Merger Arbitrage (at $21.30)
PLYM is an industrial REIT focused on warehouses and distribution centers across the US. The company received a $24.10/share takeover bid from private equity firm Sixth Street Capital. Management is reviewing the offer.
The stock trades at a 14-15% spread to the bid price, mainly because it is far from clear if PLYM’s board will agree to sell and because downside to pre-announcement levels is quite steep at 29%. REIT management teams are often viewed as self-interested, with limited share ownership and strong incentives to preserve the status quo while collecting sizable salaries. That said, several factors suggest a decent chance that PLYM will ultimately get sold.
The offer comes at an attractive price. The premium to pre-announcement levels is substantial, well above the average REIT takeover premium of 36% in 2022–2023. Valuation also looks compelling, putting PLYM in line with — or even above — the most comparable peers STAG and LXP across several metrics (see table below). Notably, PLYM is considered a lower-quality player within the sector (per this VIC write-up). STAG and LXP are also much larger in size. Overall, the offer price looks fair, which makes it difficult for management to simply reject it on valuation grounds.
Management’s incentives are actually not as misaligned as they might first appear. On the surface, PLYM looks like a typical REIT: insiders own just 1.6% of the equity while drawing sizable salaries. However, Jeffrey E. Witherell, PLYM’s co-founder, CEO and chairman, would receive about $9.6m from a golden parachute in addition to $7.4m from his personal equity stake. That is a combined $17m compared with his annual salary of $3.1m.
Sixth Street already has an existing relationship with PLYM, making it more likely that the current offer was pre-discussed with at least some members of the board. Last year Sixth Street invested $250m in exchange for a 65% stake in PLYM’s Chicago portfolio JV, non-convertible preferred equity and warrants. Pre-deal, Chicago JV accounted for ~20% of PLYM’s NOI, so it was a pretty significant transaction. Sixth Street also signaled interest in more JV deals with PLYM.
Sixth Street has a track record of investing in industrial assets and appears to have accelerated this strategy. Earlier this year, it partnered with Blackstone in an attempt to take Warehouse REIT private, making four all-cash proposals (the last was 4% higher than the first). That raises the possibility they could be willing to sweeten the offer here as well, at least symbolically. More recently, Sixth Street also completed a sizable acquisition of ESR Group, a major warehouse owner in Asia.
There is also another, non-monetary incentive in play. Last year’s investment from Sixth Street wasn’t received well by PLYM’s shareholders (mostly due to highly dilutive warrants). The stock fell from $21–24/share to $14–16/share and management’s reputation took a big hit. REIT investor Serenity Alternative Investments has summarized it well in its exit note (emphasis mine):
PLYM management team decided to raise capital by contributing a portfolio of assets to a joint venture, selling preferred equity, and selling warrants to a private real estate investor called Sixth Street. This somewhat non-traditional route for raising capital was frowned upon by REIT investors, as it was expensive, complicated, and effectively ensured dilution above a specified share price thanks to the warrants.
The result was a lower NAV estimate for PLYM, and a stock price that fell from $24 to $17.24 as of this writing. Serenity Fund I liquidated our PLYM position in 2024 at a loss, as we moved down our management score significantly post JV deal. PLYM is an excellent example of how important REIT management teams are for long term value creation, or in this case, value destruction. In an attempt to grow earnings, the company sacrificed NAV and in doing so put themselves in the REIT investor “penalty box,” a place that is notoriously hard to escape.
So if management were to reject the current buyout offer, despite the sizable premium and solid valuation, their reputation would be completely destroyed, leaving the door wide open for an activist to come in and push for a board overhaul. PLYM’s governance structure makes management quite vulnerable to that. The company has a shareholder-friendly charter with no staggered board, no dual-class structure, and no external advisor. Staggering the board would require approval from shareholders, so it’s not a viable option.
Some more thoughts on risks
The offer was made privately on August 13, but only became public on August 18 when Sixth Street filed a 13D. At first, I thought this might signal that management pushed back and the buyer went public to apply pressure. However, the filing was likely just a regulatory formality. Sixth Street had originally reported its look-through stake (from warrants) under a 13G and was probably required to switch to a 13D once it made an active offer. So this may be a nothingburger after all.
PLYM’s investor deck highlights PLYM’s undervaluation by using pretty elevated peer multiples (i.e. 18.8x average P/FFO). It’s not clear which comps that average incorporates, but it probably leans heavily on much larger, higher-quality REITs that are not very comparable to PLYM. So in theory, management could try to use something like this as justification to say that the offer is too low. In practice, I think shareholders would see through it quickly, and that would just invite activism. So it doesn’t look like a strong option for management.
>2 months has passed without update. Historically, how long does it take for a REIT board to review an offer?
The board was just waiting for your post to hit send.
30 day go shop. How likely is it Sixth Street make a binding offer given this bid is 8% below theirs?
I am guessing Sixth Street, after due diligence and negotiation, has decided against making a bid at all.
PLYM is leveraged 2x, so a bid 8% higher for the net equity translates into just 4% higher valuation for the gross asset. Sixth Street would have already made the $21.1/share offer binding if it wanted to buy PLYM at all.
The situation has now become a 30-day “call option”, not expensive if PLYM opens >2% lower on Monday, but I think the odd of a higher bid is small.
Agree with Snowball. Given Sixth Street’s relationship and involvement with PLYM, they likely would have already submitted a binding bid at $24.10/share over the past two months if they intended to. Sixth Street previously stated that it would be willing to move “expeditiously” and would seek to complete its confirmatory diligence as quickly as possible.
30-day go-shop period has expired on Sunday (23 Nov) . No update from the company yet.
Go shop expired on Sunday (at which point a preliminary bid is due), but cut-off time is end of day today (11/25) for a signed deal. Maybe its bullish that the go shop expired Sunday and no press release is out yet or maybe they are just slow. We’ll know soon.
Sixth Street filed a 13D stating that the go-shop period has expired and that it will no longer pursue the acquisition of PLYM. PLYM’s share price has barely moved, but is still slightly above the $22/share offer.
https://www.bamsec.com/filing/119312525297728?cik=1515816
Sixth Street filing that they are out of the running doesn’t exclude a third party superior offer. It’s strange PLYM hasn’t filed anything so that is likely why its still trading above the $22 offer price.
PLYM’s preliminary proxy is out. Given the lack of takeover interest from other parties and the downward offer revisions from Makarora, this saga will end with Makarora’s $22/share bid. The remaining spread is tiny and its not worth holding on to the position.
– During the sale process, PLYM received takeover bids from two other parties besides Makarora and State Street. All four bidders submitted multiple bids. While the two undisclosed parties submitted preliminary offers at $24-$25/share, they did not make them binding either due to financing or due to the ‘problematic’ State Street JV structure/obligations.
– Sixth Street revealed its $24.1/share bid publicly shortly after PLYM entered into a four-week exclusivity agreement with Makarora. SSP eventually was granted a 10-day exclusivity but walked away after due diligence.
– Makarora’s highest offer came in at $23.25/share following the exclusivity period but subsequently revised its bid to $22.25/share and then $22/share after due diligence and reduced debt financing.
– PLYM received no takeover bids during the go-shop period.