Apollo Global Management’s commercial and residential REITs announced the signing of a merger agreement today, sending their stock prices drifting in opposite directions and prompting a New York law firm to follow up with a statement announcing an ‘investigation’ into the agreement.
Apollo Residential Mortgage (AMTG) will acquire Apollo Commercial Real Estate Finance (ARI) — a REIT that primarily originates, invests in and acquires commercial real estate debt — in cash and shares of ARI common stock, which would value AMTG at approximately $14.59 per share of common stock.
AMTG stockholders will receive approximately 0.417 ARI shares of common stock per AMTG share of common stock and approximately $7.53 per share in cash.
By press time today, AMTG’s stock price had risen nearly 26 percent to $12.90, while ARI was down 8.5 percent to $15.49.
Jeffrey Gault, chairman of ARI’s board of directors and its special committee, said in a statement that the “accretive acquisition… will enable both companies’ stockholders to participate in ARI’s future growth.”
“As we indicated on our earnings call a few weeks ago, ARI continues to see compelling investment opportunities in our core commercial real estate lending business,” he added. “ARI intends to redeploy the capital from the transaction to fund ARI’s current investment pipeline and pursue attractive new commercial real estate debt opportunities expected to drive earnings growth.”
In its statement, Harwood Feffer, the law firm that announced the investigation, said: “Our investigation concerns whether the Apollo Residential board of directors is fulfilling its fiduciary duties, maximizing the value of the company, disclosing all material benefits and costs, and obtaining full and fair consideration for company stockholders.”
An Apollo spokesperson declined to comment. Benjamin Sachs-Michaels, an attorney leading the investigation at Harwood Feffer, also declined to comment, so it wasn’t clear who had hired Harwood Feffer and on what grounds.
Apollo listed a series of benefits for both ARI and AMTG’s stockholders in its announcement: For AMTG investors, the value of the consideration represents a premium to AMTG’s stock price and it will have enhanced trading liquidity and dividend yield, receiving 13.4 million shares of ARI common stock.
ARI meanwhile will be able to issue common stock at a premium to ARI’s book value per share of common stock; and through a new agreement with insurance holding company Athene Holding will provide a short-term $200 million credit facility to ARI to finance the cash portion of the merger, and it will sell approximately $1.2 billion of primarily non-Agency RMBS securities, according to the statement.
But among other concerns, a price of $14.59 per Apollo Residential Mortgage share values the company at a discount to its book value of $16.40 per share as of Dec. 31, noted a specialist with financial services company The Motley Fool, writing that “one could argue that the mortgage REIT is better off winding down in hopes of achieving a valuation of book value vs. selling out at a discount to book.”
“As one further roadblock, Apollo Residential Mortgage last traded at a premium to the merger offer as recently as July 2015. Many of its investors will likely have to realize a loss if this deal goes through,” he added.
Apollo Commercial Real Estate Finance primarily originates, invests in, acquires and manages performing commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities and other commercial real estate-related debt investments.
Among notable recent deals, in July the lender funded a $41 million slice of a $325 million mezzanine loan for the construction of a supertall condominium development at 111 West 57th Street in Midtown Manhattan. An affiliate of Apollo Global Management funded $50 million, while ARI sought to syndicate the balance.