- Independent Committee's review of Mini-Tender finds it to be coercive and against Unitholders' best interests
- Melcor REIT warns Unitholders of reckless approach of Telsec and FC Capital which puts the interests of a majority of the minority Unitholders at significant risk
- Melcor REIT warns Unitholders that Telsec and FC Capital will risk regulatory sanction for their violation of securities laws in connection with their scheme to block the Arrangement
- Independent Committee reiterates support for the previously announced Arrangement as the best alternative for ALL Unitholders
- Unitholders who have questions or need assistance in voting should contact Laurel Hill Advisory Group by telephone at 1-877-452-7184 (North American Toll Free) or 1-416- 304-0211 (Outside North America), or by email at [email protected]
INDEPENDENT COMMITTEE RECOMMENDS UNITHOLDERS EXERCISE CAUTION REGARDING THE MINI-TENDER
The Independent Committee, in consultation with its financial and legal advisors, has reviewed the Dissidents' Mini-Tender and considered numerous factors in reaching its recommendation. Consideration of the Mini-Tender has also been weighed in the context of the previously announced plan of arrangement (the "Arrangement”) with Melcor Developments Ltd. ("MRD”).
Although the Mini-Tender proposes the same consideration of $4.95 per Unit as the Arrangement, unlike the Arrangement, the Mini-Tender is only narrowly available to a small fraction of Unitholders and available only on a "first-come, first-served” basis; whereas under the Arrangement, ALL Unitholders will receive $4.95 per Unit.
Unitholders are also cautioned that the Dissidents have criticized the $4.95 consideration under the Arrangement while simultaneously offering the exact same amount under the Mini-Tender. Accordingly, it can be inferred from the Dissidents' actions that $4.95 is not good enough for them, but it is good enough for other Unitholders.
The Dissidents have structured the Mini-Tender to pressure Unitholders who support the Arrangement to tender their Units to the Mini-Tender out of fear that, if the Dissidents are successful in defeating the Arrangement, ALL Unitholders will have lost the opportunity to receive $4.95 for their Units. Since the Mini-Tender is only open to a maximum of 10% of Units, Unitholders are essentially tendering to a lottery in hopes of receiving the same consideration as the Arrangement, but if the Dissidents achieve their desire of defeating the Arrangement, the vast majority of Unitholders will likely see their Units return to similar trading levels seen before the announcement of the Arrangement.
Moreover, Unitholders are warned that the Mini-Tender is highly conditional and can be withdrawn, varied or extended for any reason and at any time given the extremely broad and discretionary conditions attached to the Mini-Tender. The Dissidents' Mini-Tender is prejudicial to Unitholders' interests and is designed to create uncertainty to entice Unitholders to act quickly, in a manner that may be contrary to their own interests.
THE ARRANGEMENT IS IN THE BEST INTERESTS OF ALL UNITHOLDERS. THE MINI-TENDER IS FOR THE BENEFIT OF TWO UNITHOLDERS: FC CAPITAL AND TELSEC
The Dissidents have cynically structured the Mini-Tender to thwart the Arrangement by requiring Unitholders to irrevocably appoint a representative of FC Capital as proxyholder. FC Capital has publicly communicated an intention to vote down the Arrangement, but has not offered an alternative vision for the future of the REIT if successful. In fact, FC Capital has publicly stated that the only solution for the REIT is for MRD to take the REIT private.
