Despite their market-beating performance, real estate investment trusts (REITs) have a reputation as a sleepy section of the market. That changed a bit yesterday, when Public Storage
We know from SEC filings that Public Storage originally approached Shurgard on July 8 with a friendly bid of 0.8 shares of Public Storage for each share of Shurgard. Shurgard rejected this offer on July 26, stating that the company is not for sale. Yesterday, Public Storage made their intent public, but did not formally offer to start buying shares. It appears that making the offer public is more about trying to get Shurgard to the bargaining table than forcing Shurgard into an offer at this price.
While I don't doubt that Shurgard's European operations are attractive to Public Storage for the new market opportunity they offer, I think Public Storage's motivations are more diverse. In the last couple of years, Public Storage has snapped up independent storage facilities and generated solid returns by increasing their occupancy while leveraging their existing operating structure to contain costs. The company's reasons for pursuing Shurgard appear similar; Shurgard's occupancy levels between 80% and 85% have lots of room to grow before they match Public Storage's 90% levels.
In addition, developing new properties is no longer as cost-effective as it has been in the past. Land and other development costs have increased dramatically in the last five years. With competitors both large and small, it's easy to understand why Public Storage would rather buy other companies at the right price.
It's interesting that Shurgard has thus far turned down Public Storage's offer, especially because Shurgard management stands to cash in nicely from a buyout. All options would immediately vest, or a similar amount of compensation would need to be agreed upon. Such decisions are the domain of the board of directors, not management, but if the operating managers support the deal, it's tough for the board to say no.
Given that, I doubt Shurgard's assurance that the company is not for sale. More likely, they just want more than a fair price -- which is my opinion of Public Storage's offer. Instead, Shurgard wants a bit of a premium, and you can hardly blame them for trying. If Public Storage wants the company badly enough, they can either pay a bit more for a friendly deal or risk paying even more via a hostile offer.
It's tough for me to see how individual Shurgard shareholds can lose in this situation. The company's management and board of directors obviously believe that Shurgard is worth more than Public Storage's offer, and that they can attain their desired value independently. On the flipside, if the deal with Public Storage does go through, Shurgard shareholders will not only get a nice immediate return, but they'll also be linked up with a solid, top-performing management team that has laid out a number of compelling reasons to merge.
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