Brookfield wins warehouse giant Segro for £1.1bn

Brookfield, a major investment group in the world, has outbid a competitor and agreed to a deal worth £557million for Tritax EuroBox. Segro, Europe’s largest shed owner , had made an offer of 68.4p per EuroBox share, but this bid is 69p. Segro had offered £552million at the time. However, its share price fell since then, and the offer is now worth about £525million.

EuroBox, which has warehouses worth £1.2 billion, mainly in Holland and Germany recommended initially that shareholders accept Segro’s offer. However, the directors now support Brookfield’s all-cash, higher offer. Many thought that Brookfield had a chance to make a higher offer, but the majority of the industry believed Segro was the winner. One fund manager was “very surprised,” that Brookfield outbid Segro. EuroBox is valued at £1.1 billion, including debt.

Segro has yet to say if it will sweeten the offer. It has only said that it has “noted the competing offer”, and will issue a statement “if necessary”. The stock market, however, seems to expect it to return: EuroBox shares climbed by 2p or 2.1% on Thursday, closing at 71 1/4p – a little above Brookfield’s offer.

Brookfield, which owns a 50% stake in Canary Wharf Group and has “for some years” been following EuroBox, stated that it was “impressed by its performance”. Segro snuffed out the takeover talks between the two companies at the start of September. Brad Hyler said that Tritax EuroBox had a portfolio of high-quality logistics assets located in strategic locations throughout Europe. These assets complement our existing portfolio. We will actively manage them, provide access capital, build new relationships with tenants, and support overall platform growth.

Robert Orr said that the board decided to support Brookfield’s bid instead of Segro because it “represents a premium over the current value offered by Segro and ensures Tritax EuroBox investors will benefit from an increase in value beyond the value of their original investment.” He added that because Brookfield’s cash offer gives EuroBox shareholders the flexibility to reinvest, he said.

While Brookfield’s offer is higher than Segro and above the price at which EuroBox shares traded before any of the interested parties became known, it still remains 12 percent below EuroBox net asset value per share. If this deal is completed, Brookfield would buy EuroBox’s entire portfolio at a price that’s 12 percent less than the most recent independent valuation.

This discount is a reflection of the uncertainty investors have about the future trajectory of commercial real estate values. Even warehouses which outperformed the majority of other areas on the market have seen their value fall by about 25 percent over the last two-and-a-half years.

In the industry, there is a growing feeling that prices have stabilized now that interest rates tend to be on the decline. David Sleath’s, Segro’s chief executive, called the bottom of a two-year downturn in the commercial property market back in the Spring when he convinced investors that the group needed another £900million. Tritax EuroBox is a landlord who has a portfolio of more than £1billion. This may appear to be a large company but it’s not.

This is why EuroBox shares have been largely ignored by the stock market. Their value had nearly halved over the past two years, before Brookfield announced its interest in EuroBox in June. Since some time, bankers have said that it is becoming more difficult to convince large institutions to invest in property companies listed on the stock exchange with a value less than £2billion.

They are concerned that it is more difficult to sell shares in “subscale” firms, as there are less investors willing to buy. One fund manager compared them to “lobster pots; the lobster is able to get in but it’s difficult to get out”.

Robert Orr (EuroBox’s Chairman) pointed out, last month, while he was still recommending Segro’s offer, selling out to Segro would allow his investors to “[take] benefit of Segro’s significantly greater trading liquidty”.

This fear of being perceived as too small is partly driving the wave of consolidation among UK listed property owners. Some point out that economies of scale can be achieved by reducing operating costs or gaining access to lower-cost debt.

LondonMetric has, for instance, been catapulted to the FTSE 100 following its merger with LXi Reit. This smaller rival owned the land where Thorpe Park, Alton Towers, and other attractions are located.

Over the last five years, 25 mergers and purchases have taken place in the sector. Matt Saperia is a real estate expert at Peel Hunt. He said: “We expect more public mergers and privateisations in the next years.”

Private equity firms have taken advantage of the huge discount between the share prices of many landlords and their net assets values to make several large take-private deals.

The stock market effectively told companies that they should expect the value of buildings to continue to decrease. However, Brookfield and Blackstone who take a more long-term perspective than the stock market punters have made a different bet.

Blackstone paid PS511m last year for Industrials Reit – a warehouse owner – and Brookfield is now targeting EuroBox. These American giants were lured in by the combination of low share values and a cheap pound. Shurgard, a US self-storage group, paid almost PS400m for Lok’nStore last summer.