National Storage takeover looms as US offer impresses analysts

The offer for Australia’s National Storage by US giant Public Storage is higher than expected, say analysts.

A National Storage facility. Picture: Tara Croser.

The country’s largest self-storage operation, the National Storage REIT, appears likely to be taken over by US giant Public Storage, with shares in the target trust jumping to close to the bid price of its $1.9bn proposal.

The company’s shares traded up to $2.38 on Monday morning, just below the $2.40 per share plan made public after market on Friday by the listed National Storage.

The bid price was above both the expectations and price targets analysts had on the local self-storage operation.

The company has rapidly expanded its property portfolio past the $2bn mark but had been valued at a lower level by stockbroking analysts who had suggested that National Storage would even accept a takeover at about $2.15 per share.

Moelis analyst Edward Day said the $2.40 offer represented a 47 per cent premium to National Storage REIT’s last stated net tangible asset backing.

Moelis increased its target price to $2.40, in line with Public Storage’s proposal, saying the bid price could see investors sell out.

“Public Storage’s offer price is significantly above our going concern valuation of $1.62, and above the $2.15 price we believed might get the board’s support,” Moelis analyst Edward Day said.

“We think an offer above $2.40 is unlikely given the premium to net tangible asset, and an acquisition price to earnings ratio of 24 times, against its passive REIT peers of 15 times,” he said.

“Given the strength of the bid, we believe investors should look to take profits, given it’s unlikely a higher bid will emerge in our view, and risks that confirmatory due diligence is not completed satisfactorily,” he said.

He said the price assumed an implied cap rate on the storage portfolio of 5.05 per cent before synergies were taken into account.

“Given the relatively firm estimated yield to cost of debt spread, we believe successful integration will require Public Storage to extract ... assumed head office synergies,” Mr Day said.

The play by the New York Stock Exchange-listed storage REIT brushed aside earlier interest by Hong Kong-based Gaw Capital, which has pursued a number of deals in Australia.

Moelis said assuming that Public Storage can save 50 per cent on head office costs, the offer still represents an implied cap rate of 5.2 per cent for the portfolio, or 167 basis points tighter than last valuations.

At the end of September, Public Storage had an all-in cost of debt of 2.9 per cent.

JPMorgan is advising National Storage and Morgan Stanley is advising Public Storage.

Macquarie analysts said the proposal price represente the highest relative price to earnings ratio compared to the history of National Storgae.

“With limited upside to the M&A valuation and potential downside risk post due diligence; we believe the downside risk is outweighing the benefit from a potential bidding war,” Macquarie said.