by: Tam Ging Wien
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On the 18th September 2018 (Tue), First REIT requested for a trading halt on its units pending an announcement that triggered numerous speculations. First REIT’s unit price closed at $1.24 prior to this announcement. Just a month ago, it was trading at close to $1.30. It traded at a high of $1.38 this year.
Just after lunch hour, an announcement was made that OUE Lippo Healthcare Ltd (OUELH) would be raising a 1-for-1 rights issue of 2,221,564,603 new shares at an issue price of S$0.0675 to raise close to $150mil to purchase 83,593,683 units in First REIT’s units and 40% of Bowsprit Capital Corp. Ltd, the manager of First REIT. OUE Ltd would be purchasing the remaining stake in Bowsprit Capital Corp. Ltd (Bowsprit) for a consideration of $59.33mil.
The transaction of 83,593,683 units represents 10.63% of First REITs total units and will transact at the price of $1.228 per unit. This results in the total purchase consideration of $102.653mil.
Figure 1: Structure Prior to the Acquisition of Bowsprit Capital Corp. Ltd
Source: ProButterfly Research
The diagram is Figure 1 describes the current ownership structure of Lippo Karawaci and its relation to First REIT. Notice that Lippo Karawaci has a 21.25% stake in First REIT through an intermediate entity known as Bridgewater International. Lippo Karawaci controls a further 7.0% state in First REIT through Bowsprit Capital Corp. Ltd who is also the manager of First REIT.
Figure 2: Structure After to the Acquisition of Bowsprit Capital Corp. Ltd
Source: ProButterfly Research
The diagram is Figure 2 describes the post-acquisition ownership structure of Bowspirt Capital. Bowsprit Capital Corp. Ltd will now be 60% owned by OUE Ltd and 40% owned by OUE Lippo Healthcare Ltd.
As a consideration for this transaction, OUE Ltd would pay PT Lippo Karawaci Tbk $59.33mil for 60% stake in Bowsprit while OUELH would pay $39.55mil for a 40% stake.
Figure 3: Structure After to the Acquisition of First REIT
Source: ProButterfly Research
The diagram is Figure 3 describes the post-acquisition ownership structure of First REIT. 10.63% or a total of 83,593,683 units in First REIT will be transferred to OUE Lippo Healthcare Ltd’s subsidiary OLH Healthcare Investments Pte. Ltd.
As a consideration for this transaction, OUE Lippo Healthcare Ltd would pay PT Lippo Karawaci Tbk $102.653mil for the 10.63% stake.
Prior to this announcement, there were much speculation on the cause of the share price fall.
This announcement is the long awaited missing piece in finally understanding the cause of price fall in First REIT. It is likely that insiders or people with advance knowledge of the transactions, sold units in First REIT to lock in profits prior to the announcement.
Because of this transaction, Lippo Karawaci stands to receive more than $200mil in cash immediately strengthening its balance sheet. However, over the long term, it would have less cash flow as it would no longer have access to the management fees and lesser entitlement to First REIT’s distribution.
Using this transaction as reason, OUE Lippo Healthcare raised $150mil via the rights issue and transfer more than $140mil of the $200mil.
With Bowsprit Capital and First REIT now in OUE Ltd and OUE Lippo Healthcare’s possession, it would constitute an interested party transaction as the Indonesian Riady family has control over both Lippo Karawaci and OUE Ltd. This would mean that while the entities has changed hands, but ultimately it is still firmly within the Riady family’s control.
The additional funding raised through the rights issue however benefits Lippo Karawaci immediately.
There does not seem to be any fundamental change in First REIT compared to prior to the transaction. It will continue to have all the benefits it had prior to the transaction with the added benefit of having access to OUE Lippo Healthcare's existing portfolio of assets.
The key difference is that the publicly known transacted price of $1.228 per unit may likely put a suppression on First REIT’s share price in the near term.
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