vibrant got.

 

Ms Ng rejoined Sabana Reit' s board in August 2019, after quitting in early 2017 over " internal dynamics" . In November last year, she was redesignated from non-independent director to independent.

 

That re-designation has drawn criticism.

 

When approached for comment, corporate governance watcher Mak Yuen Teen said Ms Ng' s dealings with ESR raise questions about her independence, and suggested regulators scrutinise the matter.

 

BT understands that concerns over Ms Ng' s dealings with ESR were raised to regulators but that no credible evidence was found showing concert party action.

 

Regulatory action has thus focused on disclosures.

 

The Securities Industry Council (SIC) asked for clarification from Sabana Reit board' s on its assessment of Ms Ng' s independence in relation to a recommendation for the Sabana-ESR merger.

 

Approached for comment, SIC said: " We do not have evidence before us that gives us a basis to disagree with the board' s assessment."

 

It added that if a director faces a conflict, he or she would not be able to make a recommendation but that the merger could still proceed.

 

The Monetary Authority of Singapore echoed this in its response to BT' s queries, and added that it had required Sabana Reit' s manager to issue an addendum to its annual report. This disclosed the board' s assessment of Ms Ng' s independence and was filed on Sept 21.

 

The Takeover Code only prohibits a director from making a recommendation on a deal if the director has an interest in the deal' s outcome.

DELOITTE & Touche Corporate Finance, as the independent financial adviser (IFA) on Sabana Reit' s proposed merger with ESR-Reit, stated in its terms of reference that it was not required to " express any advice or give any opinion on the merits of the merger relative to any other alternative" .

This presumably includes the alternative of not going ahead with the merger.

The IFA' s terms of reference also state it was not required to express a view on the " future growth prospects, financial position or earnings potential of Sabana Reit" .

This suggests that the IFA has not looked into whether the pro forma accretion in Sabana Reit' s distribution per unit (DPU) as a result of merger is any better than the standalone DPU growth the Reit would achieve anyway.

Hence, although the IFA has found the financial terms of the merger to be " fair and reasonable" , it does not mean that the transaction is actually in the interest of unitholders of Sabana Reit.

An argument could be made that IFAs should be given wider terms of reference, if their recommendations are to be really useful to investors.

Comparing precedent deals

Even within their terms of reference, IFAs could be encouraged to do more.

In its letter to Sabana Reit' s independent directors (IDs), Deloitte & Touche noted that the Reit' s unit-holders would benefit from a 12.9 per cent accretion in DPU but suffer a 20.7 per cent dilution in NAV per share and increased aggregate leverage from 33.7 per cent to 41.7 per cent.

Separately, the IFA also compared the Sabana-ESR deal with a number of precedent transactions: the acquisition of Frasers Commercial Trust (FCOT) by Frasers Logistics and Industrial Trust (FLT), Ascendas Hospitality Trust (A-HTrust) by Ascott Reit, OUE Hospitality Trust (OUE HTrust) by OUE Commercial Reit (OUE Reit), Viva Industrial Trust (VIT) by ESR-Reit, and CapitaLand Commercial Trust (CCT) by CapitaLand Mall Trust (CMT).

Yet the IFA did not compare the pro forma DPU and NAV numbers for the Sabana-ESR Reit merger with those precedent transactions.

Had it done so, it would have been able to inform unitholders of Sabana Reit that they are being treated relatively poorly.

The only precedent transaction that came close to hitting unitholders of the target Reit as badly was the FLT-FCOT deal, which was first unveiled in December 2019 and concluded earlier this year.

According to pro forma estimates on the transaction, unitholders of FCOT would have benefited from DPU accretion of 4.2 per cent but NAV dilution of 13 per cent. They would also have suffered significantly increased aggregate leverage, from 28.6 per cent to 37 per cent.

In the recently completed CMT-CCT merger, unitholders of CCT benefited from DPU accretion of 7.6 per cent, and NAV dilution of only 2.8 per cent. Aggregate leverage increased slightly, from 36.4 per cent to 39.7 per cent.

In an earlier merger within the CapitaLand group, A-HTrust was swallowed up by Ascott Reit. In this deal, the exchange ratio was based on the NAVs of the two Reits. Hence, unitholders of A-HTrust saw no impact on NAV even as they enjoyed a 1.8 per cent lift in DPU.

Then, there are the ESR Reit-VIT and OUE Reit-OUE HTrust mergers, where it was unitholders of the acquiring Reits that suffered NAV dilution, not unitholders of the target Reits.

