PLD-AMB Merger: A Colossal UPREIT? - Analyst Blog

Redefining the market dynamics, ProLogis (PLD), a leading global provider of distribution facilities, has merged with its rival AMB Property Corp. (AMB) in an all-stock deal  to become a behemoth of sorts in the industrial real estate sector.

The combined entity would have a pro-forma equity market capitalization of approximately $14 billion and a total market capitalization of over $24 billion.

According to the terms of the agreement, each ProLogis share will be converted into 0.4464 of a newly issued AMB share, and the combined company will be treated as an UPREIT – an innovative business structure that forms an umbrella partnership between property owners and real estate investment trusts (REITs).

The transaction is expected to complete during the second quarter of 2011. The combined entity will be named ProLogis and will trade under the ticker symbol PLD.

The merged entity brings two of the most complementary customer franchises on the same platform in industrial real estate market  and create a $46 billion worth of assets at  their  disposal. The combined portfolio spanning approximately 600 million square feet of modern distribution facilities is located in key gateway markets and logistics corridors of 22 countries across the globe.

Both the companies have a significant presence in North America, Western Europe and Japan. While ProLogis is relatively strong in the U.K., Central and Eastern Europe, AMB has a considerable presence in China and Brazil.

The merger would lead to potential cost savings through operational synergies and would help create a stronger platform for value creation and sustainable growth. The transaction is expected to be accretive with immediate effect.

ProLogis expects the merger to result in approximately $80 million in annual gross G&A savings upon full integration. With the merger, the private capital business of both the companies is also expected to snowball elevating it to a market leading position, with a broad range of product offerings across the major markets including the Americas, Europe and Asia and across the broad risk-return spectrum.

Both the CEOs of AMB and ProLogis will serve as co-CEOs through December 31, 2012, after which the CEO of erstwhile AMB will become the sole CEO of the combined company. The merged company's corporate headquarters will be located in San Francisco, while its operational headquarters will be located in Denver.

With the merger, former ProLogis shareholders will hold approximately 60% of the combined company's equity, while former AMB shareholders will hold the balance 40%. The combined entity will boast of unrivaled high-quality geographically well-located assets.

On a pro-forma basis, the combined portfolio was on an average approximately 93% leased as of December 31, 2010, outperforming market averages over the last three years. The merged entity is expected to have the strongest balance sheet in the sector with ample liqudity and a  spread-out debt maturity schedule that reduces pressure for repayment.

The potential “merger of equals”  would arguably create a leading global provider of logistics real estate, serving multi-market customers with both existing world-class facilities and unmatched development capabilities.

The transaction is a win-win deal for both the participating companies and would remain as the first biggest deal since recession (involving publicly traded REITs) of this echelon in the real estate history.

We presently have a Neutral rating on both ProLogis and AMB, which currently enjoys a Zacks #3 Rank that translate into a short-term Hold recommendation indicating that the stocks are expected to perform in line with the overall U.S. equity market for the next 1–3 months.