2nd UPDATE: Segro Buys BAA's Stake In Airports Venture

Europe's largest listed industrial landlord Segro PLC (SGRO.LN) Tuesday said it bought a 50% stake in Airport Property Partnerships, or APP, from airport operator BAA Ltd. as part of its strategy to acquire assets in and around major U.K. airports, and confirmed that it will start building speculatively this year.

Segro paid GBP111.3 million for 17 warehouses and offices and three indirect investments. APP's properties largely are concentrated around London's Heathrow Airport and tenants include UAL Corp.'s (UAUA) United Airlines, FedEx Corp. (FDX) and Deutsche Post AG's (DPW.XE) logistics unit, DHL.

The price implies a property valuation of GBP446.6 million on 100% ownership, excluding indirect investments, and represents a net equivalent yield of 7.6%.

Segro will also take on BAA's share of APP's debt and other liabilities of about GBP128 million. BAA is a unit of Spain's Grupo Ferrovial SA (FER.MC). The remaining 50% stake in APP is owned by clients of Aviva Fund Management Ltd.

Segro's talks with BAA to buy its part of the joint venture broke down over price in early March although a person close to the situation told Dow Jones Newswires mid-March that talks would resume shortly.

Analysts welcomed the deal, which is expected to complete in June.

"The deal pricing looks reasonable," said Evolution Securities analyst Paul Pulze. "The portfolio increases the exposure to the Heathrow market, which we see as being one of the strongest U.K. industrial markets whilst providing the opportunity for Segro to leverage its capital."

At 0907 GMT, Segro shares traded up 3 pence, or 1%, at 322 pence while the FTSE 100 index traded down 0.4%.

Segro, a real-estate investment trust, has been buying assets in or close to the U.K.'s major airports and last year completed the acquisition of troubled rival Brixton for GBP109.4 million. The buy boosted its portfolio to over GBP5 billion and brought in some 19 million square feet of U.K. industrial warehouse property, mainly located around the attractive areas of Heathrow Airport and Park Royal, where land supply is constrained.

But the acquisition also boosted Segro's vacancy rates, which is an area Chief Executive Ian Coull said he continues to address. The company has reduced the vacancy rate in the former Brixton properties to 20.7% at the end of the first quarter from 22.1% in December while the overall U.K. vacancy rate improved to 14.6% from 14.8% over the same period.

Segro also is in talks with Aviva Investors to expand the joint venture through the purchase by APP of GBP240 million of complementary assets within Segro's existing portfolio. The two transactions are expected to generate net cash proceeds of approximately GBP60 million for Segro.

This "meets one of the group's strategic objectives to leverage its property management skills across a broader asset base," said CEO Coull.

Separately, Segro issued a trading update in which it said it has made encouraging progress despite the challenging conditions in the occupier market across the U.K. and continental Europe.

It confirmed it will start speculative development in response to specific occupier demand and limited supply, with a carefully selected number of pre-let developments.

Coull told Dow Jones Newswires in March that this year he planned to spend between GBP100 million and GBP200 million on speculative development in Germany, France and Poland despite continued tough trading conditions.

He expects to begin speculative development of a number of small light-industrial projects in Paris, Duesseldorf, Warsaw and Berlin, but he cautioned those plans could be derailed by weak economies.

-By Anita Likus, Dow Jones Newswires; [phone]; [e-mail]