By Kritika Venkat, Akhil Vajjhala and Siddharth Tripurani (NYU), Ratish Singh and Luc Roberts (University of Warwick)
British real estate firm St Modwen, which develops and manages industrial properties, has agreed to a $1.7B deal with Blackstone private equity. The offer price of 542p per share, in cash, is a 21% premium to the firm’s closing price of 448p before the announcement. Blackstone has secured the support of the Board and the founder family with a combined stake of 6.6%. However, the deal has met with opposition from JO Hambro Capital Management, which owns close to 10% of the company.
St Modwen has a 19M square feet pipeline of logistics projects and its clients include Amazon UK, DHL and Ocado. Demand in the sector has been growing since the pandemic caused a surge in e-commerce. As a result, competition for warehouse properties intensified, UK warehouse leases reached a record level in Q1 and investors are now counting on rising rents.
Overview of Blackstone
The Blackstone Group Inc. is an American alternative investment management company based in New York City. Founded in 1985, Blackstone was originally formed as a mergers and acquisitions advisory boutique but soon turned into a major asset management business specializing in fixed-income investments, and private equity. Blackstone's private equity business has been one of the largest investors in leveraged buyouts and real estate in the last decade. As of 2019, the company's total assets under management were approximately $545B. Managed by Stephen A. Schwarzman (CEO and chairman), the company totals today more than 3,165 employees (2020), generating a total revenue of $6.102B in 2020.
Overview of St. Modwen
St. Modwen designs, builds, owns and manages high-quality industrial & logistics assets in the UK. From commercial warehouses to residential homes, St. Modwen’s portfolio is diversified across capital building assets. The firm’s clients include some of the world's biggest logistics and e-commerce organisations as well as significant national and regional enterprises. As one of the UK’s most active developers of speculative and built-to-suit industrial & logistics buildings, St. Modwen’s commercial development activity is focused on well-positioned sites to meet their clients’ warehouse and distribution needs. Sarwjit Sambhi is the CEO of St. Modwen and oversaw a $1.37B as of 2020.
For Blackstone, the extensive development pipeline of St. Modwen’s logistics division forms the basis for the strategic rationale of the acquisition, with a potential 19M square feet of new warehousing space resulting in an estimated 8% yield on cost. St. Modwen’s portfolio of both modern urban and big-box warehouses in key transport hubs is a significant competitive advantage for the company, which has been reinforced by increased demand for well-located facilities driven by a boom in digital commerce. This unique pipeline and resilient asset base make it an attractive proposition for Blackstone, which has been at the centre of the wave of logistics private equity investment, describing the sector as one of their highest conviction long-term investment themes. The acquisition will also play a part in scaling Blackstone’s Milestone division, which manages lucrative warehouses located in urban centres.
As the demand for warehousing and logistics is projected to continue to grow rapidly over the coming years, St. Modwen and its competitors will need to draw on their balance sheets to retain market share and fulfil growth potential. St. Modwen has explicitly confirmed that delivery of their development pipeline will require significant additional capital, therefore the company may benefit from private ownership by being granted extensive access to funds. St. Modwen will likely benefit from Blackstone’s extensive experience in managing logistics assets and a long-term investment approach, with other acquisitions including Hansteen Holdings in the UK, Iron Mountain in the US, and Embassy Industrial Parks in India.
Risks and Uncertainties
Over the last four years, St. Modwen has worked on its logistics and house building, leading to a solid financial position and a strong presence in both sectors. With continued growth in retail sales from clients such as Amazon and DHL, Blackstone is expected to integrate any restructuring goals with existing plans to recover from St. Modwen’s losses last year. This would be further complicated by Blackstone’s ongoing takeover battle for Australia’s Crown Resorts, as managing resources will be spread across the deals.
Beyond integration risks and structural cohesion, uncertainty remains around to what extent business will recover for St. Modwen’s warehouse and real estate investments. Blackstone will bolster the company’s success, however, it needs to work its way up from $170M in losses.
However, the most immediate obstacle remains on St. Modwen’s board as J.O. Hambro, an investment vehicle and a top 3 shareholder in the company, believes that Blackstone’s price was too low. The board vote seems to have passed unanimously, however, it is unclear if there will be any delays or post-transaction time-lag in the effectiveness of Blackstone’s takeover. In any case, shareholders will have to be aware of such situations in anticipation of value being delivered to the bottom line.