According to pro forma estimates, unitholders of VIT benefited from a DPU lift of 3.6 per cent and NAV accretion of 14.5 per cent. Unitholders of OUE HTrust saw a 1.4 per cent accretion in DPU and an 18.7 per cent accretion in NAV.

Regulatory scrutiny needed

Pro forma estimates only tell investors half the story though. For these figures to be really useful, investors also need clarity on their Reits' capacity to deliver standalone DPU growth.

Yet, it seems a pity that Deloitte & Touche, already precluded by its terms of reference from delving into the " future growth prospects, financial position or earnings potential of Sabana Reit" , did not at least try to compare the pro forma impact of its merger with precedent transactions.

Companies engage IFAs to examine transactions like mergers and general offers for the same reason they appoint IDs to their boards and have their books independently audited -- they are required to do so, in the name of protecting investors.

In genuinely competitive merger transactions, investors may be prepared to rely on their boards to do what' s right -- with the presence of IFAs providing a secondary veneer of respectability.

But in transactions involving entities within the same corporate group -- especially if those entities are externally-managed Reits -- investors are likely to need more from the IFAs.

It is perhaps time for regulators to scrutinise the terms of reference of IFAs, especially in intra-group deals, to ensure that their presence doesn' t provide investors with a false sense of comfort and that their role doesn' t become one of form over substance.

 

 

THE manager of Sabana Shari' ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) said it will not be convening the extraordinary general meeting (EGM) requisitioned by Quarz Capital and Black Crane Capital.

 

In a bourse filing on Nov 22, Sabana Reit said that it had " carefully considered" the requisition notice it received from the fund managers regarding five resolutions that the latter proposed for investors to vote on, and " strongly" urged unitholders to " focus on the merits of the (proposed) merger and the (trust scheme of arrangement)" .

 

Responding to the resolution relating to the Reit manager' s rationale behind the hiring of three former ESR employees, it said that " none of the relevant persons are decision-makers in the context of the merger" , and thus there is no " serious conflict of interests" .

 

The recruitment of the trio was " duly carried out in accordance with the Sabana manager' s recruitment procedures and process which is in line with market practice" , and that they were assessed to have the right skill-pool and experience, added the statement.

 

As for concerns raised by the fund managers with regard to certain members of the board and the majority of the senior management team having prior substantial and long-term relationship with ESR-Reit, Sabana Reit' s manager said that only Ng Shin Ein has a " deemed business relationship with the ESR group" for purpose of the securities and futures regulations.

 

Even then, following the completion of payment from InfinitySub to Ms Ng for the divestment of her entire interests in Blackwood Investment - which was " terminal in nature and solely for the purposes of the divestment" - on Aug 30 last year, Ms Ng no longer has any agreement or understanding with the ESR group in relation to Sabana Reit and its units, it added.

 

The statement also noted that the other two independent directors, as well as Donald Han, the manager' s chief executive, " have no relationship whatsoever with the ESR group" .

 

In Quarz and Black Crane' s fourth resolution, the fund managers requested that the board make " further study and investigations of the merits of the proposed merger" , among other disclosures, to which Sabana Reit' s manager replied that it has " the overall responsibility and discretion to manage the business of Sabana Reit" , and that it is " correspondingly the responsibility and discretion of the Sabana manager to recommend proposed business transactions" .

 

It has also not received any alternative and/or competing proposals or offers as at Nov 22, added the manager.

 

As for the payment of its distribution, Sabana Reit' s manager said it intends to declare and pay unitholders a cleanup distribution in the event that the trust scheme of arrangement is approved and becomes effective.

 

But should it fall through, the manager will also " endeavour to make distribution in the ordinary course of business" , taking into consideration factors such as market outlook and cash flow required for working capital of its business.

 

Finally, relating to concerns surrounding Ms Ng' s independence, Sabana Reit' s manager said the proposed merger with ESR-Reit was first explored in late April this year, after she had ceased to be a director of Blackwood Investment.

 

Additionally, Ms Ng had disclosed to the relevant independent directors the terms of the divestment of her entire interests in the company, which was determined on a " willing buyer willing seller basis" . Sabana Reit' s board of directors also noted that the consideration received by Ms Ng for the divestment was at a valuation in line with the consideration received by Vibrant Group for the divestment of its effective stake in the Sabana manager.

 

Other than the divestment agreements, there is no agreement, arrangement or understanding - " whether formal or informal, written or oral" , in relation to Sabana Reit and/or Sabana units between Ms Ng and ESR Cayman, or any of its subsidiaries or associated companies, said the manager.