American Realty Capital Trust (ARCT) announced today that it is being acquired by Realty Income Corporation (O). Realty Income is buying ARCT with stock at a fixed ratio of .2874 shares of Realty Income for every share of ARCT. According to this morning's press release, the transaction is worth $2.95 billion, or $12.21 per share to ARCT investors, based on Realty Income's closing stock price yesterday of $42.48. The combined market value of the two companies is approximately $7.5 billion. None of the current ARCT management is moving to Realty Income Corporation.
The transaction is expected to close in the fourth quarter of 2012, or early in the first quarter of 2013. Upon the close of the transaction, current ARCT investors will receive Realty Income stock in exchange for their ARCT shares. Realty Income is an actively traded NYSE stock, and its price is going to vary, so the merger value will fluctuate until the acquisition closes. The conversion ratio of .2874 Realty Income shares for each ARCT share is fixed. I haven't read this in any press release or news article on the transaction, but I calculate that an original ARCT investor (shares purchased at $10.00) will see a drop in yield from the current 7.1% to 5.6%, after the transaction closes and after Realty Income implements the $.13 per share dividend increase announced in the press release.
Realty Income's purchase of ARCT is not a liquidity event. ARCT listed all its shares on NASDAQ in early March, and this was ARCT's liquidity event for investors. ARCT shares will stay fully liquid before the merger, and after the merger the new Realty Income shares will be fully liquid.
Realty Income is a net lease real estate investment trust (REIT). It listed on the NYSE in 1994, when multiple RIC limited partnerships were "rolled-up" to form Realty Income Corporation. Realty Income has trademarked the term Monthly Dividend Company, and according to its website it has raised dividends 67 times since it listed in 1994, and has seen dividend growth of 101.5% since 1994.
ARCT shareholders that purchased shares in ARCT's primary offering at $10.00 per share, and still own their shares, have a 22% premium based the transaction values in the press release. ARCT shareholders, upon completion of ARCT's acquisition by Realty Income, become part of an established company nearly four times as large as ARCT as a stand-along company. As noted previously, the transaction is not a liquidity event, and ARCT investors do not have to sell their Realty Income shares after the merger is complete.
It's hard not to see the transaction as positive for shareholders, even with the drop in yield. Realty Income is now the largest net lease REIT has a long history of paying and raising its dividend. Realty Income's stock chart from its 1994 inception is below: