Recommended All-Share Merger of LXI REIT plc and LondonMetric Property plc

11 January 2024

RECOMMENDED ALL-SHARE MERGER OF

LXI REIT PLC (“LXI”)

AND

LONDONMETRIC PROPERTY PLC (“LONDONMETRIC”)

to be effected by means of a scheme of arrangement
under Part 26 of the Companies Act 2006

Summary

The boards of directors of LondonMetric and LXi are pleased to announce that they have reached agreement on the terms of a recommended all-share merger pursuant to which LondonMetric will acquire the entire issued and to be issued ordinary share capital of LXi (the “Merger” forming the “Combined Group“). It is intended that the Merger will be effected by means of a scheme of arrangement under Part 26 of the Companies Act.

Under the terms of the Merger, each LXi Shareholder will be entitled to receive:

for each LXi Share held: 0.55 New LondonMetric Shares (the “Exchange Ratio”) ⁽¹⁾

On the basis of the Undisturbed Closing Price per LondonMetric Share of 197.4 pence on 15 December 2023 (being the last Business Day before the Offer Period began), the Merger values the entire issued and to be issued ordinary share capital of LXi at approximately £1.9 billion and:

·    represents a premium of approximately 9 per cent. to the Undisturbed Closing Price per LXi Share of 99.5 pence;

·    represents a premium of approximately 13 per cent. to the volume weighted average Closing Price per LXi Share for the one-month period ended on 15 December 2023 of 95.7 pence; and

·    implies an NTA discount of 4 per cent. based on each of the LondonMetric and LXi Rolled-Forward Unaudited EPRA NTAs⁽²⁾.

Following completion of the Merger, existing LondonMetric Shareholders will hold approximately 54 per cent. and LXi Shareholders will hold approximately 46 per cent. of the enlarged issued share capital of LondonMetric.

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⁽¹⁾   The Exchange Ratio is based on an adjusted NTA to adjusted NTA approach, taking into account the fair value of debt and derivatives, potential liabilities in respect of German taxation and the termination of LXi’s management contract.

⁽²⁾      When applying the Exchange Ratio to the LondonMetric Rolled-Forward Unaudited EPRA NTA.

Highlights of the Merger

The boards of directors of each of LondonMetric and LXi 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 the Combined Group having a EPRA NTA of approximately £4.1 billion, becoming 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 £6.2 billion portfolio aligned to structurally supported sectors, with 93 per cent. 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,⁽³⁾ 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 per cent. in the medium term;

·      Leadership by a highly regarded management team with strong shareholder alignment, with the Combined Group drawing on the strengths of both companies under the leadership of LondonMetric’s highly experienced board and senior management team to create a leading internal management platform holding material shareholdings with deep market knowledge and strong occupier relationships. The Combined Group will benefit from a highly disciplined approach to capital allocation through pursuing identified opportunities within the combined portfolio for asset and investment management, recycling capital and seizing new and accretive growth opportunities;

·      Strong income longevity and security, with a sector leading WAULT of 19 years on FRI leases, 99 per cent. occupancy and high quality occupier covenants. Strong income compounding prospects will be delivered through index-linked and fixed uplift leases (which together total 80 per cent. of the rent roll) and reversionary open market rent reviews (20 per cent. of the rent roll) in sectors that enjoy high barriers to entry and strong levels of occupier demand;

·      Delivery of a Combined Group with a resilient capital structure, with well staggered debt maturities and a conservative LTV of approximately 31 per cent., on a pro forma basis taking into account LXi’s announced £210 million disposal of Travelodge assets⁽⁴⁾, with weighted average cost of debt of 3.9 per cent., weighted average debt maturity of 5.6 years and, following the arrangement of £700 million of unsecured debt facilities to replace £625 million of secured LXi facilities, £740 million of undrawn headroom;

·      Enhanced and robust credit characteristics, with improved credit metrics including net debt / EBITDA of 7.2x and ICR of 3.8x as at 30 September 2023; 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

·      The bringing together of 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.

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⁽³⁾      The statement regarding cost and operating synergies resulting from the Merger is not intended as a quantified financial benefit statement and should not be construed as such and is not subject to the requirements of Rule 28 of the Takeover Code. The statement should not be interpreted to mean that the cost and operating synergies will necessarily result in a quantifiable benefit to the Combined Group.

⁽⁴⁾      Excluding the impact of disposal costs.

Recommendations

The LXi Directors, who have been so advised by Lazard and Jefferies as to the financial terms of the Merger, unanimously consider the terms of the Merger to be fair and reasonable. In providing their advice to the LXi Directors, Lazard and Jefferies have each taken into account the commercial assessments of the LXi Directors. Lazard and Jefferies are providing independent financial advice to the LXi Directors for the purpose of Rule 3 of the Takeover Code.