The Dissidents have misled Unitholders on the value of the REIT, relying on IFRS net asset value ("IFRS NAV”) as the sole determinant of value. IFRS NAV is not a primary factor in determining the fundamental value of the Units, and treating it as such ignores:
a) the REIT's trading price prior to announcement of the Arrangement; the closing price of Units on September 12, 2024, the last trading day before announcement of the Arrangement, was $3.39. In 378 of the last 381 trading sessions, or 99.2% of trading sessions, the REIT's Units have closed below $4.95;
b) the fairness opinions (the "Fairness Opinions”) provided by BMO Capital Markets ("BMO”) and Ventum Financial Corp. ("Ventum”), each of which determined that the $4.95 per Unit consideration was fair, from a financial point of view, to Unitholders, other than MRD and its affiliates, on the date of their respective opinions, with such Fairness Opinions taking into account multiple approaches to value including discounted cash flow and direct capitalization;
c) the formal independent valuation Ventum delivered to the Independent Committee (the "Formal Valuation”), which set out a range of $3.50-$5.00 as the fair market value of each Unit. The formal valuation considered factors and employed valuation methodologies such as a discounted cash flow approach and direct capitalization approach, which implied a range of NAV values per Unit, and a precedent transactions approach, which implied a range of values per Unit;
d) alternatives considered by the Independent Committee, including the sale of select assets, sub-portfolios of assets, or the office portfolio, which were ultimately determined to be inferior to the Arrangement;
e) the result of the go-shop process, in which 100 potential buyers were contacted, 14 entered into customary confidentiality and standstill agreements, and which yielded no proposals superior to the Arrangement;
f) the fact that the REIT, under the Arrangement Agreement, has the ability to respond to unsolicited superior proposals. To date, no party has made such an offer;
g) equity research analysts 12-month price targets, which average $3.25 per Unit; and
h) the fact that the REIT faces ongoing liquidity and capital constraints and that there are material risks to its business, and it is unlikely that the REIT could be in a position to reinstitute distributions in the near to medium term.
The Dissidents would have Unitholders discard the public trading data, the Fairness Opinions of two investment banks, the formal valuation from an independent valuator, the work of the REIT to pursue asset sales, equity research analysts opinions, and the results of an extensive strategic review and go-shop process that all point to the Arrangement being the superior outcome for ALL Unitholders, in favour of singularly focusing on one accounting measure (IFRS NAV) with no means of unlocking the value indicated therein.
As with any asset, the Units are only worth what someone is willing to pay for them, and it is clear that to date, no one - not purchasers on the public markets, not 100 parties contacted during the go-shop period, not any potential unsolicited offeror, not even FC Capital or Telsec - has been willing to pay more than $4.95 per Unit.
If the Dissidents are successful in defeating the Arrangement, what is their plan to achieve the value indicated by the IFRS NAV measure?
CONCERNS OVER TERMS OF THE MINI-TENDER
The Independent Committee also considered the terms of the Mini-Tender in making its recommendation. "Mini-tender” offers often lack of procedural protections for tendering holders as they are not required to comply with Canadian laws, regulations and policies applicable to take-over bids, and accordingly, the protections that exist in a take-over bid may not be present in a mini-tender offer as mini-tender offerors are not trying to acquire 20% or more of the outstanding securities of that class of securities. However, in this case, the Dissidents (together with their joint actors) collectively own and/or have control or direction over 28.7% of the outstanding Units and, as a result, the Dissidents are not complying with, and are instead attempting to circumvent, the Take-Over Bid Regime (as defined below).
The Mini-Tender does not comply with the requirements for a formal take-over bid for the purposes of National Instrument 62-104 Take-Over Bids and Issuer Bids ("Take-Over Bid Regime”), and as a result, it does not provide Unitholders with certain protections that the Take-Over Bid Regime requires be provided to Unitholders. This is a blatant disregard for the tenets of Canadian securities laws.
TROUBLING DISSIDENT TACTICS SHOW A DISREGARD FOR LONG-ESTABLISHED LAWS REGARDING MARKET TRANSPARENCY
The Independent Committee is deeply troubled by the pattern of disregard for Unitholder protections and related securities laws displayed by the Dissidents, and cautions Unitholders that such conduct underscores the Dissidents' lack of alignment with Unitholders.
The Independent Committee has received analysis from its advisors indicating that Telsec (and those persons acting jointly or in concert with Telsec) were likely to have exceeded ownership of 10% of the REIT's Units as early as April 2024, and with certainty, in May 2024. National Instrument 62-103 - The Early Warning System and Related Take-Over Bid and Insider Reporting Issues requires investors who acquire beneficial ownership of, or control or direction over, a 10% interest in a class of securities to notify the market through issuance of a press release and an early warning report within two business days. Telsec did not make the required filings until October 22, 2024, as much as six months after the requirement was triggered.
