The boards of LondonMetric and LXi have reached agreement on the terms of a recommended all-share merger. LondonMetric will acquire the entire issued and to be issued ordinary share capital of LXi as the merger is effected by means of a scheme of arrangement under Part 26 of the Companies Act.
Each LXi shareholder will be entitled to receive 0.55 new LondonMetric shares for every one LXi share that they hold. Based on the price on 15 December (before anything was announced) the merger values LXi’s share capital at about £1.9bn and:
- represents a premium of approximately 9% to the pre-announcement price per LXi share of 99.5p (about a 13% premium to the average price one month before);
- implies a discount to net tangible assets (NTA) of 4% (based on each of the LondonMetric and LXi rolled-forward unaudited EPRA NTAs).
Following completion of the merger, existing LondonMetric shareholders will hold about 54% and LXi shareholders 46% of the combined group.
Benefits of the merger
The two boards believe that the merger would build on the strengths and strong track records of both companies to create a new major UK REIT, aligned to structurally supported sectors with high barriers to entry and income security, with a low cost base, better access to capital through greater scale, and enhanced scope for capital recycling and asset management to drive compounding income growth and total returns for shareholders. Specifically, the merger would result in:
- The creation of a new major UK REIT, with EPRA NTA of approximately £4.1bn (the fourth largest UK REIT), providing better access to capital and increasing share liquidity;
- The establishment of a UK-focused triple net lease REIT of scale, with a highly efficient structure delivering reliable, repetitive and growing income through the cycle. The combined group will be structured to continue both companies’ long track records of dividend growth, with LondonMetric currently on track for a ninth consecutive year of dividend progression;
- The formation of a combined £6.2bn portfolio aligned to structurally supported sectors, with 93% exposure to the logistics, healthcare, convenience, entertainment and leisure sectors, and with a strong exposure to key operating assets that are mission critical to the occupiers’ businesses;
- Substantial cost and operating synergies, driving faster earnings growth combined with dividend progression through economies of scale, the removal of duplicative costs and increased operating margins and efficiencies, targeting an EPRA cost ratio of 7% to 8% in the medium term;
- Leadership by a highly regarded management team with strong shareholder alignment. The combined group will draw on the strengths of both companies under the leadership of LondonMetric’s board and senior management team. Nick Leslau will join the LondonMetric Board as a non-executive director.
- Strong income longevity and security, with a sector-leading WAULT of 19 years on FRI leases, 99% occupancy and high quality occupier covenants. Strong income compounding prospects will be delivered through index-linked and fixed uplift leases (which together total 80% of the rent roll) and reversionary open market rent reviews (20% of the rent roll) in sectors that enjoy high barriers to entry and strong levels of occupier demand;
- A resilient capital structure, with well staggered debt maturities and a conservative LTV of approximately 31% (taking into account LXi’s announced £210m disposal of Travelodge assets), with weighted average cost of debt of 3.9%, weighted average debt maturity of 5.6 years and, following the arrangement of £700m of unsecured debt facilities to replace £625m of secured LXi facilities, £740m of undrawn headroom;
- Improved credit metrics including net debt / EBITDA of 7.2x and an interest cover ratio (ICR) of 3.8x as at 30 September 2023; they say that a conservative financial policy combined with increased scale puts the combined group firmly on the path to a strong investment grade credit rating thereby enhancing access to a broader range of funding sources; and
- Bringing together two highly complementary strategic approaches, with a key focus on income compounding, with reliable, repetitive and growing earnings underpinning a progressive dividend with a strong management platform to access new opportunities and deliver enhanced total shareholder returns.
Recommendations
The LXi directors intend to recommend unanimously that LXi shareholders vote in favour of the scheme. They have made irrevocable undertakings to vote in favour in respect of their, and their connected persons’, beneficial holdings of, in aggregate, 96,878,432 LXi s (about 5.65% of LXi’s issued share capital). Artemis Investment Management LLP, which holds just over 128m shares (7.4% of LXi) also intends to vote in favour.
Dividends
LXi shareholders will be entitled to LXi’s third quarterly dividend in respect of the quarter ended 31 December 2023, which is expected to be declared in January 2024 and paid in February 2024.
LondonMetric shareholders will be entitled toLondonMetric’s third quarterly dividend in respect of the quarter ended 31 December 2023, which is expected to be declared in February 2024 and paid in April 2024. On the expected dividend payment timetable only existing LondonMetric shareholders will be entitled to this dividend.
Shareholders in the combined group would receive the LondonMetric fourth quarterly interim dividend for the quarter ending 31 March 2024, which is expected to be paid in July 2024. It is anticipated that this would be approximately equivalent to the value of the quarterly dividend paid by LXi in respect of the corresponding holding of LXi shares in each of the first three quarters of the financial year ending 31 March 2024, with LondonMetric targeting a FY24 dividend increase of 7.4% to 10.2p per share.