Life Storage: Attractive All-Stock Merger Arb Deal (NYSE:LSI)

Life Storage, Inc. (NYSE:LSI) is a self-storage firm that gives storage items to people and companies. The corporate owns and operates over 900 self-storage services in the US beneath the namesake model. Life Storage is being acquired by one other self-storage firm known as Additional House Storage Inc. (EXR). EXR can be paying in shares on the price of 0.895 EXR shares per share of LSI. The transaction creates the most important storage facility operator within the U.S. relating to the variety of places. When it comes to market worth, Public Storage (PSA) ought to theoretically maintain the no. 1 spot fairly simply.

As I am scripting 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 appears to counsel little upside.

Nonetheless, Life Storage additionally pays a dividend that will doubtless proceed till the deal closes. Life Storage just lately declared a $1.20/share quarterly dividend. Observe the ex-dividend date is the thirteenth of April. One other one could get declared in July. Nonetheless, it is usually attainable the deal can be achieved earlier than then. I am going to assume just one will get collected, and there is not any dividend tax. Neither is true, in fact, however it would do for illustrative functions.

This will get me to an upside of ~2%. If I throw in yet one more dividend, I get to 2.8%, however it could additionally require a extra prolonged holding interval to be eligible to gather that.

Additionally, I did not account for the dividend on the acquirer’s aspect (which it’s essential to pay on the hedging aspect). Right here is final 12 months’s dividend historical past of EXR:

One other one appears more likely to be due in the midst of June. It will be fairly unlucky if the deal would shut after that however earlier than the subsequent Life Storage dividend was declared. This is final 12 months’s dividend historical past for LSI:

In any case, I’d anticipate Life Storage, Inc. inventory to depreciate by an quantity just like the dividend (making up for the fee on the brief place).

The deal requires a shareholder vote that I anticipate to move on either side. The draw back is theoretically in the direction of $95 or so. The inventory was buying and selling at an elevated degree simply earlier than the deal was introduced as a result of Public Storage had a competing public supply out. This additionally reveals the belongings are doubtless fascinating, given a number of opponents went after them. Regulators have been very lively in 2023, however I do not anticipate self-storage to be an business of nice curiosity. Self-storage additionally appears to be a comparatively fragmented market. There are at the very least 5 large gamers. I have never talked about CubeSmart (CUBE), Nationwide Storage Associates (NSA), Safestore Holdings PLC (OTCPK:SFSHF) and U-Haul (UHAL) but.

A 2% return over 100 days (and presumably a better absolute return, though the relative annualized return would lower if it takes longer to shut) is not wonderful. Nonetheless, it’s an all-stock merger which ends up in no web positioning. Attaining a 2% return over 100 days interprets into an annualized return of about 8.25%. That is fairly good if it would not require a lot publicity.

All inventory mergers have much less normal market danger vs. money offers (offered you hedge it correctly). Not the worst factor given the conundrum the Fed is dealing with. All inventory mergers will do notably unhealthy if the deal is damaged up. For instance, a much bigger rival shopping for up the acquirer and shutting down the deal tends to lead to disastrous outcomes for the arbs. Unhealthy outcomes can even consequence from an activist railing towards the acquisition on the acquirer’s aspect. Thus far I do not see any indicators of both, however it’s good to pay attention to.

This is not the very best deal I’ve ever seen, nevertheless it appears stable sufficient so as to add to my portfolio. I just like the all-stock make-up. I believe the market could also be underestimating how shortly this might shut. However, I could possibly be spectacularly flawed, and currently, I am unable to rule out regulators getting concerned even in mundane offers between storage services.

Editor’s Observe: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please pay attention to the dangers related to these shares.