The emperor's new clothes

Europe At the beginning of April, ProLogis must have still been feeling rather secure in its long-held position as the world's largest industrial space developer. Although the glory days of speculative warehouse development before the financial crash are now but a memory, the US giant still had its European portfolio of properties safely under management. Or so it thought - until Goodman and APG threatened to take it away from them.

The scramble for shares
ProLogis European Properties (PEPR), which is listed on the Amsterdam Euronext exchange, had a portfolio of 232 buildings in eleven European countries at the end of March, with a combined area of 4.9 mln sqm and an estimated market value of EUR 2.8 bln. At the time, ProLogis, which set up PEPR in 1999, held a 33 pct stake in the company as well as the management rights to its properties. PEPR also had (and still has) debts of around EUR 1.5 bln. A few days later, however, Australian industrial developer Goodman teamed up with PEPR's Dutch stakeholder Algemene Pensioen Groep (APG) to make an indicative, non-binding proposal to acquire PEPR and the management rights of the portfolio, offering EUR 6 per ordinary unit - a bid that valued the company at around EUR 1.14 bln. However, this could not go through without ProLogis' consent, and the initial response of the latter was to give these advances the cold shoulder, turning down what amounted to an offer of EUR 372 mln for its one-third stake. In a ProLogis press release on April 12th, the developer insisted that it had no intention of selling its holding or relinquishing management rights to the PEPR portfolio. But this was not the end of the matter. Goodman and APG's next move was to announce their intention to make a cash bid together with other potential investors for 100 pct of the ordinary units of PEPR. If ProLogis wanted to keep its management rights, it now had a fight on its hands. On April 14th, ProLogis announced that it had bought up around 11 mln units, bringing its stake up to 38 pct. In the same press release, the company also revealed that it was to make a mandatory cash offer for all the units it did not own in PEPR of EUR 6.10 per unit - a 22 pct premium over the closing share price on April 12th. For this purpose, ProLogis took out a USD 732 mln (EUR 500 mln) loan from JP Morgan Chase & Co. to buy the shares it needed to see off the takeover bid.
The affair took a decisive turn when APG announced on May 6th that it had agreed to sell its stake in PEPR back to ProLogis, after the latter increased its offer to EUR 6.20. This transaction brought ProLogis' holding up to 59.91 pct. However, the management company of PEPR gave a less than enthusiastic response to this latest development. While acknowledging in a press release that while ProLogis was now the majority stakeholder, PEPR also described the EUR 6.20 offer as undervaluing the company and "inadequate from a financial point of view" - although, in the words of Geoffrey Bell, chairman of the PEPR Board, it also provided "a certain outcome to all unit-holders, who may choose to avail themselves of the offer." Finally, on May 18th ProLogis announced that with the closing of the mandatory offer it held 89.58 pct of PEPR's ordinary units.

Turning the tables
ProLogis' strong reaction to the joint takeover bid may have just succeeded in salvaging its reputation, but also - crucially - it has retained its management rights to the PEPR portfolio. As an anonymous market source told us: "In effect, developers are now asset managers working for the investors. The fight is between developers like Goodman and ProLogis over these asset management rights." In the view of this expert, what has happened since the credit crunch is that developers such as ProLogis have been in need of alternative sources of finance for new projects, and so have had to sell shares and invite outside investors to take greater stakes in portfolios. However, the result of this diversification of shareholder structure has not been greater access to the much-needed finance for new development projects; instead, investors such as APG have now realised that they have greater power to pick and choose asset managers - and it was this that led the Dutch investor to invite Goodman to muscle in on what is now ProLogis' main business. Whether Goodman will attempt to break into this market again in the near future remains to be seen, but with the shareholder structures of a number of industrial developers having changed so significantly since the financial crisis, the possibility remains open for other investors to buy out warehousing portfolios and appoint new asset managers.
NN