Paragon REIT's privatisation offer at S$0.98 per unit. What should unitholders do?

Proposed privatisation by Cuscaden Peak and manager of Paragon REIT

On 11 February 2025, Cuscaden Peak and the manager of Paragon REIT jointly announced the proposed privatisation and delisting of Paragon REIT at a scheme consideration of S$0.98 in cash per unit. 

This implies a price/adjusted NAV of 1.07x, an 8.4% premium to precedent privatisations, and 10.9% above the 1-month Volume Weighted Average Price (VWAP) and 4.3% above the 52 week high of Paragon REIT. 

In addition to the scheme consideration, unitholders will receive 2H24 Distributions Per Unit (DPU) of 2.33 cents per unit in cash. 

Rationale for the privatisation

The rationale put forth for the privatisation of Paragon REIT includes: 

• Challenging trading conditions for Paragon REIT given low liquidity;
• Mounting competition affecting its key asset Paragon;
• A major AEI required which poses significant risks; and that the
• Scheme offers minorities an exit with an attractive premium while avoiding potential AEI-related volatility.

Major AEI at Paragon may impact near-term distributions

The offerors highlight that a sizable AEI costing an estimated S$300-600 mn in capital expenditure and taking 3-4 years to complete is necessary to rejuvenate Paragon. 

The major AEI at Paragon is expected to create long-term value for the owners of the mall, and cement Paragon’s position as a destination mall along the key Orchard Road shopping belt, which is in itself undergoing a rejuvenation. 

That said, the manager estimates that DPU could see a significant impact to the tune of 21.4-64.0% should there be no mitigating measures taken. 

Some of these potential measures include a careful phasing of the AEI over a period of time, minimising the impact on shopper traffic and tenant disruptions while providing financial support to unitholders such as income support measures. 

The potentially lower DPU may then reduce the DPU yield of Paragon REIT from 5.1% currently to 1.8-4.0%, posing a near term headwind. 

Privatisation to be conducted via a scheme of arrangement

The proposed privatisation and delisting of Paragon REIT are to be effected via a trust scheme of arrangement. 

Cuscaden Peak (61.5% ownership) will abstain from voting on the scheme, with minority unitholders’ approval required for: (1) amendments to the trust deed, requiring ≥75% of voting rights held by Unitholders present and voting at the EGM and (2) approval for the scheme >50% of the number of Unitholders representing ≥75% in value of the units present and voting at the scheme meeting. 

The scheme meeting and EGM is expected to be held in April 2025. 

An Independent Financial Adviser (IFA) will be appointed to advise the Paragon independent directors and make a recommendation on the scheme, and we will be keeping an eye on the scheme document to be sent to unitholders soon. 

What would Beansprout do? 

The major AEI at Paragon is expected to create long-term value for the owners of the mall, and cement Paragon’s position as a destination mall along the key Orchard Road shopping belt, which is in itself undergoing a rejuvenation. 

That said, should there be no mitigating measures taken, DPU could see a significant impact to the tune of 21.4-64.0%, which could pose a near term headwind. 

In the absence of a competing offer, we are inclined to accept the current offer as the offer is at a 1.07x premium to NAV. It is also above precedent privatisations and above the trading price of Paragon REIT for much of the period since the privatisation of SPH. 

We raise our target price to S$0.98 (from S$0.85) to reflect the current offer, and maintain our NEUTRAL rating. 

Download the full report here.

Related links:

• Paragon REIT share price and share price target
• Paragon REIT dividend history and forecast

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