The trend for consolidation within European and US logistics real estate markets has now come to Asia-Pacific. The central rationale for ESR’s US$5.2bn (€4.38bn) planned takeover of ARA Asset Management is to capture a bigger slice of the burgeoning growth spurred by digitalisation of Asian economies. The biggest prize for ESR in this deal is ARA’s controlling interest in the pan-Asian logistics group Logos.

In essence, the takeover delivers the merger of Logos and ESR. Both have grown rapidly within various Asia markets, which remain barely touched by the largest global logistics players. The backyard for Logos and ESR is the densely populated Indian subcontinent and Southeast Asia. The combined business will be able to scale up penetration of these markets, and at the same time reinforce ESR’s presence in North Asia.

“The dominant story remains the new economy in Asia – logistics and data-centre business,” says a source from within ESR. “While these sectors represent a smaller percentage of the enlarged group’s AUM, they will represent more than 80% of revenue and earnings.”

The combined company will immediately have total assets under management of US$50bn, mainly in logistics and data centres. “We will be the largest logistics and data-centre player by AUM in Asia-Pacific. There is a strong geographic fit between ESR and Logos. We are complementary,” the source says.

“ESR already has leading positions in markets such as Japan and Korea, and strong positions in other markets. The combined company will be the leading logistics group in India and Southeast Asia, and in Australia and New Zealand. It will accelerate us past the competition. We will emerge the second-biggest behind GLP in China.”

The Logos presence in Southeast Asia is an important part of the equation. Indonesia, Vietnam and India are emerging markets for e-commerce, but they are also countries that are underserved when it comes to modern logistics facilities and data centres.

A recent joint report by Bain, Temasek and Google says Indonesia, Malaysia, Vietnam, Singapore and the Philippines now have 400m internet users, with up to 70% of their populations online. The report says Southeast Asia’s Internet economy will hit US$105bn this year, as the coronavirus pandemic continued to propel the expansion of online shopping.

The Indian government agency, Indian Brand Equity Foundation, predicts that e-commerce in India will reach US$99bn by 2024, growing at a compound rate of 27% until 2024. It says the Indian e-commerce market is expected to grow to US$200bn by 2026 – up from US$38.5bn in 2017. As of September 2020, the number of Internet connections in India had significantly increased to 776.45m, driven by the national Digital India programme, says the agency.

Canada’s Oxford Properties, an existing investor with a 16% shareholding in ESR, will emerge as the second-largest shareholder in the enlarged company. Oxford’s primary interest is in logistics.

“As one of ESR’s largest institutional shareholders, Oxford fully supports ESR’s proposed acquisition of ARA Asset Management and, as such, has provided an irrevocable undertaking to vote in favour of the transaction,” David Matheson, head of Europe and Asia at Oxford Properties, told IPE Real Assets.

“The acquisition significantly accelerates ESR’s growth strategy and provides meaningful scale to its business. We believe the transaction will create value for shareholders by capitalising on a number of secular trends, including the increasing need for physical real estate assets to service the digital economy and the increasing preference among global investors to consolidate relationships to a smaller number of large-scale managers.”

Another Canadian institution, Ivanhoé Cambridge, is also a key dealmaker in the transaction. It was the foundation investor in Logos, and has co-invested with the developer and manager in several markets, including Indonesia and China.

IPE Real Assets understands that Ivanhoé Cambridge has agreed to tip its Logos interest in with ARA’s assets. This would enable ARA to bring an 86% stake in Logos to the deal. Logos founders – John Marsh, Trent Iliffe and Stephen Hawkins – hold the remaining 14%.

Key shareholders support aside, the common denominator in the deal is the US private equity firm Warburg Pincus. It played a critical role in the creation of ESR, which it listed and subsequently sold down. It will have 12.3% holding in the enlarged ESR group.

Warburg Pincus has been an investor and supporter of John Lim and his ARA business for more than decade, and currently has a 46% stake. Jeffrey Perlman, described by some as the visionary who spearheaded Warburg Pincus’ business, particularly in Southeast Asia, chairs the listed ESR and sits on the ARA board as its deputy chair.

While confirming that logistics is a key focus, sources told IPE Real Assets that other aspects of the ARA business were also important – for both diversification and for providing new avenues of growth.

The combined entity will have AUM of US$129bn – ahead of its next-largest Asia-Pacific competitor, Singapore’s CapitaLand – and will run 14 real estate investment trusts, which will play a key role in generating recurring fee income through the management of listed assets.

The company will have on tap capital from some of the world’s largest sovereign wealth funds, like GIC, major pension funds and large institutions like Japan’s Sumitomo Mitsui Banking Corporation.

So why is John Lim, who has had big ambitions for ARA since taking it private in 2017 and oversaw the growth of its AUM from S$37bn to S$95bn today, agreeing to a takeover?

One source says: “John is always looking to take the business to the next level. He understands that in this business, scale is very important. The bigger the platform, the more strategies, more products and more options a manager is able to offer its LPs. That big platform is harder – and slower to achieve – on its own. John sees the synergies the two businesses have and believes they will work well together.”

The source adds that Lim contemplated listing ARA again but instead opted to go down the merger route with ESR. He will place his 16% interest in ARA into the new company, giving him a 4% stake, roughly the same size as his other significant shareholder, Straits Trading. They will take board seats on the new company. Lim has undertaken to lock up his new stake for 36 months.

Another source says Lim is not walking away. “He will play an important role in the combined business. Our teams will work well together and benefit from having him on board.”