SEGRO PLC's (LSE:SGRO) proposed merger with Tritax Eurobox PLC (LSE:EBOX) looks like an attractive fit portfolio-wise, suggests Shore Capital, especially given the cost savings.
FTSE 100 member SEGRO also gets an increased scale in highly complementary European industrial and logistics assets plus low-cost acquired debt.
SEGRO now has the potential to deliver a 53% uplift to last year’s passing rent of £639m over the next three years.
This looks achievable through the combination of several factors: the expiry of current rent-free periods, the letting-up of currently vacant space, the capture of current portfolio reversion and £154 million from the development pipeline.
SEGRO also has one of the strongest balance sheets among listed REITS with undrawn debt facilities and cash of £1.8 billion and drawn facilities benefitting from a low average cost of just 3.1%.
With sector-leading earnings growth it remains a 'buy' following the Tritax deal says ShoreCap.
Tritax at 'perpetual discount'
Stifel notes that Tritax Eurobox had traded at a perpetual discount, largely as a result of being sub-scale.
This impacted both cost ratios and dividend coverage. Although some issues had been addressed, the lack of scale had led the board to explore potential options for realising value.
The quality portfolio attracted considerable interest from a number of parties leading up to this all-share offer from SEGRO.
The deal should be tied up by the end of the calendar year, resulting in cost savings from internalising the management and be accretive to both earnings and asset value.
Brookfield to return?
Peel Hunt adds that while the SEGRO transaction would offer significantly improved liquidity, there remains a possibility that Brookfield or another party could make an alternative cash offer, which some shareholders may prefer and the c.16% discount to EPRA NTA perhaps offers a pricing window to do so.
"SEGRO expects the transaction to be accretive to EPRA NTA per share and EPS, but we believe this is likely to be relatively modest - EuroBox would comprise 4% of the combined company’s share capital."
SEGRO shares were down 1.1% at 870p with Tritax Euro up 2% at 67.9p.