12/19/2013 | by
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West Coast multifamily REIT Essex Property Trust, Inc. (NYSE: ESS) said it will acquire its former competitor, BRE Properties (NYSE: BRE), in a merger valued at approximately $4.3 billion. The transaction will create a combined company with a total market capitalization of approximately $15.4 billion.

Essex president and CEO Michael Schall noted during a conference call that in recent years the two companies have followed similar strategic paths, with a 90 percent geographic overlap of properties.  The merger, he said, will result in the “only West Coast pure play in the public multifamily REIT space.”

By combining the two multifamily REITs, “we expect to realize operating efficiencies and further enhance our growth profile,” Schall said. Other benefits of the deal are projected to include a lower long-term cost of capital, and annual synergies that are expected to offset the anticipated increase in property taxes from California’s Proposition 13.

Schall will serve as president and CEO of the combined company, and three directors from the BRE board will be added to the Essex board.  Upon completion of the merger, which is expected in the first quarter of 2014, the company will retain the Essex name and will continue to trade under the ticker symbol ESS. 

The two companies announced earlier this month that they were in exclusive merger negotiations. Under the terms of the agreement, each BRE common share will be converted into 0.2971 newly-issued Essex common stock, plus $12.33 in cash. The transaction values each BRE outstanding share at $56.21.

Essex said it has arranged $1.0 billion in committed financing, if needed, to fund the cash portion of the transaction. The company is also considering asset sales, joint ventures or new financing to fund the cash portion.

“This transaction allows us to maintain our strong balance sheet and is consistent with our disciplined approach to capital allocation,” Essex Chief Financial Officer Michael Dance said. He added that combining with BRE “improves our financial flexibility and liquidity which we expect will reduce the combined company’s long-term cost of capital.”

Analysts at MLV & Co LLC said that over time, they expect the new company to be able to leverage the geographic overlap, realize operating efficiencies, and cut duplicate costs. The long-term positive aspects of the deal could include improved net operating income (NOI) growth and net asset value (NAV) expansion, they said.  However, during the integration period the analysts warned that the transaction is likely to be dilutive to shareholders.

Goodwin Procter LLP served as legal adviser to Essex. The team included Gil Menna, John Haggerty and Mark Kirshenbaum.