Broker Stifel has questioned whether a commercial agreement between Phoenix Life and Abrdn has influenced the decision to merge Tritax Big Box (BBOX ) and UK Commercial Property (UKCM ).

The £6bn all-share merger between Tritax and UKCM will see two Abrdn interests come together given Abrdn’s Will Fulton manages UKCM and Abrdn has a 60% interest in Big Box’s manager, Tritax Management.

But there is also an ongoing commercial agreement between Abrdn and Phoenix Life, which is the largest shareholder in UKCM, owning 43% of the trust.

Having blocked a deal to merge UKCM with Picton Property Income (PCTN ) at the end of last year, the insurance group has thrown its weight behind the combination with Tritax.

Stifel analyst Denese Newton noted that while details of the commercial agreement were not included in previous announcements, the latest scheme document set out details of a ‘historic arrangement between Phoenix and Abrdn’.

Newton said that at a group level Phoenix ‘receives a partial rebate on management fees paid for the management of UKCM assets’ and ‘it would appear that as a result of Abrdn having a 60% interest in the Tritax manager, this arrangement will remain in place’.

If UKCM had merged with a trust that had no connection to Abrdn, such as Picton, then Newton said that ‘the likelihood is that this arrangement would have fallen away’.

As for the scale of the rebate, Newton said that she was ‘unable to ascertain the quantum of the rebate’ and it ‘may or may not be material’.

If the rebate is material, she said that Phoenix would be advantaged by the Tritax offer’ and it ‘might well have a bearing on the decision-making process of minority shareholders’.

Newton also flagged UKCM chair Peter Pereira Gray’s failure to support the merger and his decision to abstain from voting.

In an unusual twist, Pereira Gray has been a dissenting voice on the board, and maintained that a better price could have been achieved for the real estate portfolio if ‘other parties would have come forward had there been a more open and comprehensive sales process’. 

In an opinion piece on Citywire this month, TR Property (TRY ) fund manager Marcus Phayre-Mudge called for UKCM to rethink the merger in light of its chair’s opposition. Shareholders vote on the deal on Thursday 2 May.  

‘Whilst the quantum of the fee rebate arrangement is unclear, other minority shareholders may wonder whether they have received all relevant information under the Takeover Code and been treated equally,’ said Newton.

‘To be clear, this rebate arrangement is purely between Abrdn and Phoenix. There is no financial impact for Tritax Big Box or its shareholders.’

Newton said that the rebate deal between Phoenix and Abrdn was first noted in a 2010 prospectus issued by UKCM. It said that the board of UKCM understands that Ignis – which was acquired by Abrdn in 2014 – has arrangements in place to offer ‘a partial rebate of fees’ to certain Phoenix Group companies and Friends Provident given their position as ‘significant shareholders’.

Abrdn declined to comment given that shareholders are yet to vote on the merger.

Renewed confidence

There was little mention of the merger in UKCM’s annual results to the end of 31 December, published last week, with a passing mention that the deal was conditional on a shareholder vote on 2 May.

The trust, which owns £1.25bn of property, skewed towards industrials, grew EPRA earnings per share to 3.35p per share in 2023 from 3.15p the previous year, while the net asset value (NAV) of the trust was up 3%. The total dividend was increased 4.6% to 3.4p for the year, and was 99% covered by earnings.

Pereira Gray said that the valuation of the portfolio ‘remained broadly stable’ with a marginal 0.89% drop over the year and the trust performed favourably to its MSCI Balance Portfolio Quarterly Property index, which was down 6.4% over the year, meaning the trust has outperformed its benchmark over one, three, five and 10 years.

‘The improvement in property returns recorded in 2023 – while still overall negative – was led by the industrial and living sectors, both of which posted positive total returns for the year, counterbalancing the office sector which continued its decline as thematic headwinds remained,’ said Pereira Gray.