BREAKINGVIEWS-Prologis' UK warehouse bid is ready for delivery

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Yawen Chen

LONDON, July 22 (Reuters Breakingviews) - Britain's Segro SGRO.L has spent the past month arguing that U.S. bidder Prologis PLD.N is undervaluing the UK group's potential. That defensive stance may have helped get some more money out of its $140 billion suitor. But after the American landlord made a new "best and final" proposal on Wednesday, it's hard to argue that the price on the table falls short.

As before, Prologis' final offer is mostly share-based but comes with an optional cash alternative. The key difference is that the headline value is a tenth higher than it was the first time around. Segro investors would get 0.0920 Prologis shares in return for each of their own. Using Wednesday's exchange rates and after accounting for a slight dip in Prologis' stock after the announcement, the offer is worth £10.15 per share, or £13.8 billion ($18.4 billion) in total.

On that basis, the proposal is 37% above Segro's undisturbed price in late June, and 12% above its latest adjusted net asset value per share, which according to Prologis would be among the highest NAV premiums paid for a UK real estate company in the past decade.

Segro’s board may conceivably be right that its logistics and data-centre developments will justify a higher valuation over time. Panmure Liberum analysts reckon the UK warehouse owner is worth closer to £13 per share, after factoring in the value of future projects. The question is whether an acquirer should pay today for gains that depend on years of investment and execution. Shareholders may instead conclude, on the balance of probabilities, that the premium represents adequate compensation for the hypothetical future upside.

A simple price-earning calculation makes the point. Segro recently told investors that it expects around 50 pence of earnings per share in 2030. The group's average 12-month trailing valuation multiple over the past five years is 27.1, according to LSEG Datastream. That suggests the stock might be worth £13.57 at the end of 2030. Discount to today at 8%, and the present value would be £9.60 per share, which is below Prologis' offer. For further comparison, the mean analyst target price for Segro's shares is currently £9.27, according to LSEG data, which is also below the latest bid proposal. The upshot is that the target should probably accept.

A similar conclusion emerges after looking at the deal from Prologis’ perspective. Breakingviews previously estimated, using the bidder's return on investment precedents and after adjusting for execution risk, that the bidder could probably afford to pay just over £10 per share. Wednesday's offer beats that, suggesting that the bidder has pushed itself to the limit. Segro has fought a strong defence, but it's finally time to engage.

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CONTEXT NEWS

U.S. warehousing giant Prologis on July 22 made what it called its best and final proposal to buy British rival Segro for about £14 billion ($18.7 billion).

The proposal comprises 0.0920 Prologis shares in exchange for each Segro share, but also includes a partial cash alternative of up to £3.5 billion.

The implied value, using Prologis' July 21 closing share price and July 22 exchange rates, is about £10.32 per share.

Shares in Segro were trading at £8.95 as of 1540 GMT on July 22. That was roughly 12% below the latest value of Prologis, after accounting for a 1.6% fall in the U.S. group's share price after the announcement.

($1 = 0.7483 pounds)

(Editing by Liam Proud; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))