Market Commentary | May 19, 2023
Old Currency is New Again
History has a tendency to repeat itself and, at times, it can be a long, frustrating process.
On May 3rd, the Federal Reserve raised rates for a 10th time bringing the target rate back to the highest level it has been since the Great Financial Crisis. The attendant side effects of these actions include higher lending rates, tighter credit standards, and restricted access to capital markets. Those three factors combine to dramatically slow or even stall transactions in the broader universe of mergers and acquisitions. Add in the still unresolved issue of the debt ceiling and it seems we face M&A paralysis.
While this environment is market destabilizing, an M&A trend that was dominant two decades ago has recently reemerged. In February, Public Storage (PSA) made an all-stock offer to purchase Life Storage (LSI) at a 20% premium to its market price. LSI found the offer to be insufficient, rejected it, and subsequently accepted a superior, all stock offer to merge with Extra Space Storage (EXR).
This week, grocery-anchored retail REIT Urstadt Biddle Properties (UBA) agreed to merge with Regency Centers (REG) in an all-stock transaction at a 20% premium to UBA’s market price. Since this is a synergistic, immediately accretive acquisition for REG, both parties win. Since REG’s stock is the currency of the transaction, they were able to circumvent the otherwise high cost of capital in today’s environment and make the deal beneficial to all parties involved.
Though we didn’t own either of the above acquisition targets in the examples above, we own their even cheaper sector peers. For more than thirty years we have been disciplined analysts in pursuit of issues that would provide high streams of income and earnings growth which could be purchased at steep discounts to their demonstrable intrinsic value. From 2000 to the Great Financial Crisis, more than 30 of these assets were the targets of acquisition. The return of stock as superior acquisition currency opens new opportunities for value investors.
Our inflation fighting, rate raising, and politically profligate market/investment environment has been frustrating. This renewed M&A activity should make it much more tolerable.