Sakura SOGO REIT (3473 JP) – Merger Arbitrage – 5% Upside

Current Price: ¥81000

Offer Price: ¥85000

Upside: 5%

Expected Closing Date: August 2020

Press Release

 

Borrow is limited.

Star Asia Investment (SAI) is acquiring Japanese small cap REIT Sakura SOGO (SSR) for 0.89 SSI share per each SSR share. The buyer already owns over 5% of the target company.  Approvals from both companies unitholders is required - >50% attending and 2/3rds of unitholders approving the transaction.

This situation is rather odd for the peaceful Japanese REIT culture. In fact this is the first hostile takeover example in Japanese REIT industry. In May'19 SAI raised questions on the poor business performance of SSR and the competence of its management and requested to convene the unitholders meeting in order to change the CEO and merge with SAI. SSR has, of course, quickly rejected the offer. Moreover, it also managed to find a new and "friendly" buyer - MIRAI Corporation, that had to help the company to repel the hostile proposal. Two proxy firms (ISS and Glass Lewis) recommended to vote against both proposals. Nonetheless, in Aug'19 SSR shareholders have approved the SSI offer. Eventually, after a little scramble with a certain shareholder (who owns 2.6% and was unhappy with the voting results), the companies have announced the merger on the 2nd of March.

All in all it seems that the unitholder voting condition seems likely to go through, given that SSI offer has already been approved by the shareholders. On the other, hand, voting documents don't state how many shareholders have participated in the vote, so it's difficult to judge how many shareholders have actually supported SSI (it is important to note that in this particular vote shares that did not participate in the offer were counted as "Yes").

Portfolios of the companies seem to be beneficial as well - both target office, retail and residential assets. SSR has 18 properties (portfolio value ~$600m). Star Asia Investment Management owns 35 properties with total value of $1bn. The merger will help to improve the positioning of the REITS in the current market and will offer extra liquidity and growth opportunities.

2 COMMENTS

  1. Ilja

    Star Asia has increased their stake to 6% and intends to make additional purchases in the open market (about 300m JPY = ~over 1% of Sakura’s market cap).
    Glass Lewis and ISS both recommend shareholders to vote for the merger.
    Current spread stands at 10%.

    http://sakurasogoreit.com/file/en-news-930cd28d81473858764b1cdb381ae2a414c31cc1.pdf
    http://sakurasogoreit.com/file/en-news-65fbeee4804a699c73473df19ae532abd0ba589c.pdf
    http://sakurasogoreit.com/file/en-news-dff484d4a30350efcb36bf55c724705087450f33.pdf

  2. Ilja

    Sakura shareholders have approved the merger on the 31st of March, however the announcement is quite vague and doesn’t provide any timeline for the closing. Spread shrank to 3%. The risk that Star Asia decides to walk away or push for price reduction still remains. Taking this into account, as well as the lack of proper updates from the company, the idea is closed with 2% in 1 month.

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