ProLogis and AMB Property will combine their business, but what they really need is for the logistics market itself to get bigger
Consolidating the world’s largest logistics facilities companies will almost certainly turn out be easier than consolidating the vast empty space that is weighing down the warehouse industry.
The merger of ProLogis and AMB Property announced last week will combine two of the world’s largest industrial real estate operators into a single business with some $46 billion in assets and 600 million square feet of warehouse space under a single corporate roof.
The companies say their “merger of equals” will allow them to generate some $80 million in annual cost savings while pulling together management of distribution centers in 22 countries. It’s a response, they said, to the growing global demands of their shipper and logistics provider customers.
But the real driver of the tie-up is the steep decline in trade and, more pointedly, the moves by retailers and manufacturers to scale back inventory holdings to preserve cash and reduce their own costs.
The U.S. industrial vacancy rate grew for eight straight quarters starting in 2008 and started declining only slightly in the middle of last year. Despite an increasingly strong shipping rebound, logistics industry analyst Armstrong & Associates is projecting a modest 2 percent recovery in U.S. commercial warehousing revenue this year.
ProLogis and AMB Property are counting on something stronger, however, and believe they’re in a better position to take advantage of an economic turnaround as one business than as competitors.
“After two or three years of very tough times in the industrial business, the market is improving and turning around,” ProLogis CEO Walt Rakowich told reporters after the announcement. “Our customers are thinking of expansion, whereas a year ago they weren’t doing anything or even contracting.”
Rakowich came into ProLogis at the height of the downturn to repair the finances of a business hit hard by the economic collapse in 2008. The company had been expanding rapidly around the world, and the sudden burst in the global economic balloon left ProLogis heavily exposed with vast unused space in major markets.
“ProLogis has recovered to the point where they can make another move,” said Dick Armstrong of Armstrong and Associates. “It was only 1½ years ago that they had to sell off significant operations because they were so overextended.”
Whatever synergies they expect to get in their internal business may not have a big impact beyond the single warehousing colossus.
Industrial real estate analysts Grubb & Ellis estimated the business the new business will be the largest player in the industry but still will only have 4 to 5 percent of the overall U.S. warehouse market. But that remains a very fragmented market and is highly sensitive to pricing.
“The market is large enough to absorb this merger without creating any monopolistic pricing,” Rene Circ, vice president and national director of research at Grubb & Ellis, said in a report on the merger.
The company will have some advantages over time, however, in dealing with larger customers and in putting together resources, including capital, for new expansion.
“The combined company will be better positioned to capture a customer and keep that customer loyal across the globe,” Circ said. “A company of this size will be better able to offer flexible lease terms and space portability than any other industrial landlord. In return, it should be able to achieve higher rents.”
Although they call it a merger of equals, the companies have not shared equally in the downturn’s pain.
ProLogis lost $129.3 million in the first nine months of 2010 and lost money in five straight quarters. AMB, smaller and more focused on the distribution centers at airports and seaports, was marginally profitable last year.
And although the combination is being artfully designed to integrate both businesses, the financially healthier AMB clearly is taking the corporate lead. AMB CEO Hamid R. Moghadam will become chairman of the combined company, and Moghadam and Rakowich will be co-chief executives until the end of 2012, when Rakowich will retire and leave Moghadam as the sole leader.
The ProLogis wing of the business will take the lead on operations while it appears AMB’s leadership will take on more financial responsibility. Rakowich will focus on operations and integrating the business to achieve “merger synergies,” they said.
The company will be called Prologis, but the AMB headquarters in San Francisco will be the corporate base.