Prologis (PLD 0.72%) wants to acquire fellow logistics-focused real estate investment trust (REIT) Duke Realty (DRE) to create an even larger industry behemoth. So far, its overtures haven't garnered a positive response from Duke's management. That's leading Prologis to go public with its offer to acquire its smaller rival.
Here's a closer look at the proposed transaction and why Prologis wants to acquire Duke Realty.
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Upping the ante
Prologis disclosed that it initially offered to acquire Duke Realty in late November. The industrial REIT offered an all-stock deal with an exchange ratio of 0.465 per share, a 20% premium to Duke Realty's stock price at the time. Prologis subsequently made additional offers over the past five months. It most recently improved its offer in early May, modestly increasing the exchange ratio to 0.466 per share, reflecting a 34% premium to Duke's stock price at the time.
However, with Duke again rejecting the opportunity to negotiate privately, Prologis is making its proposal public. A news release unveiled its proposal, highlighting that the current exchange ratio it offered values Duke Realty at $61.68 per share, a 29% premium to its most recent closing price.
Prologis also published a letter that its CEO, Hamid Moghadam, wrote to Duke's CEO. In that letter, Moghadam wrote: "On almost every metric (current stock price, [volume-weighted average prices], and consensus price targets), our proposal provides Duke Realty's shareholders with a premium at the absolute top tier of valuation, as compared to other comparable REIT transactions. The terms we are proposing provide Duke Realty shareholders with the opportunity to participate in the growth and upside potential of the combined company, while also delivering an immediate, substantial, and compelling premium."
That valuation premium is worth noting because Duke Realty has routinely traded toward the low end of its peer group. Prologis' offer would eliminate that valuation gap while providing Duke investors with the opportunity to participate in the future upside of the combined business.
Why Prologis wants to acquire Duke Realty
Prologis currently sits near the top of the leaderboard as one of the largest publicly traded REITs with a more than $90 billion market cap. It's the dominant player in the industrial REIT sector, where Duke Realty ranks second with a roughly $20 billion market cap. By acquiring Duke Realty, Prologis would leapfrog American Tower (AMT 1.09%) as the largest REIT, while further widening the gap between its next-closest rival.
That enhanced scale is one of many reasons Prologis is trying to convince its closest peer to agree to a deal. Moghadam pointed out in his letter to Duke's CEO that there are clear strategic and financial benefits to the merger, including:
- A highly strategic and complementary combination.
- The incremental value created from Prologis' platform.
- Enhanced external growth.
- Significant synergies.
- It's immediately accretive to core funds from operations.
He also noted that Prologis has a strong record of creating value through acquisitions. For example, since acquiring DCT Industrial and Liberty Properties Trust, Prologis has outperformed its peers by 41% and 22%, respectively. Moghadam believes that the combination of Prologis and Duke would enable the company to continue to deliver relative outperformance.
It's hoping public pressure will lead to a transaction
Prologis hoped to negotiate privately with Duke Realty and come to a merger agreement. However, Duke doesn't believe the premium Prologis offered is enough. Instead of continuing to incrementally offer more, Prologis is making its offer public to see if Duke's shareholders will put pressure on management to make a deal.
They might be more open to a transaction given the recent performance of Duke's stock, which had fallen 19% in the time between Prologis made its initial offer and publicly disclosed that proposal. Duke has thus underperformed Prologis, which has declined about 14% during that time frame.
Shares of both REITs have been under pressure due to concerns that rising interest rates might cool off demand for warehouse space. Those fears might also persuade investors to push for a deal since the larger company would be in an even better position to navigate potential industry headwinds.
