Packing Up the Public Storage Deal

Go on vacation for a couple of weeks and you miss everything. Well, perhaps not everything, but I still have some catching up to do. Speculation about when Public Storage (NYSE: PSA  ) and Shurgard Storage Centers (NYSE: SHU  ) would iron out their differences and pair up came to an end while I was off relaxing, and I completely missed it until Monday. I'm fascinated by the deal and how it will work out.

Given that Public Storage had approached Shurgard multiple times and always received a chilly reception -- until now -- it's a very interesting deal. It's also just one of many deals involving real estate investment trusts in the last year, including General Electric (NYSE: GE  ) acquiring Arden Realty (NYSE: ARI  ) and investment firm Blackstone Group preparing to buy out CarrAmericaRealty (NYSE: CRE  ) after having gobbled up La Quinta and others. While individual investors, myself included, have labeled some REITs a bit expensive, it's clear that corporations, pensions, and some private equity funds still have a large appetite for them.

I have gone on record that I think this deal can work for both parties, but I find it particularly attractive to Shurgard shareholders. They get a premium now, and Public Storage should be able to get value out of the Shurgard properties over time by reducing the operating expenses and improving occupancy. Public Storage has demonstrated that it can do this with smaller acquisitions; now it will need to do so on a larger scale.

The 0.82 shares of Public Storage being offered for each share of Shurgard is not too far above the 0.8 shares initially offered. However, given that there are no caps or collars on the share price, I think it's a very fair deal. The deal also creates a monster in the industry, dwarfing the next two largest storage REITs -- U-Store-It Trust (NYSE: YSI  ) and Sovran Self Storage (NYSE: SSS  ) .

Investors on the sidelines, like me, will want to pay attention to the progress the combined company makes over the next six to 12 months. If there are any stumbles, there could be a very attractive opportunity to pick up a well-managed company at an attractive price -- and make no mistake, I view this company as well-managed. However, right now, the shares don't offer the margin of safety that I'd prefer.

For more REIT-related Foolishness:

• REITs Get Rowdy
• Public Storage Turns Up the Heat
• Public Storage Creates Value

Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.