Breakingviews: Why are warehouses such hot M&A property?

Nothing says drama like warehouse M&A. But this once-stodgy business has become the new must-have acquisition with over $40 billion-worth of tie-ups proposed this year. This includes industry behemoth Prologis’s agreed offer on Sunday to buy Liberty Property Trust in an all-stock deal for $9.7 billion. Investors may find the price a bit rich. But clients including Amazon and Walmart are competing for delivery speed. So being able to offer storage ahead of the so-called last mile could become a gold rush. Wall Street bankers facing sluggish deal volumes are happy to hand them a pan.

Prologis is paying up to increase its U.S. footprint. The capitalized value of the costs the real-estate trust reckons it can cut immediately only cover some two-thirds of the 21% premium that Chief Executive Hamid Moghadam is forking over. That leaves a $500 million shortfall, slightly more than the value shareholders had demolished by mid-afternoon Monday – a sign they have little hope that the opaquely described “incremental development value creation” that Moghadam is promising to find longer term will make up the difference.

Prologis isn’t the only one buying. Blackstone has dubbed logistics its “highest conviction” theme. Last month Stephen Schwarzman’s private-equity shop said it would spend nearly $6 billion for Colony Capital’s warehouses, having already shelled out $18.7 billion for Singapore-based GLP’s logistics assets this year.

E-commerce only represents about 11% of total U.S. retail sales. But it has been growing by double digits while traditional retail sags. Amazon wants to move more customers to one-day, and even same-day, delivery. Target’s web sales grew over 25% in each of the past five years. And Walmart will start delivering groceries into people’s fridges.

Such service demands prime warehouse locations. Yet zoning codes restrict building new warehouses around cities like Los Angeles, Seattle and San Francisco. Areas like Houston and central Pennsylvania are already oversupplied, so Prologis is buying these assets based on the idea that these markets will grow into their supply.

Whether that’s the case or not, the activity is a silver lining for bankers, with M&A deal value down 28% over the summer months, according to Refinitiv. The sudden craze for warehouses won’t reverse this trend, but it’s a boost. Now the buyers need to show they can make the deals pay, too.

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