What to do for ESR Reit - Viva Ind Trust Merger?

Exciting news from ESR and VIT! Merger! (BT 19-05-2018)

Are you clear of what to do next? Are there any arbitrage opportunities? I shall bring you through the process of evaluation of the scheme to find out what's best for you. The evaluation is simple yet taunting to investors, especially if you have no time to think through it.

Details of the scheme here:
PDF: VIT SLIDES
PDF: JOINT SCHEME ANNOUNCEMENT

Summary of scheme

• Offer of $0.960 per VIT unit (10% in cash, 90% in new ESR units)
• Ask price of $0.540 per unit in merged entity

Indicative timeline

Assumptions

• Current price of ESR is $0.510 (Last price on market at time of writing)
• Current price of VIT is $0.890 (Last price on market at time of writing)
• Ignore dividends

Evaluation

I am interested to invest in the merged trust but should I buy ESR or VIT now? Let's assume I bought 1000 units of VIT at $0.890 = $890.

With the offer of $0.960 per unit,

Gain as of now = 0.960*1000 - 890 = $70 → G

Cash returned = 10% of $960 = $96

Cash for "buying" new ESR units = 90% of $960 = $864

Number of new ESR units bought at $0.540 = 864 / 0.54 = 1600 units

However, as current market price of ESR ($0.510) is lower than $0.540, I will be recording a loss in this transaction.

Loss from this conversion = [0.540 - 0.510] * 1600 = $48 → L

Overall gain = G - L = 70 - 48 = $22

ROI% based on $890 = 22/890*100% = 2.47%

If factor in max trading comms (typically 0.12% to 0.25%),

ROI% = 2.47% - 0.25% = 2.22%

Sensitivity Analysis of ESR Current Price

At what price of ESR now will make buying VIT units now a bad deal?

Recall L from the evaluation. If L is greater than G = $70, it is a bad deal.

Solve ... 

[0.540 - ESR_Price_now ] *1600 = 70,

ESR_Price_now = $0.49625

This means that if market price of ESR now fell below $0.500, it is a better deal to buy ESR from he market than VIT. This is assuming price of VIT stays 0.890 and above.

Conclusion

If (you are optimistic on the future business of the merged entity)

  If {

      ESR market price is > 0.495
      VIT market price is < 0.895

      }

    Buy VIT

  Else

    Buy ESR.

Else

  Do nothing.