RBC Capital Markets downgraded rating of real estate investment trust operator ProLogis (NYSE: PLD) to "sector perform" with above average risk qualifier from "outperform" and lowered its price target to $15.25 from $16.
ProLogis and smaller rival AMB Property Corp. (AMB) have agreed on Monday to combine both the companies through a merger of equals. Under the deal terms, each ProLogis common share will be converted into 0.4464 of a newly issued AMB common share.
The parties currently expect the transaction to close during the second quarter of 2011. Upon the tax-free merger deal, the new entity will be named ProLogis, with the ticker symbol PLD on the New York Stock Exchange.
"Following the conference call with the management teams of both AMB and ProLogis Monday morning, we believe that while incremental value appears to lie in ProLogis shares per our prior view, this merger transaction has been long negotiated and will likely make any suitor offers for ProLogis challenging," said Dave Rodgers, an analyst at RBC Capital Markets.
"With the merger consideration locked at pre-announcement levels and announced synergy projections in line with our prior view, our $15.25/sh target is consistent with ProLogis' share of our combined firm valuation," Rodgers added.
As previously suggested by both companies, the merger pricing was locked at a share-for-share ratio prior to the pre-release of information by the Wall Street Journal on Wednesday January 26. The transaction is an at-the-market deal with nearly 0.45 AMB shares issued for every ProLogis share.
In aggregate, the combined firm is likely to experience $150 million of merger costs. The components include $50 million to $60 million of transaction and legal costs, $15 million to $20 million of transfer taxes, $60 million of severance and other synergy costs and potentially $10 million to $20 million of bank and bondholder costs.
Rodgers said that with ProLogis as the acquiring entity from an accounting view, change of control provisions would occur primarily on the AMB side. However, these have been waived at the executive level.
Rodgers said the merger is expected create a nearly $46 billion combined company and generate annualized operating and overhead synergies of $80 million, or $0.19 per share of FFO, beginning in full year 2013 (on an expensed basis).
"Leverage of the combined firm will improve modestly to 7.3 times of net debt to EBITDA on an annualized basis once synergies are achieved. We expect that ongoing deleveraging will be needed to push leverage under 7 times and will occur by way of lease-up, land sales and property dispositions near term," said Rodgers.
Shares of ProLogis rose 0.40 percent to $14.98 in the pre-market trading on NYSE.