Laaco (LAACZ) – Merger Arbitrage – 8% Upside

Current Price: $9133

Offer Price: $9840

Upside: 8%

Expected Closing: December 2021

Presentation, Merger agreement

 

Consolidation in the US self-storage space with attractive 8% upside and expected closing during the next month.

CubeSmart is acquiring its smaller peer LAACO for $1.69bn gross proceeds. The consideration to LAACO shareholders will amount to gross proceeds less debt resulting in $9840/unit. The idea is timely as successful closing is very likely and I expect the current spread to be eliminated shortly. The situation exists probably because LAACO used to be a micro-cap/underfollowed/illiquid/pink sheet listed stock with a high nominal price per share and did not report with the SEC. The merger was announced after the market closed on the 15th of November and yesterday share price has jumped over 100% already.

Attractive aspects of the situation:

  1. This is a strategic, synergistic transaction by a larger peer. The buyer is an $11bn market cap company that has done roll-up $2.2bn in acquisitions over the last 5 years. The merger is expected to be immediately accretive to FFO per share with enhanced levels of accretion expected to be achieved through the realization of operating synergies over time
  2. There is no financing condition involved. The buyer expects to fund the deal with debt and equity. $1bn debt portion has been secured prior to merger announcement and equity raise will close on the 19th of Nov.
  3. Shareholder meeting won’t be necessary. LAACO is 70% owned by insiders. Managing general partner (Stability LLC) owns 69% and its stake is enough to secure the approval (merger agreement):

The vote of Stability’s units pursuant to the Voting Agreement will be sufficient to obtain the Unitholder Approval and no other vote by a limited partner of LAACO will be necessary to obtain the Unitholder Approval.

  • Price comes at 3.7% cap rate at an estimated 2022 NOI – in line with the recent EZ Storage acquisition at mid 3% cap rate (April) – see this VIC write-up’s comment on the 17th of August.
  • Both the buyer and the target receive comparable $19+ rents per in-place occupied square foot (see slide below) and have similar occupancy levels. At the buyout price LAACO is valued similarly to CubeSmart ($384/sq vs $336/sq respectively), with the small difference due to acquisition premium as well as unencumbered storage properties (no mortgage after repayment of $41m)
  • Transaction fees will be covered by the buyer (as per merger agreement) and the only deductable from gross proceeds is $41m of LAACO debt:

At the Closing, and subject to the terms and conditions of the Merger Agreement, each outstanding limited partnership unit and general partnership unit of LAACO (other than units held by LAACO in treasury or by the Company or Merger Sub, which are referred to herein as “Cancelled Units”) will automatically be canceled and converted into the right to receive their pro-rata share of the Purchase Price (net of amounts applied to repay LAACO debt).

 

LAACO

LAACO owned Storage West operates 59 self-storage assets in the highly desired western markets of Southern California (22), Phoenix (17), Las Vegas (13), and Houston (7). Two of these properties are owned by two separate joint ventures, each owned fifty percent by LAACO. Total rentable square feet is 4.4m. Laaco doesn’t report with the SEC and apparently doesn’t have an investor relations page, but financials can be found here.

The buyer will derive substantial cost synergies due to a high overlap in certain markets:

 

CUBE

CubeSmart is the third-largest owner and operator of self-storage properties in the US.

The combined company:

14 COMMENTS

  1. dt

    Gross merger consideration = $1,690m
    Less debt -$40.9m
    Net merger consideration = $1,649m
    Units outstanding 167,557
    Net consideration per unit = $9,842/unit

    Am I missing something here?

    1. mcg

      Yea, your shares out number is wrong. 172 481 currently but that doesnt include anything granted this Q so could be even higher

      1
      1. dt

        I have taken unit count from the Q2 fillings. The count was quite stable over the years.
        Where do you see the 172k figure?

      2. dt

        ok, found the 172k figure here https://sec.report/otc/financial-report/294758
        Not sure which the correct one to use, the difference tween the two might be due to:

        “As of December 31, 2020, a total of 9,291 units have been repurchased for total consideration of $12,972,000. An additional 54 units have been repurchased in 2021 for total consideration of $135,000. The Company retired 3,832 of the repurchased units, with the remaining repurchased units being held in treasury or reissued under the Equity Incentive Plan.”

        or

        “In 2012, the Company adopted the LAACO, Ltd. Equity Incentive Plan which provides officers of the Company with awards of restricted and unrestricted limited partnership units of the Partnership. The maximum number of units that may be issued under the plan are equal to the number of units acquired after January 1, 2012, pursuant to the Unit Repurchase Program. As of December 31, 2020, a total of 922 units have been issued under the plan and there are 4,537 units that are still issuable under the plan.”

      3. sacredbiotech

        The filing says the right to receive the amount per Unit in cash is equal to $9,838, CUBE is liable for that amount, if you don’t get that and if there aren’t deductions for dilution and expenses for closing….

        1
      4. dt

        I tend to think 172k figure includes treasure units not yet retired. In that sense 167.5k is the correct one to use. However, some additional (or potentially all) additional units might have been issued or will be issued under the incentive plan upon the closing of the merger.

        1
  2. Terence

    $9,838 per LP unit, right? Below is page 3 of Merger Agreement (or page 14 of 8k filing).

    Section 2.5 Effect on Units. At the Effective Time, as a result of the Merger and without any action on the part of the equity holders of the Company or any other Person:

    (a) Merger Consideration. Each Unit issued and outstanding immediately prior to the Effective Time (other than Cancelled Units) shall at the Effective Time, upon the terms and subject to the conditions set forth in this Agreement, automatically be cancelled and converted into the right to receive the amount per Unit in cash equal to $9,838 (as adjusted pursuant to Section 2.7 and Section 2.8 (if applicable), the “Merger Consideration”), without interest and subject to applicable withholding taxes pursuant to Section 2.6(f), whereupon such Units will cease to exist and no longer be outstanding, and each holder thereof will cease to have any rights with respect thereto, except the right to receive the Merger Consideration, without interest, upon surrender of Units in accordance with
    Section 2.6.

    2
    1. dt

      Not in a position to answer this as I am not tax expert. However, my understanding is that per unit consideration will be received in full. I am not sure what kind of withholding taxes the merger agreement is referring to, so might be wrong on this one.

      Obviously, this kind of answer does not help at all.

Leave a Reply