It looks as if R. Wayne Hughes, the billionaire chairman of Public Storage Inc., is preparing a nasty takeover battle for Shurgard Storage Centers Inc.


And his timing couldn't be better.


Several analysts said Public Storage's hiring last week of Goldman Sachs & Co. as its financial advisor, and Wachtel Lipton Rosen & Katz as its legal counsel, shows how serious it is in taking its $2.49 billion unsolicited bid directly to Shurgard shareholders.


"They're not going away unless it's with Shurgard in tow," Morgan Stanley analyst Greg Whyte wrote in a recent note. "We believe there is now a greater likelihood that Shurgard will ultimately sell and most likely to Public Storage."


The takeover effort could get contentious, at least judging by a conference call last month in which angry Shurgard shareholders quizzed executives on their reasons for not sitting down with Public Storage. Shurgard Chairman and Chief Executive Chuck Barbo has said that the company is not for sale.


Public Storage has offered to acquire the Seattle-based company in an all-stock deal that valued Shurgard at a 14 percent premium over its trading price in late July. The offer sent Shurgard's stock soaring to a 52-week high of $55.20 a share, recently settling to just above $54. Public Storage is trading near $66 a share.


With 640 self-storage properties, Shurgard is much smaller than Glendale-based Public Storage, with 1,470 properties, a quarter of them in California. But Shurgard has a highly coveted asset: its 130 self-storage properties in Europe that make up the fastest-growing market in the self-storage industry.


"The real purpose for Public Storage to buy Shurgard is to get an entry into Europe on the cheap," said Bob Winet, a former business partner of Hughes and an expert witness on the self-storage industry.


Hughes, who has been trying to purchase Shurgard for nearly a decade, knows that timing is everything. He waited until after Shurgard increased its stake in its European operations to 85.5 percent, from 7.6 percent last year, before taking his unsolicited bid public.


Another key issue likely to be exploited by Public Storage involves Shurgard's recent accounting missteps, including earnings restatements for most of 2004.


End-game strategies
Because Shurgard had "material weaknesses" in its internal controls, the company can't raise money in the public markets, despite a previous shelf registration. That makes it tougher for Shurgard to raise capital and grow those European assets and gives Public Storage one more reason to argue that its offer is attractive.


Shurgard has its own arsenal, including a shareholder rights plan complete with poison pill that makes a hostile acquisition difficult. But through the recent declassification of Shurgard's board, shareholders can vote them all out when they come up for reelection next year.


"We're counting on the Shurgard shareholders to make their voice known to both the board of directors and senior management of Shurgard," Ron Havner, Public Storage's president and chief executive, said in a conference call in early August.


Maybe. But Shurgard shareholders have plenty to be concerned about because the offer could potentially wipe out the company's higher-priced dividend, a big attraction for income-loving investors.


Public Storage recently raised its dividend 11 percent to 50 cents a share, compared to Shurgard's 56 cent a share payout.


The deal would be taxable to Shurgard shareholders, allowing Public Storage to buy Shurgard's assets on a "stepped up" cost basis. This would allow Public Storage to take enhanced depreciation and amortization deductions and lower its taxable income. That means smaller dividends and retaining more cash for expansion.


"We have the financial strength to absorb Shurgard, maintain our strong and flexible financial profile, and easily access capital for continued growth," Havner said on a conference call.


Public Storage reported second-quarter net income of $108.3 million, compared with $92.4 million for the like period a year earlier. Revenue rose 4.5 percent to $194.3 million. Shurgard, meanwhile, posted a second-quarter net loss of $693,000, including $5.2 million in non-cash losses from foreign currency exchange compared with net income of $20.8 million in the year-ago period. Revenue rose 14.6 percent to $119.7 million.


Jay Leupp, an analyst at RBC Capital Markets, wrote in a recent research report that Public Storage will ultimately prevail by sweetening its offer. "We believe Public Storage's bid will likely have to rise 10 percent to 15 percent, to between $57 and $59 a share, to unlock serious institutional investor interest," he wrote.

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