Prime Retail Inc. yesterday took a major step toward becoming the nation's largest factory outlet mall owner with a $906 million purchase of a Michigan company, a deal likely to brace the Baltimore-based developer against competition and an anticipated leveling off of the discount retail industry.
The real estate investment trust's planned acquisition of the Horizon Group Inc. will add 20 retail centers to Prime Retail's portfolio -- including projects in Perryville and Queenstown -- and nearly double the size of its outlet mall portfolio.
The combined company will control 43 outlet malls containing nearly 12 million square feet in 25 states, and make Prime Retail one of the nation's 25 largest publicly held real estate companies, based on its $2.2 billion total market capitalization, which is defined as total debt plus equity.
The Prime Retail/Horizon deal also marks one of the largest mergers between publicly traded commercial real estate companies since March 1996, when mall giants Simon Property Group Inc. and the DeBartolo Realty Corp. merged in a $1.5 billion stock swap.
"The industry we're in is consolidating and, as such, the remaining players will be and will have to be stronger to survive and prosper," said Abraham Rosenthal, Prime Retail's chief executive officer. "Our combined company will have among the best centers in the country and the best tenants, which makes for a strong company and creates a platform for future growth."
The deal, scheduled to close in the first three months of 1998, is expected to boost Prime Retail's operating earnings by 10 percent in the coming year, and raise its average sales per square foot to $246, 8 percent above Prime Retail's current level.
"This transaction makes Prime Retail the leading outlet center developer in the world," said Mark Millman, president of the Millman Search Group, a Towson retail consulting company. "The outlet industry is changing dramatically; it's leveling off somewhat, but this gives them clout and credibility.
"This gives them the opportunity to grow and get into new types of developments. It also will make it harder for others to now enter the business. This makes them a force to be reckoned with, the undisputed industry leader."
But swallowing Horizon won't come without a price.
As part of the deal, Prime Retail will assume $540 million in Horizon debt, liabilities that will push its total leverage to more than $1 billion. Rosenthal said the figure isn't a concern, though, and that Prime Retail's operating income will be twice the amount necessary to cover the debt level.
For Horizon, the Prime Retail acquisition is likely to mean the difference between life and death. In the past year, Horizon had been hurt by top management defections and under-performing projects. Three of Horizon's top officers are slated to join Prime Retail's board upon completion of the deal.
"Horizon was a busted-up, imploding REIT that had a lot of troubled assets," said David M. Fick, a vice president and senior financial analyst at Legg Mason Wood Walker Inc., who tracks Prime Retail.
"So this will be good for Horizon shareholders, and it will be good for Prime in that it will increase their earnings significantly and increase what they can do with the assets they have going forward," Fick said.
Some of Horizon's properties are so lowly regarded, in fact, that 17 of them will not be folded into Prime Retail, but rather transferred into a new company, called Horizon/Glen Outlet Center Ltd. Partnership.
In turn, Prime Retail will shift three of its projects to Horizon/Glen. Rosenthal said the shifts were occurring because the excluded properties would have required too much time and attention.
Pub Date: 11/14/97