PSA - Life Storage: Attractive All-Stock Merger Arb Deal

2023-04-12 14:32:06 ET

Summary

• Life Storage, Inc. is a self-storage company that owns and operates over 900 self-storage facilities in the United States.
• The company is being acquired by Extra Space Storage Inc., which will pay 0.895 EXR shares per share of Life Storage.
• The transaction will create the largest storage facility operator in the U.S. in terms of the number of locations.
• Life Storage's current share price suggests little upside, but the company pays a dividend that will likely continue until the deal closes, providing an upside of about 2%.
• All-stock mergers like this one have less general market risk than cash deals, but there is still a risk if the deal is broken up.

Life Storage, Inc. ( LSI ) is a self-storage company that provides storage units to individuals and businesses. The company owns and operates over 900 self-storage facilities in the United States under the namesake brand. Life Storage is being acquired by another self-storage company called Extra Space Storage Inc. ( EXR ). EXR will be paying in shares at the rate of 0.895 EXR shares per share of LSI. The transaction creates the largest storage facility operator in the U.S. regarding the number of locations. In terms of market value, Public Storage ( PSA ) should theoretically hold the no. 1 spot quite easily.

As I'm writing this, EXR trades at $164.68, which suggests a consideration of $147.39 per share of LSI.

LSI trades at $145.66 per share.

That seems to suggest little upside.

However, Life Storage also pays a dividend that will likely continue until the deal closes. Life Storage recently declared a $1.20/share quarterly dividend. Note the ex-dividend date is the 13th of April. Another one may get declared in July. However, it is also possible the deal will be done before then. I'll assume only one gets collected, and there's no dividend tax. Neither is true, of course, but it will do for illustrative purposes.

This gets me to an upside of ~2%. If I throw in one more dividend, I get to 2.8%, but it would also require a more extended holding period to be eligible to collect that.

Also, I didn't account for the dividend on the acquirer's side (which you must pay on the hedging side). Here is last year's dividend history of EXR:

Another one seems likely to be due in the middle of June. It would be quite unfortunate if the deal would close after that but before the next Life Storage dividend was declared. Here's last year's dividend history for LSI:

In any case, I would expect Life Storage, Inc. stock to depreciate by an amount similar to the dividend (making up for the payment on the short position).

The deal requires a shareholder vote that I expect to pass on both sides. The downside is theoretically towards $95 or so. The stock was trading at an elevated level just before the deal was announced because Public Storage had a competing public offer out. This also shows the assets are likely desirable, given multiple competitors went after them. Regulators have been very active in 2023, but I don't expect self-storage to be an industry of great interest. Self-storage also seems to be a relatively fragmented market. There are at least five big players. I haven't mentioned CubeSmart ( CUBE ), National Storage Affiliates ( NSA ), Safestore Holdings PLC ( SFSHF ) and U-Haul ( UHAL ) yet.

A 2% return over 100 days (and possibly a higher absolute return, although the relative annualized return would decrease if it takes longer to close) isn't amazing. However, it is an all-stock merger which results in no net positioning. Achieving a 2% return over 100 days translates into an annualized return of about 8.25%. That's pretty good if it doesn't require much exposure.

All stock mergers have less general market risk vs. cash deals (provided you hedge it properly). Not the worst thing given the conundrum the Fed is facing. All stock mergers will do particularly bad if the deal is broken up. For example, a bigger rival buying up the acquirer and shutting down the deal tends to result in disastrous outcomes for the arbs. Bad outcomes can also result from an activist railing against the acquisition on the acquirer's side. So far I don't see any signs of either, but it is good to be aware of.

This isn't the best deal I've ever seen, but it seems solid enough to add to my portfolio. I like the all-stock makeup. I think the market may be underestimating how quickly this could close. On the other hand, I could be spectacularly wrong, and lately, I can't rule out regulators getting involved even in mundane deals between storage facilities.

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