When I first wrote about the buyout offer that Public Storage (NYSE:PSA) made for competitor ShurgardStorage Centers (NYSE:SHU) I received a number of emails telling me that Shurgard's management and CEO, Charles Barbo, would rather eat [insert inappropriate item to eat] than sell the company to Public Storage.
While that's an important point, insiders own only 6% of the company, which leaves them without a lot of leverage in this case. (There is a poison pill provision, though.) Public Storage made it very clear in its initial announcement that it was serious about going forward with its offer, and now it has -- by taking its pitch to Shurgard's shareholders.
In my first look at Public Storage's offer, I mentioned that it appears fair to Shurgard shareholders. In the information Public Storage has provided (available here in PDF format), the would-be purchaser states that Shurgard shareholders will own 22.9% of the company while contributing an estimated 17.6% of funds from operation (FFO) in 2005 and 20.4% in 2006. The offering packet is not kind to Shurgard management or its historical performance, but it's chock-full of solid reasons for shareholders to consider the offer.
Shurgard shareholders also appear more likely to see solid dividend increases in the future from a combined entity. Public Storage's dividend was 61% of 2004 FFO and an estimated 55.1% of the combined entity's FFO for 2005. In other words, it can pay out a healthy dividend and still have plenty of cash left over. In contrast, Shurgard's current dividend payouts exceed analysts' estimates for FFO this year -- suggesting that it may actually be going into debt to maintain its present dividend payouts.
For Public Storage shareholders to see benefits from this merger, management will need to unlock some of the value it sees in Shurgard's portfolio of properties. They'll need to increase occupancy rates and capitalize on potential synergies by bringing Shurgard's cost structure in line with Public Storage's.
It will be interesting to see how Shurgard's management -- and its shareholders -- react to this deal, because its economics are compelling. However, as Oracle (NASDAQ:ORCL) discovered while pursuing PeopleSoft, you've got to consider more than just economics and historical performance when making a deal.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