Accordingly, the LXi Directors intend to recommend unanimously that LXi Shareholders vote in favour of the Scheme at the Court Meeting and vote in favour of the LXi Resolution to be proposed at the LXi General Meeting (or, in the event that the Merger is implemented by way of a Takeover Offer, to accept or procure acceptance of the Takeover Offer) as they have irrevocably undertaken to do in respect of their, and their connected persons’, beneficial holdings of, in aggregate, 96,878,432 LXi Shares representing, in aggregate, approximately 5.65 per cent. of the issued ordinary share capital of LXi as at the Latest Practicable Date.

The Merger constitutes a reverse takeover for LondonMetric for the purposes of the Listing Rules. Accordingly, the Merger will be conditional on the approval by the LondonMetric Shareholders of the Merger and related matters at the LondonMetric General Meeting.

The LondonMetric Directors have received financial advice from Barclays, Peel Hunt and J.P. Morgan Cazenove in relation to the Merger. In providing their advice to the LondonMetric Directors, each of Barclays, Peel Hunt and J.P. Morgan Cazenove have relied upon the LondonMetric Directors’ commercial assessments of the Merger.

The LondonMetric Directors consider the Merger to be in the best interests of LondonMetric Shareholders as a whole and, accordingly, the LondonMetric Directors intend to recommend unanimously to LondonMetric Shareholders to vote in favour of the LondonMetric Resolution to be proposed at the LondonMetric General Meeting which is to be convened to approve the Merger and related matters, as the LondonMetric Directors have irrevocably undertaken to do in respect of their own beneficial holdings of, in aggregate, 9,334,273 LondonMetric Shares, representing approximately 0.85 per cent. of the issued ordinary share capital of LondonMetric as at the Latest Practicable Date.

Proposed director for the Combined Group

Following completion of the Merger, it is expected that Nick Leslau will join the LondonMetric Board as a non-executive director. The LondonMetric Board believes that this appointment will deliver an appropriately-sized and balanced board, with the complementary experience and skills necessary to drive the Combined Group forward following the Merger and to provide good continuity for LXi Shareholders together with very strong shareholder alignment through the approximately 2.58 per cent. holding in the Combined Group to be held by Nick Leslau and certain entities associated with him of 52,788,123 LondonMetric Shares following completion of the Merger.

Shareholder support and Lock-in Commitments

In addition to the irrevocable undertakings received from the LXi Directors, LondonMetric has also received a letter of intent from Artemis Investment Management LLP to vote in favour of the Scheme at the Court Meeting and to vote in favour of the LXi Resolution to be proposed at the LXi General Meeting (or, in the event that the Merger is implemented by way of a Takeover Offer, to accept or procure acceptance of the Takeover Offer), in respect of a total of 128,066,087 LXi Shares, representing approximately 7.46 per cent of the issued ordinary share capital of LXi as at the Latest Practicable Date.

In total, therefore, LondonMetric has received irrevocable undertakings and a letter of intent representing, in aggregate, approximately 13.12 per cent. of the issued ordinary share capital of LXi on the Latest Practicable Date.

In addition, Nick Leslau has agreed that, subject to certain customary exceptions, during the period of 12 months following the Effective Date, he and certain entities associated with him will not offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, 39,591,092 New LondonMetric Shares (or any interest therein or in respect thereof) issued on completion of the Merger or enter into any transaction with the same economic effect as any of the foregoing.

Further details of these irrevocable undertakings and the letter of intent are set out in Appendix 3 to this Announcement.

Dividends

LXi Shareholders will be entitled to receive and retain 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 to LXi Shareholders on LXi’s register of members on a record date set prior to the expected Scheme Record Time.

LondonMetric Shareholders will be entitled to receive and retain LondonMetric’s third quarterly dividend in respect of the quarter ended 31 December 2023 (the “LondonMetric Third Quarterly Interim Dividend“), which is expected to be declared in February 2024 and paid in April 2024 to LondonMetric Shareholders on LondonMetric’s register of members on a record date set on or prior to the expected Scheme Record Time. On the expected dividend payment timetable only existing LondonMetric Shareholders will be entitled to this dividend.

Based on the expected timetable for the Merger to become Effective, Scheme Shareholders who retain their New LondonMetric Shares following completion of the Merger would receive the LondonMetric fourth quarterly interim dividend in respect of the Combined Group for the quarter ending 31 March 2024, which is expected to be paid in July 2024. It is anticipated that the value of the dividend received by such Scheme Shareholders in respect of their New LondonMetric Shares for the quarter ending 31 March 2024 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 per cent. to 10.2p per share. ⁽⁵⁾

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⁽⁵⁾      This is a target and not a profit forecast.