Early warning reporting requirements prevent stealth acquisitions of functional blocking positions, such as Telsec's, and market participants rely on these rules being complied with. These rules were designed for a variety of reasons, including to allow an issuer undergoing a strategic process to determine the existence of key stakeholders prior to entering into a definitive agreement, incurring transaction expenses and agreeing to operational covenants. Early warning rules are a tenet of securities law, essential for market transparency and investor confidence, as they ensure that the market is aware of acquisitions of significant blocks of securities. For example, information may affect investment decisions as large block holdings effectively reduce the public float, thereby limiting liquidity and increasing a stock's potential for price volatility.
Further, the Take-Over Bid Regime stipulates that any purchase in the market that causes a securityholder to gain beneficial ownership of, or control or direction over, 20% or more of class of securities of an issuer requires the purchaser to make a formal take-over bid to all of the issuer's securityholders under identical terms for a minimum take up of at least 50% of the Units. The analysis conducted by the Independent Committee's advisors indicates that Telsec (together with its joint actors, excluding FC Capital) breached this 20% threshold in September, and in any case, once Telsec finally fulfilled their obligation under the early warning system, it disclosed ownership of 2,892,974 Units (together with its joint actors, excluding FC Capital), which is over 22% of the relevant class of Units, or when combined with FC Capital (and its affiliates), nearly 27% of the outstanding Units. Telsec seemingly attempted to obscure the ownership of the class and shirk its obligations under the Take-Over Bid Regime by reporting as a percentage of the Units on a fully-diluted basis, assuming the exchange of Class B Units of Melcor REIT Limited Partnership, the unlisted securities of a distinct legal entity, into Units, which is contrary to the early warning reporting requirements which clearly require acquirors to disclose (with emphasis added): "acquiror's security holding percentage in the class of securities.”
Instead of fulfilling their obligations under the Take-Over Bid Regime and making a formal offer to acquire not less than 50% of the outstanding Units not held by the Dissidents to all Unitholders, the Dissidents offered to purchase only a small fraction of Units, seemingly with the intention of thwarting the Arrangement and bolstering their own position to the detriment of minority Unitholders, which further deprives Unitholders of rights and protections that would otherwise be available to them under a full take-over bid.
In the view of the Independent Committee, these regulations are important safeguards for minority Unitholders and this pattern of repeated disregard for investor protections demonstrates the recklessness and disingenuousness of the Dissidents in their attempt to thwart the Arrangement at any cost. Unitholders would be wise to question if their interests are aligned with the actions of the Dissidents.
DISSIDENT UNITHOLDERS ARE NOT ALIGNED WITH UNITHOLDERS
The Dissidents' desire to undermine the Arrangement is not based on any economic case, but rather in personal grievance. The Independent Committee believes other Unitholders are invested in the REIT for investment purposes.
The Mini-Tender and related opposition to the Arrangement is an opportunistic attempt by the Dissidents to gamble with other Unitholders' investment by holding the Arrangement hostage. They are happy to see the Arrangement fail, even if it leaves themselves and, as collateral damage, other Unitholders, worse off. The Dissidents have not communicated their plan if they are successful in defeating the Arrangement because they likely do not have one. However, if they are successful, Unitholders should be aware that the trading price of the Units are at risk of returning to their trading levels before the Arrangement was announced, with diminished liquidity due to Telsec's surreptitious buying in contravention of the early warning system. In addition, the Units will likely face additional price pressure as the Dissidents' actions would signal to the market that the Dissidents may block any potential value-maximizing transactions in the future.
UNITHOLDERS SHOULD BE CAUTIOUS OF THE IRREVOCABLE NATURE OF THE PROPOSED PROXY DESIGNATION
The Independent Committee also expresses concerns about the Mini-Tender and voting process that requires tendering Unitholders to have irrevocably designated a representative of FC Capital in any and all instruments of proxy in respect of any meeting or meetings of the REIT, including potentially beyond the special meeting of unitholders ("Special Meeting”) being held on November 26, 2024. In fact, the offer states that the depositing Unitholder shall have been deemed to have irrevocably made the designation at the time of deposit rather than at the time of purchase and it is not clear that such irrevocability would cease to apply if such Units are not ultimately purchased by the Dissidents or otherwise withdrawn by the Unitholder. The lack of certainty and consistency in the offer documents causes concern, and the terms themselves provide that the Dissidents' interpretation of the documentation shall be final and binding. Failure to communicate clarity on the terms of the offer further highlights the Dissidents' disregard for minority Unitholders.
