UK Commercial Property (UKCM ) chair Peter Pereira Gray will abstain from voting on the merger with Tritax Big Box (BBOX ), stating that a better price could have been achieved for the real estate portfolio.

The £924m all-share takeover by Tritax of UKCM was backed by both boards and major shareholders last week, but one dissenting voice remains in Pereira Gray, who has criticised the deal since details of negotiations were leaked earlier this year.

Pereira Gray has only been chair of Abrdn-run UKCM for nine months but he has made waves with his criticism of the Tritax deal, which has been noted in the recommended all-share offer being put to shareholders.

The chair, in an unusual move, will abstain from voting on the creation of the UK’s fourth largest real estate investment trust (Reit), although documents filed with the stock exchange state ‘he accepts that the proposed combination should be put to UKCM shareholders’.

Although Pereira Gray noted that UKCM had traded on a ‘persistent discount’ to net asset value (NAV) – currently 12% – he said the ‘strong rising trend of the last six months has, however, led to UKCM delivering the second highest share price total return within the listed property sector over the last 12 months’ leaving it on a narrower than average discount than sector peers.

He noted the shares were trading at 65.4p the day before the takeover talks were leaked and the merger price offer of 71p ‘offers a limited premium’ to return for giving up control of the trust.

‘There remains no certainty of the price at which UKCM shares might actually convert into Tritax shares given daily volatility in the Tritax share price,’ he said. Shares in Tritax are up 17% over the past 12 months but are down 7% this year, and currently trade at a discount of 14%.

Pereira Gray said a better offer could have been forthcoming had there been ‘a more open and comprehensive sales process’. Although the deal is supported by UKCM’s largest shareholders – Phoenix Wealth and Investec – Pereira Gray questioned whether it is ‘the highest price or the best value that could have been achieved’.

He doubled-down and stated that a liquidation would generate a higher net return to shareholders than the 71p per share being offered by Tritax, but acknowledged that ‘a merger with Tritax could deliver a higher net present value…over time assuming growth in the value of Tritax’s core investment portfolio and possible narrowing of the discount’.

However, documents filed to the stock exchange said that following the breakdown in takeover talks with Picton Property Income (PCTN ) in November, UKCM received ‘expressions of interest from a number of other listed and private counterparties’ but Tritax was the only interested party to make a formal offer. The recommended combination was the fourth proposal that Tritax made over a period of two months.

UKCM’s biggest shareholder Phoenix Life, which owns 43% of the trust, not only scuppered the talks with Picton when it said it would not support the merger, it also had a hand in the Tritax deal.

It stated that it would back the deal with Tritax provided there were no competing offers that put forward a price 10% higher than the Tritax bid when it was first announced, equivalent to 78.24p, meaning any competing bids would have to far outpace the Tritax offer to get shareholder support.

Pereira Gray has also criticised the merging of two different portfolios, with UKCM being a diversified generalist while Tritax is a specialist large warehouse investor, stating that ‘diversified, low geared’ UK trusts had a role to play.

He said the merger was not a ‘compelling strategic rationale for UKCM shareholders’ given the differing investment strategies. While Tritax can offer a ‘higher proportion of long index-linked and fixed rental uplift leases, a significant development programme’ it also has a higher level of gearing at 41% versus UKCM’s 14%.

Margaret Littlejohns, senior independent director of UKCM, said shareholders will benefit from the larger scale and improved liquidity a merger will bring, as well as tackling the wide discount.

She said Tritax – whose management team Tritax Management is 60% owned by Abrdn – has a ‘strong track record of delivering attractive, sustainable returns’ from UK logistics that will drive earnings and support a fully-covered dividend.

‘By combining the businesses on an EPRA net tangible asset (NTA)-to-EPRA NTA basis, shareholders will be able to share fully in the future potential valuation upside whether that is delivered from asset management initiatives, rental growth, the potential of the Tritax development pipeline or a broader improvement in real estate sector sentiment,’ said Littlejohns.

‘These factors together with the compelling strategic and financial rationale of the transaction lead us to recommend this deal to all shareholders.’

Consolidating sector

The consolidation of the UK real estate investment trust (Reit) sector is well underway. There has already been an all-share merger between LondonMetric Property (LMP) and LXI Reit (LXI ) this year, following the successful mergers of Capital & Counties and Shaftesbury (SHB) and LondonMetric and CT Property (CTPT ) last year. Shareholders in Abrdn Property Income (API ) were voting on a merger with Custodian (CREI ) today.

Peel Hunt analyst Matthew Saperia said of the 48 real estate investment companies listed in London more than a quarter have a market value below £250m.

‘This long tail of companies means that, while the cohort has a mean market cap of £1.2bn, the median is just £440m,’ he said.

A market-cap below £500m is considered too small for wealth managers to even consider a trust for clients given the perceived issues around liquidity.

Saperia said sub-scale funds have three options: merge, sell, or liquidate. He said mergers are a ‘potentially compelling option for shareholders’ as share liquidity is improved, and there is also potential for an immediate uplift in value, exposure to a better portfolio and improved capital structure.

‘It also gives shareholders the opportunity to participate in any upside from here,’ he said.

‘We believe this is an important point to consider at this stage in the real estate cycle, given the net asset value discounts on offer and the anticipated recovery in real estate capital markets as interest rates loosen in the UK and elsewhere.’