Prologis/Duke: warehouse deal flies against recession fears

Warehouse operators were a winning investment during the first two years of the pandemic. Demand for industrial storage space surged amid a boom in online shopping. More recently, supply chain bottlenecks have prompted companies to stockpile goods, fuelling demand for places to stash merchandise. 

Prologis is the world’s largest warehouse owner with a $81bn market value. Growing further means finding affordable sites in key cities to build new storage capacity. The US group appeared to have found a solution this week: buying a smaller rival.

The real estate group is acquiring Duke Realty for $25.6bn, including debt. Under the terms of the all-stock deal, Duke shareholders will receive 0.475 of a Prologis share for each of theirs. Based on Friday’s closing prices for the two companies, that values Duke at $55.66 a share and represents a 10 per cent premium.

Prologis had initially offered to buy Duke stock at a ratio of 0.466 of its own shares. That offer, made over a month ago, valued Duke at $61.68 per share, a 29 per cent premium to the group’s share price at the time. 

Investors are unimpressed. Shares in Prologis are down 6 per cent since the deal was announced on Monday. Fears of a slowdown in ecommerce activity have weighed on the sector. 

Investors may also balk at handing a fifth of the new company’s equity to Duke, even though the latter will contribute only 17 per cent of the enlarged group’s ebitda. 

But the warehouse operator deserves the benefit of the doubt. The $310-370mn cost saving it is forecasting for the first year, worth between $2.3bn-$2.7bn taxed and capitalised, more than covers the premium it is paying for Duke.

Demand is also holding up for now. Prologis reported an average occupancy rate of 97.4 per cent during its most recent quarter.

Growth in online shopping will slow, but its long-term prospects are good. Buying Duke will expand Prologis’s presence in key areas including southern California and south Florida. And paying in shares gives plenty of downside protection.