Tweet This
Last week Iron Mountain (IRM) announced that the company had reached an agreement to acquire Recall Holdings Ltd., an Australian-based document storage company with a similar business model to the US-based REIT.
Under the proposed (100% stock) deal, Recall shareholders will receive 0.1722 of an Iron Mountain common share for each Recall share. Iron Mountain will establish a secondary listing on the Australian Securities Exchange to allow Recall's shareholders to trade Iron Mountain shares locally, if the scheme of arrangement is approved and implemented.
Iron Mountain will offer Recall shareholders the option to elect to receive alternative consideration of A$8.50 per Recall share in cash. This would be subject to a proration mechanism that will cap the total amount of cash consideration to be paid to Recall shareholders at A$225 million.
The contemplated transaction is valued at around $1.96 billion (in US dollars) or A$2.5 billion in Australian dollars (based on Iron Mountain's closing price and Recall's share count of 313,670,000).
Iron Mountain noted that the terms of the proposed transaction will not be adjusted for any dividends that Recall or Iron Mountain pay in the ordinary course or any dividends.
While the deal is subject to due diligence and regulatory approval (could take up to 12 months to close), the transaction could provide meaningful synergies for the US-based REIT.
Currently Iron Mountain has a geographic mix that includes 63% domestic and 37% international income while Recall generates around 42% in the US and 58% internationally. The business mix is similar with both companies deriving around 75% of income from records management and the balance in data management and shredding.
Earn safe, reliable income with the help of veteran real estate expert Brad Thomas in Forbes' newest advisory Forbes Real Estate Investor.
Iron Mountain Flexes Its REIT Muscle
Iron Mountain made a run ($1.8 billion bid) at Recall Holdings last year but the offer was rebuffed. Also, in the same month (December 2014) Iron Mountain’s REIT status was declared effective and as a result, a special meeting of the company's stockholders was held on January 20, 2015 to seal the plan of merger between the C-Corp. and the REIT.
That was just a "rubber stamp" though since Iron Mountain was already a REIT in many ways.
The biggest hurdle for the Boston-based company was receiving a Private Letter Ruling (or PLR) from the IRS and specifically a letter stating that the characterization of the company's steel racking structures was “real estate”.
In 2014 Iron Mountain had already achieved IRS approval for REIT status retroactively as of January 1st, completing the process that began in 2012.
Remember that by converting to a REIT Iron Mountain is now required to payout at least 90% of taxable income to investors, resulting in a substantially higher dividend than the company previously paid.
Also, in addition to the clarity with regards to the definition of steel racking as real estate, Iron Mountain will be deemed somewhat of a hybrid as it relates to its peer classification.
In other words, there are no direct peers.
Although Data Center REITs have racking systems (like Iron Mountain) the business model is entirely different from traditional data storage of self-storage because of the service component that is associated with Iron Mountain's integrated data management business.
Conversely, Iron Mountain rents out space in larger buildings that are comparable to Industrial REITs. So in terms of peer orientation, Iron Mountain has a unique operating model that is akin to self-storage (both offer ancillary services) and also big box warehouses.
Iron Mountain’s quest for REIT status took years to finalize and now that the company is officially a REIT, the vehicle is well-positioned to take advantage of the favorable M&A activity that will facilitate the opportunity for the 64 year-old company to extend its brand.
What are the Hurdles?
Iron Mountain says that the company has already conducted due diligence and the preliminary reports indicate that the regulatory process should be favorable with a “low probability” that the deal is rejected.
The most likely scenario is that the company will have to sell off some of the pieces (for regulatory clearance) while the earnings potential for the new deal appear should provide an enhanced growth profile and greater economies of scale (with significant synergies). With around 50% of synergies achieved in Year 2 (2017) the transaction is expected to generate high single-digit Adjusted EPS, FFO, and AFFO accretion.
Iron Mountain has come a long way since its founder (Herman Knaust) turned an underground mushroom storage business (in 1951) into a document storage dynamo. Today Iron Mountain serves over 156,000 customers in 36 countries and 5 continents.
Assuming the Recall deal closes, these two industry giants (No. 1 and No. 2 in the world in the data-storage business) should extend their reach and Iron Mountain will become a larger target for dedicated REIT investors.
Iron Mountain has agreed to a 3% breakup fee (based on equity value) if the deal is not approved (due to antitrust) – another good indicator that the deal is likely to see a favorable outcome.
Assuming the midpoint of Iron Mountain’s synergy range, consensus estimates of Recall's 2015 EBITDA and the fixed exchange ratio, the REIT estimates that the going-in EBITDA multiple is just over 12x and is reduced by 4 to 4.5 turns on a fully synergized basis, demonstrating the benefits of the proposed transaction.
At the end of Q1-15 Iron Mountain had liquidity of more than $780 million and the current debt to total market capitalization is roughly 38%, in line with major REIT averages.
A Margin of Safety?
On the day that the Recall deal was announced IRM shares edged up indicating the accretion attributes - a likely indicator that the (Recall) deal will close. However, the broader REIT selling has sparked a slide in the share price that is now around 10% below the 30-day price.
Iron Mountain is now trading at $34.25 with a 5.5% dividend yield. The AFFO (adjusted funds from operations) multiple is 14.5x ($2.35/share in AFFO) and the historical AFFO/share norm is 16 to 17x. (Also cheap compared with peers in the self-storage and industrial sectors).
Assuming the Recall deal closes, I believe the share price will move considerably higher, especially since the Institutional investors will become more fixated on the size and scale of the leading data-storage brand.
The proposed Recall transaction is no sure deal but the 5.5% dividend yield seems like a good way to get paid while waiting (on the Regulators). Based on the current share price (of $34.25) I believe there’s a margin of safety with Iron Mountain that provides minimal price risk with attractive overall total return prospects.
Brad Thomas is the Editor of the Forbes Real Estate Investor and he has no ownership in IRM.
Source: IRM Investor Presentation and SNL Financial.
