Logistics facilities developers in mega-merger

Logistics facilities developers in mega-merger    The two largest U.S. owners and operators of industrial real estate space are planning to merge, with AMB Property Corp. reportedly close to an $8.7 billion deal in stock to acquire ProLogis.
   The companies have characterized the deal as a 'merger of equals,' but most analysts see San Francisco-based AMB as the stronger of the two despite being smaller than Denver-based ProLogis. Both companies are in the business of building logistics facilities for shippers and logistics companies.
   The deal comes as ProLogis has lumbered under the weight of its rapid global expansion through the last decade, an expansion that meant it was overleveraged when cargo demand stalled in late 2008 through mid-2009. The company sold off its portfolio of Chinese facilities in 2010, but operates primarily in the United States, Europe and Japan.
   AMB has an international presence in China, Mexico and Brazil, but ProLogis' global footprint and reputation is larger, giving it more name recognition and a wider network of assets.
   'Pre-crisis, this merger was quite unthinkable,' Rene Circ, vice president, national director of research, industrial for real estate giant Grubb & Ellis, wrote Monday. 'ProLogis, the larger of the two, was expanding globally at an astronomical rate, monetizing its global portfolios through the public markets and raising billions of dollars for their funds. Merging with AMB would have been a distraction.
   'Now, this merger, despite being quite unexpected and even shocking, makes perfect sense. AMB, currently the stronger company and considered the acquirer by some, will gain access to new global markets and customer base that ProLogis has been cultivating for a decade, while ProLogis will be able to help its deleveraging effort, which has tied the company down for the past two years.'
   Circ said market segmentation would keep AMB-ProLogis pricing power in check.
   'Most other landlords will have to compete on price,' he said. 'Logistics space is commodity-like in that it is price elastic. Thus, this merger could have an adverse impact on rents as smaller landlords undercut rents to attract customers who otherwise would be attracted to the one-stop-shop of industrial real estate.
   According to reports, the companies will operate with twin chief executive officers — AMB CEO Hamid Moghadam and ProLogis CEO Walt Rakowich — with Moghadam (an initial founder of AMB) taking over alone in 2012.
   'In the short run, we expect an increased level of activity,' Circ said. 'The combined company will go through a period of portfolio reconfiguration, resulting in increased sales activity. We also expect the merged entity to accelerate its investment activity, as proceeds come in, although some will still be used for delevering. Increased activity is positive for the entire industrial real estate space; investors benefit by more supply entering the market; service providers, like Grubb & Ellis, benefit by helping their clients meet their investment objectives. However, the overall industrial market is still in its early stages of recovery, so we do not expect the merged entity will have much pricing power, despite its relatively large market share.'
   Circ said the merger won't unduly affect the overall industrial market, despite the size of the joint company.
   'In the long run, this merger will be good for the two companies, as they will be able to cut costs and better serve their customers on a global basis,' he said. 'On the overall industrial market, the impact will not be noticeable. Industrial real estate is the one property type that attracts the most investors, as it requires the smallest amount of capital. It also attracts the greatest variety of businesses. The market is large enough to absorb this merger without creating any monopolistic pricing.'