Should you take up the Mapletree Commercial Trust (MCT) preferential offering?

TL;DR

• The ongoing preferential offering by MCT is intended to fund the cash-only option given to MNACT holders as part of the merger between the two REITs.

• With the preferential offering price of S$2.0039 higher than MCT’s current market price of $1.78, I would be less inclined to take up the offering.

• If investors do not take up the preferential offering, Mapletree Investments, the sponsor of both MCT and MNACT, has committed to take up the maximum number of preferential offering units. 

• Even if Mapletree Investments’ shareholder in the merged entity were to increase, the transaction is still expected to be accretive to MCT unitholders by 4.3-6.8%.

If you are a Mapletree Commercial Trust (MCT) shareholder, you will probably be aware that you are eligible for a preferential offering which commenced on 12 July.

You will have until 5.30pm on 20 July to decide if you want to apply for the preferential offering, which means that you’d have to decide soon on whether to take this up.

If you are still wondering how to think about the preferential offering, here’s a quick guide to walk you through.

Why is there a preferential offering? 

The preferential offering for MCT came about because of the ongoing merger with Mapletree North Asia Commercial Trust (MNACT). 

If you’d like to understand more about how the MCT and MNACT merger would create one of Asia’s largest REITs, read our earlier article here. 

Long story short, the initial proposed merger between MCT and MNACT would see each MNACT holder receive either 0.5963 new MCT units or a combination of 0.5009 MCT units and S$0.1912 in cash.

However, as investors of MNACT believed that the transaction would undervalue MNACT and there were no “apparent operational synergies” from the deal, MCT had to come back with a revised offer. 

This would give MNACT holders to receive the entire offer price of S$1.1949 per unit in cash.

Now, the question is who is going to fund the $2.2 billion of cash to paid the MNACT holders? 

This is where the preferential offering comes in as a means to pay for the transaction. 

To fund the additional cash needed of up to $2.2 billion in the new cash-only option, MCT is making a preferential offering that we are in the midst of currently. 

Would I take up the preferential offering?

It is worth noting that the preferential offering is at $2.0039 per unit. 

It is not often that you’d see a preferential offering priced at a premium to the market price.

After all, the whole idea of a preferential offering is to encourage existing holders to take it up by offering a discount. 

So why $2.0039 per unit? This was the same price that was used in the calculation for MNACT unit holders who choose to receive units in MCT. 

As the offering price of $2.0039 is above the current MCT price of $1.78, I would be less inclined to take up the preferential offering if I were holding MCT.

What happens if investors do not take up the preferential offering?

If investors do not take up the preferential offering, Mapletree Investments, the sponsor of both MCT and MNACT, will be the one providing the additional cash for the transaction. 

To demonstrate its support for the merger and confidence in the long term value of the merged entity, it has has agreed to take up the maximum number of preferential offering unit if other investors do not subscribe to it. 

This will help to meet the cash requirement for MNACT unitholders without requiring MCT to take on more debt. 

To further show its commitment, Mapletree Investments has also voluntarily agreed to not sell units in the merged entity for 6 months. 

Should I be worried about dilution risk if I do not take up the preferential offering? 

In the event that all MNACT holders elect for the cash offer and no other investor takes up the preferential offering, Mapletree Investments will end up with a 57.09% stake in the eventual merged entity by taking up all the preferential offering. 

Does this mean that the transaction will be dilutive to existing MCT holders? 

Well, not more so than if all MNACT holders had elected to take up the MCT shares as part of the initial merger proposal. 

I'd also be less worried about the dilution as the transaction is still expected to be accretive to MCT unit holders by 4.3-6.8%.

What do unitholders of MCT need to do? 

Well, not much if you're happy to allow Mapletree Investments to take up the preferential offering that is priced at a premium to MCT’s current price, while enjoying the expected dividend accretion from the transaction. 

At the end of the day, it’s a question of whether you believe in how the merger will leapfrog the combined entity to one of the top 10 largest REITs in Asia and create a proxy to key gateway cities in Asia.