Down to the wire on REIT merger
Friday is the final day for unitholders to submit proxies regarding the merger between two related entities, NorthWest Healthcare Properties REIT and NorthWest International Healthcare Properties REIT.
If and when the Court of Queen’s Bench of Alberta signs off on the plan of arrangement in a week or so, the process that started 18 months ago will come to an end. For those interested, the two parties – NWH’s major owner is NWI, and NWI is 65 per cent controlled by Northwest Value Partners, a company controlled by Paul Dalla Lana who sits on the NWH and the NWI board – have provided 364 pages of reading material.
Despite that detail, analysts and investors still have concerns. For instance:
NO PREMIUM? Given that NWH is offering 0.208 of its own units for each NWI unit, and given that NWVP controls NWI, after the merger NWVP will end up as the controlling NWH. It will have enough of a stake (at 34%) to block any possible acquisition of NWH in the future.
In a report the day that the merger was announced Neil Downey, a managing director at RBC Capital Markets, issued a note saying, “preannouncement unit prices for NWH and NWI were essentially trading on-par with the exchange ratio, thus equating to a nil merger premium.”
The normal situation is that when a shareholder acquires control, a premium is paid.
Downey was so unimpressed with the merger that he lowered his NWH target to $9.50 from $10.50. One reason was the higher-risk profile now taken on by NWH. “The change in strategy and risk profile for NWH may, over time, cause some turnover in the unitholder base,” he wrote. One NWI unitholder was concerned about NWI being exposed to the “seriously deteriorating Canadian office building market.”
NO AUCTION? Given that NWH will have a new boss, observers wonder why no one put NWH up for sale to determine if a buyer for the company could be found. In other words is NWH’s minority best served by buying NWI?
VALUATIONS? Much has been made of the NWI valuation determined by Canaccord Genuity, the firm that was retained after NWH’s former adviser, Brookfield Financial, was “formally terminated” last December.
Canaccord Genuity said fair market value was in the $2.15 to $2.40 range. But in its 25-pages report, Canaccord uses a number of metrics for its valuation including: precedent transactions, trading range and comparable companies. But on a net asset value basis its valuation runs from $1.26 to $1.77 and $1.52 to$1.98 (when synergies are excluded).
That valuation is higher than the $1.25 to $1.45 Brookfield had determined it to be in the middle of 2014. This week NWH noted NWI is a different company than it was because of a number of financings and acquisitions it had made.
In a statement, NWH said “the valuation as at March 31, 2015 of NWI derived by Canaccord and as set forth in the circular makes the appropriate and correct use of the full range of best practice valuation metrics, including comparable trading multiples, precedent transactions, trading ranges and net asset value, to conclude a fair market value range of $2.15 to $2.40 per NWI unit. And the combination with NWI and its portfolio of high quality healthcare real estate is in the best interest of NWH’s unitholders.”