Given the Dissidents' disregard for investor protections to date, Unitholders should exercise a high degree of caution and ensure that they do NOT grant an irrevocable right to the Dissident group to exercise their proxies to vote at the Special Meeting or otherwise by depositing their Units which may not ultimately be taken up and purchased by the Dissidents.
UNITHOLDERS SHOULD EXERCISE CAUTION TO THE MINI-TENDER AND VOTE FOR THE ARRANGEMENT
The only avenue for ALL Unitholders to receive the $4.95 per Unit is for the required percentage of Unitholders to vote FOR the Arrangement.
The REIT, along with Independent Committee, informed by its legal and professional advisors, are continuing to evaluate and will take any and all steps necessary to advocate for and defend Unitholder value and to protect minority Unitholders against this and any other opportunistic or coercive actions by the Dissidents that would harm shareholder interests.
QUESTIONS AND VOTING ASSISTANCE
Voting Unitholders who have questions or need assistance in voting should contact Melcor REIT's strategic unitholder advisor and proxy solicitation agent, Laurel Hill Advisory Group, by telephone at 1-877-452-7184 (North American Toll Free) or 1-416- 304-0211 (Outside North America), or by email at [email protected].
About Melcor REIT
Melcor REIT is an unincorporated, open-ended real estate investment trust. Melcor REIT owns, acquires, manages and leases quality retail, office and industrial income-generating properties in western Canadian markets. Its portfolio is currently made up of interests in 36 properties representing approximately 3.072 million square feet of gross leasable area located across Alberta and in Regina, Saskatchewan; and Kelowna, British Columbia.
Forward Looking Statement Cautions and Disclaimers:
This news release includes forward-looking information within the meaning of applicable Canadian securities laws. In some cases, forward-looking information can be identified by the use of words such as "may”, "will”, "should”, "expect”, "intend”, "plan”, "anticipate”, "believe”, "estimate”, "predict”, "potential”, "continue”, and by discussions of strategies that involve risks and uncertainties, certain of which are beyond the REIT's control. In this news release, forward-looking information includes, among other things, expectations with respect to the timing and outcome of the Arrangement and the anticipated benefits of the Arrangement, the likelihood of the REIT reinstituting distributions in the future, statements relating to future expectations regarding the trading price and volume of the Units if the Arrangement is not completed, statements relating to the impact of the Mini-Tender on the REIT and the Arrangement, and statements relating to potential future steps and action taken by the REIT and the outcomes thereof. The forward-looking information is based on certain key expectations and assumptions made by the REIT, including with respect to the structure of the Arrangement and all other statements that are not historical facts. The timing and completion of the Arrangement is subject to customary closing conditions, termination rights and other risks and uncertainties including, without limitation, required regulatory, court, and unitholder approvals. Although management of the REIT believes that the expectations reflected in the forward-looking information are reasonable, there can be no assurance that any transaction, including the Arrangement, will occur or that it will occur on the timetable or on the terms and conditions contemplated in this news release. The Arrangement could be modified, restructured or terminated. Readers are cautioned not to place undue reliance on forward-looking information. Additional information on these and other factors that could affect the REIT are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR+ website (www.sedarplus.ca).
By its nature, such forward-looking information necessarily involves known and unknown risks and uncertainties that may cause actual results, performance, prospects and opportunities in future periods of the REIT to differ materially from those expressed or implied by such forward-looking statements. Furthermore, the forward-looking statements contained in this news release are made as of the date of this news release and neither the REIT nor any other person assumes responsibility for the accuracy and completeness of any forward-looking information, and no one has any obligation to update or revise any forward-looking information, whether as a result of new information, future events or such other factors which affect this information, except as required by law.
The Ventum Fairness Opinion and Formal Valuation was prepared for the exclusive use of the Independent Committee and the BMO Fairness Opinion was prepared for the exclusive use of the Independent Committee and the Board and any summary is qualified entirely by reference to the full text thereof in the management information circular of the REIT dated October 25, 2024 in connection with the Special Meeting, a copy of which is available on REIT's profile on SEDAR+ (www.sedarplus.ca) as well as on the REIT's website at http://melcorreit.ca/special-meeting.
