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DENVER-Monday’s news of ProLogis’ $4.9-billion acquisition of Catellus Development Corp. came as a surprise to many industry observers. With combined assets totaling 350 million sf in more than 2,250 facilities, the new company will hold the largest network of warehouses and distribution services in the world.

Ed Lowenbaum, senior vice president with Trammell Crow Co., says this kind of industry muscle means many things to many people. “It means significantly more competition for existing developers and REITs,” he comments. “For brokers, it’s probably not a big change; it means one more service provider, and both are pro-broker organizations. For users, it’s just a bigger national player they can leverage off of.”

Under the terms of the agreement, shareholders of San Francisco-based Catellus can receive $33.81 for every share of Catellus they own. This results in a 16.1% premium over the closing price of Catellus shares on Friday, which posted at $29.24 on the New York Stock Exchange.

According to the agreement, 65% of the Catellus shares will be exchanged for ProLogis common shares, while the balance of the Catellus shares will be exchanged for cash. As a result, Catellus stockholder elections will be prorated so the merger consideration is fixed at 56.7 million ProLogis shares and $1.255 billion in cash, or $11.83 per Catellus share. At Monday’s closing, shares of Catellus rose $3.75, or 13%, to close at $32.99, while ProLogis shares fell $1.26, or 3%, to close at $40.11.

ProLogis will also assume $1.3 billion in Catellus debt and transaction costs as part of the deal. ProLogis expects the transaction to be accretive to the company’s estimated 2006 FFO by 3% to 5%.

Following the completion of the deal, the board of the combined company will include 12 ProLogis members. It will also include Nelson Rising, Catellus’ chairman and chief executive officer, and one other Catellus board member to be announced at a later date. Ted Antenucci, president of Catellus, will be named president of global development.

“ProLogis has increased its development capabilities with the personnel they ratcheted up the ladder,” says Lynn Reich, executive vice president with Rosemont, IL-based Colliers Bennett & Kahnweiler. “They’re keeping the top people at Catellus, so they basically just added a development arm. This is really good for ProLogis, because there isn’t a whole lot of redundancy between the two. This is a case of where one and one make three.”

Following the ProLogis announcement, New York-based Fitch Ratings released a statement saying the marriage was a “modest-positive” for ProLogis. Fitch believes after the merger, the new company will have a hand in 13% of all domestic distribution/bulk real estate development.

Fitch’s Matthew D. Gallino tells GlobeSt.com that while the combined expertise and experience of the two companies should lead to continued success in ProLogis’ effectiveness at developing and selling high-quality assets, it may also increase development risk on the company’s balance sheet. That’s not to say ProLogis has entered into a risky move but that taking on new assets is “riskier than owning stabilized property” like solid industrial assets.

Unlike ProLogis, Catellus engages in several property types. The company’s current development projects include the redevelopment of the Robert Mueller Airport in Austin, TX; Pacific Commons in Fremont, CA; Los Angeles Air Force Base; and Enterprise Landing in Alameda, CA.

“ProLogis has been focused on one type of product with warehouse and distribution centers, while Catellus has been involved in extensive mixed-use redevelopment projects,” says Jeff Barrett, managing director with CB Richard Ellis. “Catellus has a broader appetite toward the type of real estate it would tackle, so going forward it will be interesting to see what philosophy prevails.”

The transaction is expected to be completed by the end of 2005. Banc of America Securities acted as financial advisor and Mayer, Brown, Rowe & Maw LLP acted as legal counsel to ProLogis. Morgan Stanley served as financial advisor and O’Melveny & Myers LLP acted as legal counsel to Catellus.

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