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Why are warehouses such hot merger and acquisition properties?
[NEW YORK] Nothing says drama like warehouse M&A (merger and acquisition). But this once-stodgy business has become the new must-have acquisition with over US$40 billion-worth of tie-ups proposed this year. This includes industry behemoth Prologis's agreed offer on Sunday to buy Liberty Property Trust in an all-stock deal for US$9.7 billion. Investors may find the price a bit rich. But clients including Amazon and Walmart are competing for delivery speed. So being able to offer storage ahead of the so-called last mile could become a gold rush. Wall Street bankers facing sluggish deal volumes are happy to hand them a pan.
Prologis is paying up to increase its US footprint. The capitalised value of the costs the real-estate trust reckons it can cut immediately only cover some two-thirds of the 21 per cent premium that chief executive Hamid Moghadam is forking over. That leaves a US$500 million shortfall, slightly more than the value shareholders had demolished by mid-afternoon Monday – a sign they have little hope that the opaquely described "incremental development value creation" that Mr Moghadam is promising to find longer term will make up the difference.
Prologis isn't the only one buying. Blackstone has dubbed logistics its "highest conviction" theme. Last month Stephen Schwarzman's private-equity shop said it would spend nearly US$6 billion for Colony Capital's warehouses, having already shelled out US$18.7 billion for Singapore-based GLP's logistics assets this year.
E-commerce only represents about 11 per cent of total US retail sales. But it has been growing by double digits while traditional retail sags. Amazon wants to move more customers to one-day, and even same-day, delivery. Target's Web sales grew over 25 per cent in each of the past five years. And Walmart will start delivering groceries into people's fridges.
Such service demands prime warehouse locations. Yet zoning codes restrict building new warehouses around cities like Los Angeles, Seattle and San Francisco. Areas like Houston and central Pennsylvania are already oversupplied, so Prologis is buying these assets based on the idea that these markets will grow into their supply.
Whether that's the case or not, the activity is a silver lining for bankers, with M&A deal value down 28 per cent over the summer months, according to Refinitiv. The sudden craze for warehouses won't reverse this trend, but it's a boost. Now the buyers need to show they can make the deals pay, too.
Logistics real-estate company Prologis on Oct 27 said it has agreed to buy commercial real-estate rival Liberty Property Trust in an all-stock deal worth US$9.7 billion. Prologis will also take on almost US$3 billion of Liberty's debt.
Prologis expects that the two real-estate investment trusts will, once combined, be able to cut US$120 million in costs, with another US$50 million in "incremental development value creation" possible over time.
In addition, Prologis intends to dispose of US$2.8 billion-worth of non-strategic logistics properties and US$700 million of office properties.
BofA Securities and Morgan Stanley are advising Prologis, while Goldman Sachs and Citigroup are working with Liberty Global.