The saga for control of industrial REIT (real estate investment trust) Monmouth Real Estate Investment (NYSE: MNR) has taken an interesting turn. The company had agreed to a merger with Equity Commonwealth (NYSE: EQC), an office REIT controlled by Sam Zell, in a $3.4 billion all-stock deal. However, it recently received an unsolicited offer from Barry Sternlicht's Starwood Capital Group. The all-cash proposal could derail Zell's plans to get into the fast-growing industrial real estate sector.
Upping the ante at the last minute
The takeover battle for Monmouth Real Estate started last year. The company received an offer from Blackwells Capital -- one of the REIT's largest shareholders -- to take it private for $18 per share in cash. That offer was only 5.9% higher than Monmouth's closing price before the deal announcement.
Monmouth ultimately rejected that proposal. However, it launched a strategic review that included hiring advisors to run a complete sales process. That culminated in its merger agreement with Zell's Equity Commonwealth in early May. The all-stock transaction had an implied value of $19.58 per share, including $19.40 per share in stock at the exchange ratio at the time, and allowed Monmouth to make one more $0.18-per-share dividend payment.
Monmouth has since received a new acquisition proposal from Sternlicht's Starwood Capital, which participated in the initial bidding process. The revised all-cash offer would pay the REIT's investors a net $18.70 per share. That reflects a stated purchase price of $19.51 per share, minus the termination fee Monmouth would have to pay Equity Commonwealth of $62.2 million, or $0.63 per share, and the previously declared $0.18-per-share dividend.
While that's below the initial value offered by Equity Commonwealth, its stock has fallen since the deal announcement. At the current price of $27.50 per share, the 0.67 exchange rate implies a valuation of $18.42 per share. As such, investors would lock in a firm sales price by agreeing to Starwood's deal.
Meanwhile, Equity Commonwealth's proposal has the risk of its stock price declining in the future. On the flip side, the all-stock merger offers more upside potential if the combined company can grow shareholder value by executing its expansion plan.
Monmouth's board of directors is currently reviewing Starwood's proposal. That process could yield a range of outcomes, including:
- Rejecting Starwood's offer and proceeding with the Equity Commonwealth merger at the current terms.
- Accepting the certainty of Starwood's all-cash offer and breaking their merger agreement with Equity.
- Renegotiating a better deal from Equity Commonwealth, which could include a cash component.
The REIT could go in any direction. However, Monmouth's board of directors seems to prefer remaining public instead of accepting an all-cash deal to privatize the company, given that they already rejected Blackwells' offer and Starwood's initial bid. By cashing in, they're in a sense handing over all the future upside to the private equity investors.
On the other hand, by accepting an all-stock deal, existing investors can participate in the company's future upside as it executes its expansion plan. That makes me think that Sam Zell has the upper hand in his battle with Sternlicht over Monmouth.
An interesting battle to watch
Sam Zell and Barry Sternlicht are legendary real estate investors with a history of making a lot of money in the sector. That makes their battle over Monmouth fun to watch.
However, it doesn't necessarily make the REIT's stock a buy. If Sternlicht wins, investors buying today would potentially lose money, since Monmouth's stock currently trades above Starwood's offer price after factoring in the break fee and dividend. Because of that, investors looking for exposure to the red-hot industrial real estate sector should consider one of these attractive REITs instead.