Public Storage Makes Bid for Rival but Is Rejected

By Roger Vincent

Aug. 2, 2005 12 AM PT

Times Staff Writer

Consumer spending drives our economy, but it also creates the headache of where to put all that stuff.

That need helped create the nation’s largest owner of mini warehouse facilities, Glendale-based Public Storage Inc.

On Monday the company unveiled plans to get even bigger by revealing that it had made an unsolicited $2.5-billion offer to buy smaller rival Shurgard Storage Centers Inc.

On July 8, Public Storage offered to pay 0.8 share of Public Storage stock for each share of Shurgard.

A few hours after Public Storage disclosed its offer, Seattle-based Shurgard rejected the bid. The news drove up Shurgard’s stock 13% as it rose $6.10 to $53, after reaching a 52-week high of $55.20. Public Storage fell $1.15 to $65.60.

Public Storage’s offer for Shurgard is now valued at $52.48 a share.

“This proposal is good for Public Storage, but bad for Shurgard,” Shurgard Chief Executive Charles Barbo said in a statement.

Public Storage CEO Ronald Havner Jr. declined to comment on whether his company would consider raising its offer or even launching a hostile takeover bid. “We really want to sit down with them and negotiate an agreement,” he said. “We’re reasonable people.”

Five years ago Public Storage also tried to buy Shurgard.

“I don’t think this is the last offer from Public Storage, and I think the Shurgard assets are worth a lot,” said James Corl, chief investment officer for real estate securities at Cohen & Steers Inc., which is Shurgard’s largest shareholder with 4.5 million shares. It also owns 3.7 million Public Storage shares.

Public Storage and Shurgard operate self-storage facilities in many of the same markets, including Los Angeles, Chicago, New York and Seattle. Together, they would operate more than 2,000 storage centers in 38 states and seven countries in Europe.

Shurgard’s holdings in Europe are a prime attraction because Public Storage’s properties are confined to 80 U.S. cities, said analyst Craig Silvers of Bricks & Mortar Capital in Los Angeles. “It would give Public Storage a European footprint,” Silvers said. “Shurgard is doing well there.”

The combination of the two companies has been the subject of speculation in the investment community for years, Silvers said. But their stocks traded at similar valuations until two years ago, when Shurgard disclosed an overpayment of more than $1 million to CEO Barbo and its auditor Deloitte & Touche resigned because it “could no longer rely on representations of the company’s management.”

Shurgard made management changes, but hasn’t fully regained its credibility on Wall Street, Silver said.

Both companies are real estate investment trusts, which means they must distribute 90% of their income to shareholders.

Public Storage has been a hot stock on Wall Street -- and among REIT shares -- this decade, giving it a strong currency with which to make acquisitions.

In the last five years, through Friday, the total return on Public Storage shares -- price appreciation plus dividends -- was 234%, according to Bloomberg News. By contrast, the total return on Bloomberg’s index of 147 REIT shares was 145% in the same period, while the total return on the blue-chip Standard & Poor’s 500 index fell 6.6%.

“Shurgard has been a substantial underperformer, and Public Storage has been a rocket ship,” said Silvers, who owns both stocks. “I think this deal is an excellent idea.”

Havner said the combined companies would have annual revenue of more than $1.5 billion and would save money by using the same advertising and telephone directory listings to cover a greater number of storage sites. The companies also could cut overlapping expenses, such as customer service call centers and administrative costs.

By using Public Storage’s brand, advertising and promotions, the combined companies could boost the occupancy rates at Shurgard’s facilities, Havner said. Public Storage facilities are 92% leased, Havner said. Shurgard’s European units are about 80% occupied, according to public documents.

Across the country, the number of storage facilities has shot up more than 60% in the last decade to 38,817 properties, according to MiniCo’s Self-Storage Almanac. Along the way, the business has evolved from mom-and-pop operations in industrial areas or the outskirts of towns to upscale retail and commercial projects with high visibility.

Public Storage got its start in 1972 when co-founder B. Wayne Hughes opened a mini warehouse in El Cajon. The sign read: “Private Storage Spaces.” Business was slow until a customer showed up and asked if space was available to the public. Hughes changed the sign to “Public Storage” and business boomed.

Hughes, Public Storage’s chairman, has a net worth of $2.5 billion, according to Forbes magazine.

People need extra storage to cope with changes in a growingly mobile society, Havner said. Plus they tend to accumulate things.

“Americans are avaricious consumers,” he said. “We like stuff. To get more stuff you’ve got to do something with the old stuff, and we’re part of the solution.”

The average Public Storage unit is rented for three years, he said.

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Companies at a glance

Public Storage

Headquarters: Glendale

Chief executive: Ronald L. Havner Jr.

Number of locations: 1,471

Occupancy rate: 92%

Employees: 4,149

Shurgard Storage Centers

Headquarters: Seattle

Chief executive: Charles K. Barbo