Dealtalk: AMB/ProLogis deal would be no merger of equals

NEW YORK Thu Jan 27, 2011 8:12pm EST

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NEW YORK (Reuters) - U.S. warehouse and distribution center owner ProLogis (PLD.N) is substantially larger than rival AMB Property Corp AMB.N both in terms of square footage and market value.

Yet if the two companies' recently announced talks on a "merger of equals" pan out, AMB Property is likely to be the real buyer and ProLogis the target, investors and Wall Street analysts said.

That is because ProLogis, whose massive debt load brought the company to its knees at the end of 2008 and prompted CEO Jeffrey Schwartz to resign, is entering the deal from a position of weakness.

"This is two parties coming together and saying how can we make this work in a way that's beneficial to both, even though AMB is buying ProLogis," said Ian Goltra, portfolio manager with Forward Management, which owns both stocks and has $1.5 billion under management. "ProLogis coming in under their wing is a big positive to the company."

Late Wednesday, the two companies said they were in talks "regarding a potential merger of equals, in which the two companies would combine in an all-stock, at-market transaction."

Both companies said they would not comment further.

Although the companies are the two largest in the sector, a combination would likely pass muster with antitrust authorities, lawyers said.

ProLogis, based in Denver, has spent the past two years selling off properties, refinancing debt and raising capital to pay down its maturing debt.

Prior to the news of the merger talks, AMB shares traded at 33 times adjusted funds from operations (AFFO), a performance measure for a real estate investment trust, while ProLogis traded at 26 times AFFO, reflecting its greater leverage.

Put more simply, ProLogis shares traded at a 10 percent to 12 percent discount to AMB shares before the talks were announced.

"ProLogis is a much larger company with a much weaker balance sheet," Cowen and Co analyst James Sullivan said.

ProLogis owns or manages 435 million square feet (40 million square meters) of "industrial real estate" mainly in the United States, Eastern Europe, the UK and Japan.

AMB, based in San Francisco, is the No. 2 warehouse owner, with about 158 million square feet (15 million square meters) of space, located mostly at or near ports and airports in the United States, China, Brazil and Mexico.

Although ProLogis has more properties, AMB's are more valuable because of their location near ports and airports, closer to major shipping sites.

Chairman and CEO Hamid Moghadam, who entered the Massachusetts Institute of Technology when he was 16, is the "M" in AMB. He formed the company in 1983 with current board member T. Robert Burke (the "B") and Douglas Abbey, (the "A").

Walter Rackowich, ProLogis's former president, stepped into the role of CEO in 2008 to lead the company out of its dire straits. At the time, many analysts speculated that the company would soon follow mall operator General Growth Properties Inc (GGP.N) into bankruptcy.

Forward Management's Goltra said he believes Moghadam would eventually become chairman of a combined company, and Rackowich CEO.

LARGER SLIVER OF BIG PIE

A combination would allow the companies to wring out costly overhead, which costs each about 20 percent of their annual revenue, Sullivan said. Under a combined company, 2 cents of funds from operations could be gained for every $10 million of overhead saved, he said. Analysts said the savings could eventually be as much as $100 million a year.

The combination of the No. 1 and No. 2 industrial real estate owners could catch the eyes of U.S. regulators. But the combined company would control only 5.2 percent of the 11.5 billion square feet of U.S. investment grade warehouse and distribution center space, according to Jones Lange LaSalle.

Regulators looking at the deal would focus on geographical areas to determine areas in which the pair have too high a combined market share. In those areas, property could be sold so the deal could be approved, antitrust experts said.

"There's no show stopper here that's obvious," said John Briggs, an antitrust expert with Axinn, Veltrop and Harkrider LLP.

Robert Doyle of Doyle, Barlow and Mazard PLLC, said regulators would also look at types of industrial real estate.

"Within industrial real estate, there are warehouses and distribution centers," said Doyle.

Warehouses can be in fairly remote areas but customers who hire space in distribution centers tend to want them near ports or airports, so it would be tough for a new company to enter those markets, said Doyle.

"There may be problems at certain discrete ports and airports," said Doyle.

If a deal does not emerge, ProLogis properties could attract other buyers. Blackstone Real Estate Advisors, the real estate arm of private equity firm Blackstone Group LP (BX.N), has been an active buyer and is seeking more properties.

Additionally, there is Singapore-based Global Logistics Properties Ltd (GLPL.SI), whose CEO Jeffrey Schwartz is the former CEO of ProLogis. More than a year ago, Schwartz told Reuters that he would like to compete with ProLogis.

Schwartz declined comment. Blackstone could not be reached for immediate comment.

ProLogis shares closed at $15.87, up 8 percent, on Thursday. AMB shares closed at $34.01, up 3.5 percent. Both stocks hit 12-month highs during the day.

(Additional reporting by Diane Bartz; Editing by Phil Berlowitz)

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