SMMCF - Merger Arb Opportunity: 4% Merger Arb Spread In Summit Industrial REIT Is A No-Brainer

Summary

• Acquirer / Type: GIC and Dream Industrial REIT / SWF.
• Nature / Payment Type: Friendly / $23.5 per share in Cash.
• Deal value / Equity Value: C$5.9 billion / $4.5 billion.
• Spread: 4.0% | Implied Probability: | Closing: Q1-2023.
• Remaining Milestone(s): Investment Canada Act.

Risk & Return Analysis

Summit Industrial (SMMCF) is being taken private by a JV between GIC and Dream Industrial REIT (DREUF). The current merger spread is 4% and the market is pricing in a ~85% probability of closing. I estimate there is a 23.7% downside if the deal breaks, so size the bet according to your risk limit. A summary is provided in the table below:

Buyers' Profile

GIC is the sovereign wealth fund of Singapore. Dream Industrial REIT is a publicly traded REIT with a portfolio of 258 industrial assets totaling approximately 46.5 million square feet of gross leasable area across Canada, Europe, and the U.S. The JV is a smart decision by both sides - Dream gets an SWF as a partner and GIC gets Dream's on-the-ground asset management expertise.

Financing Analysis

The equity split is 90%/10% between GIC and Dream. The JV will assume Summit's unsecured debentures and have TD Securities backstop any mortgages where the lender does not provide consent to the assumption of mortgages. The transaction is not subject to financing condition.

Remaining Milestones

The key milestones are: (1) unitholder approval, (2) Court Approval, and (3) Investment Canada Act Approval. Unitholder and Court Approval have been obtained. As for the Investment Canada Approval, my understanding is that subject to further extension, the Minister of Innovation, Science and Economic Development has 75 days to review and make a decision. The process could be longer if the Minister thinks the transaction should be subject to a national security review, which I don't think is the case here. Adding 75 days to the deal announcement date of November 22 takes us to Feb 5, 2023.

Conclusion

With all but one approval obtained, I think this take-private transaction will successfully close. On balance, I don't see any deal risk here - I can't imagine a SWF backing out of a deal even if the market tanks between now and Q1-2023. The Investment Canada Act Approval should only be a matter of time - I also can't imagine Canada turning hostile towards Singapore. Outside of any withholding tax consideration, this merger arb trade is a no-brainer.

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