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It's Official: AMB, ProLogis to Form $46 Billion Industrial ‘Goliath’

Shareholders of the two biggest companies in the nation’s industrial real estate sphere are expected to approve the merger of the two, a union that would create the dominant firm in the industrial sector.

AMB Property Corp. (NYSE: AMB) and ProLogis (NYSE: PLD) this week confirmed a “definitive” agreement to combine through a “merger of equals,” creating the largest global owner, operator and developer of industrial real estate. The combined company is expected to have an equity market capitalization of approximately $14 billion, a total market capitalization in excess of $24 billion, and gross assets owned and managed of approximately $46 billion. According to National Real Estate Investor's most recent Best of the Best report, ProLogis ranks first among the top 25 industrial owners in the U.S. with a portfolio of 478.8 million sq. ft., and AMB ranks second, with 155.1 million sq. ft.

“It’s enormous news in the industry. You’re basically combining titans of the business,” says Al Pontius, managing director of commercial property groups for Marcus & Millichap in San Francisco, where the joint headquarters for the merged company will be based.

“It certainly changes the competitive landscape,” in the industrial sector, says Pontius. The new company is expected to realize an estimated $80 million to $100 million in annual cost savings from eliminating duplicated personnel, systems and facilities in the markets where both now operate, freeing up capital for growth, he adds.

“They were already goliaths,” says Pontius. Now the merged company is likely to further expand, acquiring new assets and developing build-to-suit facilities, after the transaction becomes final.

AMB CEO to become chairman

Under the agreement, the chief executive officer of ProLogis will retire by the end of 2012, and the CEO of AMB, Hamid Moghadam, will lead the combined company.

The new company will be named ProLogis and will trade under the ticker symbol PLD (NYSE). The all-stock merger is intended to be a tax-free transaction.

Each ProLogis common share will be converted into 0.4464 of a newly issued AMB common share. The combined company will be an UPREIT, a business structure that forms an umbrella partnership between property owners and real estate investment trusts. The merger is subject to approval of AMB and ProLogis shareholders, but the merger is expected to close during the second quarter of 2011.

The combined portfolio encompasses approximately 600 million sq. ft. of distribution facilities in key gateway markets and logistics corridors in 22 countries. Both companies have substantial portfolios in North America, Western Europe and Japan. ProLogis is well-established in the United Kingdom and Central and Eastern Europe, and AMB has a significant presence in China and Brazil.

"This merger is about two great companies coming together to create a stronger platform for sustainable value creation and growth. By joining forces, this merger will create a company positioned to be the leading global provider of logistics real estate — a Blue Chip REIT," said Moghadam, the AMB CEO, in a statement.

"The combined company will be a global player active on four continents. This enhanced platform will enable us to better serve the needs of multi-market customers and provide them with both existing world-class facilities and unmatched development capabilities. The combined company will also be well-positioned to create more opportunities and value for both our shareholders and fund investors."

"This combination will help create the most efficient, effective industrial real estate organization with the best, most diverse talent. And, we have developed an achievable plan to put these companies together seamlessly," added Walter Rakowich, ProLogis CEO.

"The merger of these two leading industrial platforms will advance a number of priorities already underway at each company. These priorities include improving efficiency and reducing costs by better aligning our portfolios through the reduction of non-core assets and the recycling of capital into higher growth opportunities; increasing asset utilization by stabilizing the operating portfolio; leasing up the development portfolio; and monetizing the land bank."

ProLogis’ Rakowich and CFO to retire

Moghadam and Rakowich will serve as co-CEOs through Dec. 31, 2012, at which time Rakowich will retire, and Moghadam will become sole CEO of the combined company. Moghadam also will be chairman of the board of the combined company and will be primarily responsible for shaping the company's vision, strategy and private capital franchise, according to AMB.

Rakowich will be principally responsible for operations, integration of the two platforms and optimizing the merger synergies.

Until Dec. 31, 2012, Rakowich also will serve as chairman of the board's executive committee. William E. Sullivan, current ProLogis CFO, will continue to serve as CFO and will retire from ProLogis on Dec. 31, 2012. During that period, Thomas Olinger, AMB's current CFO, will be responsible for day-to-day integration activities and report to the CEOs; he will become the CFO of the combined company.

The board of directors of the combined company will consist of six board members designated by ProLogis and five board members designated by AMB. Irving "Bud" Lyons, III, an existing ProLogis Board member, will serve as lead independent director.

Although the combined company's corporate headquarters will be located in San Francisco, its operations headquarters will be located in Denver.

Executives expect big savings

The transaction is expected to be immediately fruitful, with approximately $80 million in estimated annual gross savings over the 18-month period following the closing.

"We continue to see improvements in operating fundamentals across the globe with increasing occupancies and more positive net absorption," said Rakowich. "As global demand picks up and trade activity returns to more robust levels, we believe our combined footprint and capabilities will allow us to better meet the real estate needs of our global customers and drive future growth."

The combined company will be a market leader in the industrial real estate private capital sector, with a broad range of product offerings across the major markets including the Americas, Europe and Asia and across the risk/return spectrum, said Moghadam.

Following the merger, former ProLogis equity holders will hold approximately 60% of the combined company's equity, and former AMB equity holders will hold approximately 40% based on the exchange ratio.

The combined company's owned and managed assets, excluding development, were on average approximately 93% leased as of Dec. 31, outperforming market averages over the last three years. "Our goal is to create one of the strongest balance sheets in the REIT industry," says Sullivan.

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