Prologis can spruce up UK warehouse bid
BREAKINGVIEWS-Prologis can spruce up UK warehouse bid The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, July 6 (Reuters Breakingviews) - In UK property deals, offering to pay market price often gets a deal done. That was $130 billion Prologis's PLD.N logic in its bid for UK rival Segro SGRO.L. But by discounting the value of Segro's pipeline of future data and logistics centres, it gave its target every reason to say no. For Prologis Chief Executive Dan Letter, the more important question is whether a higher offer might still be cheaper than building new sites himself.
Last week Letter doubled down on the “compelling value" behind his near £13 billion approach for Segro, arguing the combination would unlock more value than the UK landlord could create on its own. Segro disagreed.
The numbers suggest the target's board has a point. Prologis invests in logistics developments and data centres. Its recent property purchases have returned around 5.2%, a reasonable guide to the minimum return it expects when deploying capital.
A simple way to value Segro is to add up the income its assets could generate. Its existing warehouses and logistics properties earned around £675 million last year in net rental income. With rents rising, analysts at Panmure Liberum expect that to grow to roughly £729 million. Then there's the development pipeline. Segro's logistics projects are expected to earn a 7.5% return on the roughly £2.9 billion still left to spend, per the company's own guidance, generating around £218 million of additional income once complete. Its data centre pipeline adds roughly £416 million more, according to Breakingviews calculations. Add £50 million of annual cost synergies, broadly in line with Jefferies estimates, and Segro's total annual income once everything is fully developed reaches roughly £1.4 billion.
Based on the 5.2% return Prologis has accepted on recent property purchases, £1.4 billion of income implies a total enterprise value of around £27.2 billion. Subtract the £6.1 billion still needed to complete the development pipeline and Segro's £5.9 billion of existing debt, and the implied value for Segro's shares is roughly £15.2 billion, or 1,113 pence per share. That's about 20% above Prologis's current offer.
Prologis may argue that is too much to pay. A number of the planned projects haven't been built yet, and completing them takes time, money and carries risk. One way to reflect that uncertainty is to apply an illustrative £1.5 billion adjustment. That's roughly a quarter of the £6.1 billion still left to invest which would capture executive risk, the time value of money and the return Prologis may expect for completing the remaining pipeline.
After that adjustment, the implied value of Segro falls to around £13.7 billion. That is around 8% above Prologis's current offer. Still, Prologis has made clear it will not pursue growth at any price. Whether it ultimately returns with a higher offer will depend on how much of Segro’s future development value it is prepared to recognise today. The math suggests there is room to go higher without abandoning that discipline.
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CONTEXT NEWS
Segro on June 30 said it continues to reject a possible bid approach from Prologis after the U.S. landlord outlined the strategic and financial rationale for the proposed combination.
In a presentation published on June 30, Prologis highlighted the "compelling value" of its approach, the benefits of having access to public and private capital and its track record of outperformance.
Prologis said on June 26 Segro rejected its £12.6 billion ($16.62 billion) all-share takeover proposal. Under the terms of the proposed combination, Segro shareholders would have received 0.084 new Prologis shares for each share they held, implying a value of 925 pence apiece — a 24.7% premium to Segro's closing price on June 23.
(Editing by Aimee Donnellan; Production by Maya Nandhini and Streisand Neto)
((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))