Timetable and conditions

·    It is intended that the Merger will be implemented by way of a scheme of arrangement under Part 26 of the Companies Act 2006. However, subject to the Panel’s consent, LondonMetric reserves the right to elect to implement the Merger by way of a Takeover Offer.

·    Under the terms of the Merger certain resolutions related to the Merger will be put to (i) the LXi Shareholders at the Court Meeting and at the LXi General Meeting and (ii) the LondonMetric Shareholders at the LondonMetric General Meeting, and the Merger is conditional upon such resolutions being passed by the requisite majorities. In order to become Effective, the Scheme must be approved by a majority in number of Scheme Shareholders present and voting at the Court Meeting, either in person or by proxy, representing at least 75 per cent. in value of the Scheme Shares held by those Scheme Shareholders. In addition, at the LXi General Meeting, the LXi Resolution must be passed by LXi Shareholders representing at least 75 per cent. of the votes validly cast on that resolution, whether in person or by proxy. The LXi General Meeting will be held immediately after the Court Meeting.

·    At the LondonMetric General Meeting, the LondonMetric Resolution requires the approval of a simple majority of votes cast, in person or by proxy, in order to be passed. The LondonMetric General Meeting will be held on or around the same date as the LXi Meetings.

·    The Merger will be implemented in accordance with the Takeover Code and on the terms and subject to the Conditions which are set out in Appendix 1 to this Announcement and on the further terms and conditions that will be set out in the Scheme Document.

·    It is expected that the Scheme Document, containing further information about the Merger and notices of the LXi Meetings, together with the Forms of Proxy and the Combined Circular and Prospectus containing further information on LondonMetric and the Combined Group and notice of the LondonMetric General Meeting, will be published as soon as practicable and, in any event, within 28 days of this Announcement, unless LondonMetric and LXi otherwise agree, and the Panel consents, to a later date.

·    It is expected that the Scheme will become Effective by 31 March 2024, subject to the satisfaction or waiver (as applicable) of the Conditions and the further terms set out in Appendix 1 to this Announcement and to the full terms and conditions of the Merger which will be set out in the Scheme Document. An expected timetable of principal events will be included in the Scheme Document.

·    This Announcement contains property valuations supported by reports from the external valuers (as defined by the Royal Institution of Chartered Surveyors’ Valuation – Global Standards (2022)) for both LXi and LondonMetric as at 31 December 2023 pursuant to the requirements of Rule 29 of the Takeover Code.

Commenting on the Merger, Andrew Jones, Chief Executive of LondonMetric, said:

“This is a compelling transaction which creates the UK’s leading triple net lease REIT and underscores our ambitions to leverage our management platform and access exciting new opportunities across the UK real estate market.  

The deal gives us access to a very well let triple net portfolio of key operating assets and brings together two highly complementary investment approaches that embrace the qualities of income compounding.

The combined £6.2 billion portfolio will have no legacy assets, full occupancy, high occupier contentment and exceptional income longevity with a high certainty of growth – both organically and contractually. 

In the world of income compounding, bigger is better and the deal will deliver economies of scale, substantial cost savings, better liquidity and improved terms in both debt and equity markets which will drive accelerated earnings and dividend progression. Increased scale will allow us to look at the widest possible range of opportunities and we will have more tools at our disposal to carry on our trade, which will allow further operating synergies. 

Our team is strongly aligned to shareholders and has deep real estate experience with a strong track record for capital allocation, asset recycling and active management. This strategy will not change and our proactive culture will remain intact, and whilst we will undoubtedly look to reposition parts of the portfolio, this will be more of a tilt than a pivot with logistics remaining our strongest conviction call for organic growth.”    

Commenting on the Merger, Cyrus Ardalan, Chairman of LXi, said:

“LXi has delivered strong growth and outperformance since its IPO in 2017 thanks to its high quality, resilient and actively managed long income portfolio. The Board of LXi would like to thank the LXi REIT Advisors team for the important contribution they have made to the company’s success.

The merger with LondonMetric will build on the strengths and track records of both LXi and LondonMetric. It will create the UK’s leading triple net lease REIT with an enlarged and more diversified portfolio aligned to structurally supported sectors, a robust and predominantly unsecured capital structure, broader appeal to investors and enhanced share liquidity, and a highly regarded internal management team.

The Merger will position the Combined Group for continued growth and outperformance and the delivery of reliable, sustainable and progressive dividends through the cycle, thereby underpinning superior total shareholder returns.”