David Toti Comments: Essex, BRE Finally Come To Terms On $4.3B Merger

December 20, 2013, CoStar Group

After More Than A Year of Rumors And Board Room Intrigue, Deal Would Create Dominent West Coast Multifamily REIT

After a long courtship, Essex Property Trust Inc. (NYSE:ESS) and BRE Properties Inc. (NYSE:BRE) have agreed to merge for $4.3 billion in cash and stock.

If consummated, the transaction between the two San Francisco Bay Area rivals would form the largest pure-play apartment REIT on the West Coast, with an expected total market capitalization of about $15.4 billion.

San Francisco-based BRE said earlier this month it has begun a review of strategic alternatives, including a possible sale or merger, acknowledging it has received a non-binding merger proposal from Essex, based in Palo Alto, CA.

If approved by shareholders, Essex would buy BRE for about $4.3 billion in cash and stock. Each BRE common share would be converted into 0.2971 newly issued shares of Essex common stock plus $12.33 in cash. The deal values BRE shares at $56.21 each, according to a joint release.

The company will retain the Essex name and will continue to trade under the ticker symbol ESS (NYSE).

In a rating note, Moody’s said the combination will create the dominant apartment landlord in the companies’ markets, with larger size and scale leading to lower capital costs and a broader growth platform.

The combined company will own 56,000 multifamily units in 239 properties in three major regions of Southern California, Northern California and Seattle.

"For over a year, BRE’s board and management team have been evaluating alternatives to maximize shareholder value," said Constance B. Moore, chief executive officer of BRE. "This transaction will create a must-own sharpshooter REIT focused on West Coast apartments, and we believe this is a great outcome for our company."

"The combined company will be the largest and only publicly traded pure play apartment REIT on the West Coast, which we believe will provide a greater competitive advantage in our markets," said Michael Schall, Essex’s president and CEO. "In addition, by combining the strengths of the two platforms, which have a significant geographic overlap, we expect to realize operating efficiencies and further enhance our growth profile."

Cantor Fitzgerald REIT analyst David Toti said in a note that the proposed merger is ultimately a defensive move by Essex to eliminate a competitor rather than an accretive play driven by a compelling return proposition.

"Apartment mergers abound, but have not been catalysts for share prices," Toti said. "That said, the revival of M&A within the sub-sector implies value arbitrage and possible pricing support, and could suggest a valuation floor."