Arrowhead, Gemgrow talk merger

Fund managers, who have been clamouring for consolidation to improve liquidity in listed sector, welcome proposal

A second merger within two weeks has been announced in the listed property sector, pleasing fund managers who have been clamouring for consolidation to improve liquidity and help increase the size of smaller struggling companies.

Arrowhead Properties and Gemgrow have announced an intention to merge, which has pleased investors who believe Gemgrow’s management has underperformed and that the small fund should not have listed in the first place as it was too illiquid. Fairvest recently announced its proposed merger with Safari Investments.

The boards of Arrowhead and Gemgrow said that they had agreed in principle to a transaction, which would result in the reverse takeover of Gemgrow by Arrowhead.

Gemgrow is structured into A and B shares, which appeal to investors with different risk appetites. A shares holders, who tend to be risk averse, have a preferential claim to earnings and are paid their dividends before the B shares investors are paid. The growth in their dividends is capped at about 5% and the prevailing consumer price inflation rate. Arrowhead owns 53.3% of Gemgrow.

Arrowhead’s CEO Mark Kaplan said he had found that investors liked the option of buying A and B shares and to keep this in place, Gemgrow would be the acquirer of the Arrowhead shares.

Gemgrow would acquire all of the shares in Arrowhead and would issue 0.8237 Gemgrow B shares for every Arrowhead share. Arrowhead would then be de-listed. The combined entity would have a market capitalisation of about R6.8bn.

Nesi Chetty, head of listed property at Momentum, said Arrowhead’s share price had risen about 4% following the announcement, while the Gemgrow A and B share prices were flat, indicating that a merger would better suit Arrowhead.

“One will need to see what the potential balance sheet synergies between the two companies will be,” Chetty said.

Indluplace Properties, which was listed with Arrowhead’s residential assets a few years ago, would continue to be listed separately. Some critics have said that Arrowhead, Gemgrow and Indluplace should merge into one company to avoid paying listing fees and that it should have one focused executive management team.

Gemgrow was listed three years ago out of the consolidation of Synergy Income Fund and Cumulative Properties. Cumulative was formed when Arrowhead spun out its smaller assets into a separate company.

CIO at Reitway Global, Garreth Elston, said that in hindsight Gemgrow should not have listed. “With hindsight, it is an easy call to have made that the listings of Gemgrow and Indluplace should not have occurred.

“However, at the times the listings occurred in 2015 with Indluplace and Gemgrow in 2016 it was a less clear, and they did occur during the halcyon days of multiple listings and nonstop capital raising, where very few market participants were raising red flags about the industry.”

He said if the economy had seen good growth and robust economic activity, the listings would have naturally been more successful, as in a normal economy they made strategic sense, and at the time were the correct option. “Unfortunately SA’s economic reality negated any benefits rather rapidly.”