Public Storage has advantage in clutter battle

Life Storage

06/02/2023 21:47

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Jennifer Saba
       NEW YORK, Feb 6 (Reuters Breakingviews) - In the storage
market, one person’s junk is a landlord’s treasure. That could
turn into a battle for Life Storage  LSI.N , the smaller
competitor that has become target of an $11 billion hostile
takeover from industry giant Public Storage. The offer leaves
some room for counterbids, but Public Storage  PSA.N  has an
advantage – its stock. 
    The industry that collects rent from people who are
decluttering their apartments and homes has grown considerably
over the past several decades. The $54 billion Public Storage
has some 239 million square feet of rentable storage, almost
twice what it had in 2007. But the sector is highly fragmented –
81% is still owned by small, regional operators, according to
Morningstar – and Life Storage is one of a select number of
publicly-traded storage firms.
    That makes Life a good target for Public, especially
considering the environment. People bother to hoof their extra
coats and dishes to an offsite facility when they have some
extra cash to indulge in the luxury of keeping it around. Once
they make the decision, they rent for years. So the recurring
revenue stream creates a sticky yield. But when budgets are
tight, storage becomes a luxury. Growing is hard, so if Public
wants size, it needs to be competitive.
    The sticking point is price. Public's offer will leave it
with 83% of the combined company. Assuming $200 million in
synergies, about 10% of the combined company's costs, Public’s
shareholders will end up some 2% better off than they are right
now, based on their share of cost savings, taxed and
capitalized. It suggests the offer is low. 
    In a historical context, though, it doesn’t look as good.
Cap rates, or cash flow relative to the price of assets, have
dropped from around 8% a decade ago to around 5% now. That means
Life is expensive just as the industry's outlook is
worsening. Interest rates are higher, too, so other bidders that
pay cash, like Blackstone or Brookfield, might be forced to
borrow at a higher yield than they would get on the asset. 
    Put that all in grandma's hand-me-down martini shaker, and
it suggests Public has an advantage using its stock. Life
shareholders may not want a deal. But shares in a larger and
more valuable company aren’t something to put in the cabinet and
ignore. 
    Follow @jennifersaba on Twitter
    CONTEXT NEWS 
    Public Storage sent a letter on Feb. 5 to Life Storage
proposing an all-stock acquisition of $11 billion. Under the
deal, Life Storage investors would receive 0.4192 shares of
Public Storage common stock. The offer represents a premium of
19% based on the 20-day volume weighted average price of both
stocks as of Feb. 3. 
    Life Storage said on Feb. 5 it is reviewing the most recent
proposal and will “determine the course of action that it
believes is in the best interests of all shareholders."
    Public Storage said its smaller rival rejected an offer
under similar terms on Jan. 12 forcing the company to make its
approach public. Public Storage initially approached its target
in December. 
    The $9 billion Life Storage rejected Public Storage in a
Dec. 29 letter saying the company was not for sale, Public
Storage said. 
    Additionally Public Storage, which has a market
capitalization of $54 billion, said on Feb. 5 it was raising its
dividend 50% from $2 per share to $3 per share. 
 (Editing by Lauren Silva Laughlin and Amanda Gomez)
 ((For previous columns by the author, Reuters customers can
click on  SABA/ 
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe
 | jennifer.saba@thomsonreuters.com; Reuters Messaging:
jennifer.saba.thomsonreuters.com@reuters.net))