CMT CCT Merger – Can you arbitrage the price difference? Is it a good deal for investors? [ASK FH]

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I’ve received a couple of great questions on the CMT-CCT Merger recently, so I figured now’s a great time to share some thoughts.

I’ve set out one of the really great questions below:


Good day FH!

I’ve been reading your blog for the past few months and I personally think it’s one of the better ones out there. I especially like the way you write; concise think pieces written for the layman to understand, especially for a person like me who have just started his investing journey.

As such, I would like to hear your thoughts on the proposed merger of CMT and CCT. I’m pretty new to investing and even more so on this merger thing, so I was hoping to get a bit of enlightenment from you. 

Assumptions:
I understand that it’s a proposed merger and anything can still happen. For the sake of simplicity, let’s assume the merger will happen.


About myself: 

– early 30s, prefers holding longer positions and making dividend plays

– less than a year into my investing journey, knowledge is mostly self-learnt by reading blogs such as yours and reading books when I can

– Not holding on to CMT or CCT 

My understanding:
Basically read the entire document on CapitaLand’s site, and pretty clear on the information presented.


My questions:
– Should I be buying into either CMT or CCT? Both are trading at premiums, so what am I buying into if they merge?

– At a consideration of $2.12 for CCT holders, why are people not buying it to raise share price to this level?

 

Current CCT share price is $2.04, isn’t it ‘guaranteed’ money (net of expenses) if I buy now and wait for the merger? 

 

– Assuming I buy CCT, should I use the cash component from the merger and buy more CICT shares? I don’t quite like that I’m instantly ‘cashed out’ of CICT as I prefer dividend plays + buying into CICT again incurs expenses. 

 

I know this question is pretty vague and leads to more questions (what will be CICT’s trading price, value of my cash component substantial enough to make expenses worthwhile etc). I guess I’m hoping to get clarity on whether how to maximise this merger package for a CCT unit holder. 

– what else should I be looking out for in a merger that will affect my decision to buy CMT/CCT now? (I’m more than willing to do my own groundwork, so point form replies here works for me!)

 

Sorry if some of the questions sound vague, there are many investing nuances that I’m still not familiar with and might not be able to articulate my questions clearly.

 

Appreciate your help on this and look forward to hear from you! 


Basics: CMT CCT Merger

Now the CMT CCT Merger has been covered some extensively by the other sites (see here and here – CapitaLand Presentation), so I won’t deal with it in too much detail.

I’ve set out an extract from the Fifth Person on the mechanics below:

Mechanics of the deal

The mechanics of the deal will be as follows: CMT will acquire all the issued and paid-up units of CCT, and all CCT unitholders will receive 0.72 new CMT units plus S$0.259 in cash per CCT unit. CMT’s issue price for new shares will be fixed at S$2.59 per consideration unit, which means each CCT unitholder will receive S$1.8648 in value in CMT shares (S$2.59 x 0.72). When added to the S$0.259 in cash, the total consideration that each CCT unitholder will receive is S$2.1238 per unit.

This works out to be a gross exchange ratio of 0.82 times (calculated as the consideration amount of S$2.1238 divided by CMT’s issue price of S$2.59). CMT and CCT will hold their respective extraordinary general meetings (EGMs) in May 2020 and there will also be a scheme meeting to approve the merger. The expected delisting of CCT is expected to take place in June 2020.

Response to questions on the CCT CMT Merger

 I’ll do a short response to the questions below, and then I’ll share my fuller thoughts after that.

– Should I be buying into either CMT or CCT? Both are trading at premiums, so what am I buying into if they merge?

Whether to buy is up to you. Who am I to advise you on that ?. 

If you buy CCT, you get units in CICT and some cash (0.72 new CMT units plus S$0.259). If you buy CMT, you own CMT (which will acquire CCT – after which CMT will be renamed to CICT).


– At a consideration of $2.12 for CCT holders, why are people not buying it to raise share price to this level?

Short answer: Because you get units of CMT instead of cash. So the $2.12 “value” is 88% units, which can fluctuate. The exact market value of the CMT units in June is in doubt.

You also assumed that the merger is a done deal, which is not necessarily the case. So the market also prices in a small risk-premium reflecting the possibility that the deal doesn’t complete.

Current CCT share price is $2.04, isn’t it ‘guaranteed’ money (net of expenses) if I buy now and wait for the merger?  

Short answer: No, because the $2.12 is not in cash. The value of units can fluctuate.

– Assuming I buy CCT, should I use the cash component from the merger and buy more CICT shares? I don’t quite like that I’m instantly ‘cashed out’ of CICT as I prefer dividend plays + buying into CICT again incurs expenses. 

If you’re afraid of being “cashed out” immediately, and if you’re very confident the deal will complete, one way is to just buy more CCT units now. Calculate how many units of CICT you want to hold after all this is done, and work backwards to determine how many units of CCT you need to buy now.

Once the merger is done (if at all), you’ll get back your money in cash.

My own take on the CMT CCT Merger

Some of you guys have asked me for my take on the CMT-CCT Merger.

I shared my thoughts on REIT mergers in general a while back for the FLT-FCOT merger deal, and to me, most of the broad trends still remain relevant.

So I do recommend you guys to take a look at the previous article if you want my thoughts on REIT mergers.

That said, I do expect many more REIT mergers to happen going forward, so we might as well get used to it happening.

Regarding the question of whether there is any arbitrage opportunity in play here, I think the simple answer is that the market is too efficient for that. Sure, you can make some spare change this way, but you’re unlike to make big money unless you do it systematically, and using large amounts of capital – in which case most of what you’re monetising is essentially the risk-premium of the deal not completing.

To illustrate – using today’s prices, CCT trades at $2.01, CMT trades at $2.46.

So buying a CCT unit today gets you 0.72 new CMT units plus S$0.259 in cash per CCT unit. On a simplistic analysis, that 0.72 CMT units is worth $1.7712. Added the $0.259, that works out to $2.03.

Versus the market price of $2.01, you technically “make” $0.02 right?

The problem of course, is that:

Not a done deal – The CCT CMT merger is is not a done deal. Unitholders have not approved the transaction, and the market prices in the risk that the trasanction doesn’t materialize.

You are getting Units – 88% of the consideration for your CCT units comes in the form of CMT units. Whether you will be able to sell your CMT units in June to profit from the arbitrage, is a question mark. If too many people think this way, then the share price on the first day of trading post-completion will drop, and you’re unable to arbitrage.

If instead you decide to hold onto your CICT units and hope to sell them at a profit down the road, then you’re basically taking on market risk. The price of CICT units can go up, but they can also go down.

So it’s not that there’s no arbitrage opportunity. It’s just that the potential for payout, and the amount realized if this pays out, is not large. There’s just too many variables in play here.

Of course, if you’re a systematic trader and you’re prepared to take a big position to exploit any efficiencies here, there could be some money to be made. But then again, there’s an argument to be made that you’re simply monetising the risk-premium of the merger not completing.

What do you think of the CCT CMT merger? Share your comments below!

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2 COMMENTS

  1. Hi sir, with the dramatic change in CMT and CCT prices in the past month, are the pricing assumptions still valid and will the deal still go through as it is?

    Thank you

    • Good question. Your guess is as good as mine! Everything is changing on a daily basis, it would be foolish to try to look so far into the future.

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