Friday, March 22, 2013

Merger Update

I'm traveling and can't properly comment on the latest goings on between Cole Credit Property Trust III (CCPT III) and American Realty Capital Properties (ARCP) until later in the weekend.  In short, ARCP has offered to buy CCPT III for $12.00 per share or .80 of ARCP stock for each share of CCPT III.  Yesterday, CCPT III's board rejected the offer and affirmed is decision to go ahead with its plan to buy its sponsor as originally intended.

On the surface it seems to me that CCPT III needs more explanation as to why it's rejecting ARCP's $12.00 per share offer.  ARCP's bid eliminates the $150 million internalization fee to Cole, which likely explains the real basis for CCPT III's decision.

I'll post longer over the weekend.

Note that in an earlier post I didn't know whether the Cole transaction included eliminating the annual asset management fee.  It does and Cole will no longer receive an asset management fee.  The ARCP transaction also eliminates the annual asset management fee.


Anonymous said...

Cole's board needs to accept ARCP offer. Best deal for shareholders. BD community needs to make this happen.

Anonymous said...

The press has been too quick, and gullible, in believing anything ARC says. We've all seen these tactics before from them. Enough with this hostile takeover none sense. This would be a terrible move for Cole. In looking at the 8-K's and Cole's website, between this and the Spirit deal, it would be almost all of the property currently under Cole's management. As a shareholder in III, I wouldn't be at all surprised if the stock values at over $12, and the dividends have always been good under Cole's management. The CHC/III merger will allow that management to stay in place. this is not that much different than the WP Carey deal. I'm not quite sure what the fuse is about in terms of Mr. Cole's payout either. He took all the risk and has built a great company. As a small business owner, I feel as though my rewards have come from the risks I've taken. And I'm entitled to those rewards. Sounds to me like ARC is a bit nervous about Cole as a public company. Cole could very well be making the right move here, and shareholders could benefit now and in the future.

Rational Realist said...

Thank you for the comment. ARC is driving the narrative because Cole is not saying anything, which is unfortunate. Its rational for rejecting ARCP's offer is the same rational for the merger. You hit on a key point, Cole is selling this as a merger with a manager managing $12 billion in assets, but with the Spirit deal and the CCPT III internalization, fees on over $10 billion goes away. I'm sure Cole and its bankers accounted for this in their valuation metrics, but it'd be good for investors to read the disclosure, assumptions and methodologies.

This deal is way different from WP Carey. WP Carey was already public when it acquired CPA 15 - just the opposite of Cole Holdings. WP Carey took no internalization fees and no incentive listing fees when it acquired CPA 15 - just the opposite of Cole Holdings.

As a shareholder you are entitled to the rewards, not Cole. You took the risk, not Cole, and you should benefit. Cole was paid upfront and ongoing - regardless of any returns to you as a shareholder - for its services. It gets another incentive payment if it returns your capital plus 8% per year. You don't have to give Cole an additional big payday that was never disclosed to you upfront. Cole's attempt to receive both an internalization fee and an incentive fee are unprecedented. (Cole gets the incentive fee in ARCP's bid, but it doesn't get the internalization fee.)

As a small business owner you are entitled to the rewards of your success. If you have additional equity investors in you business, they are entitled to share the success, too. And if the other equity investors own all the equity in your company they are entitled too all the rewards. You can't burden equity investors with all the downside risk while you take all the upside. Business doesn't work that way. As a small business owner you know better than anyone that's a deal you'd never accept.

In the short-term, this may be a terrible deal for Cole, but it's a sure, profitable deal for CCPT III shareholders. Over time it looks much better for Cole. It now has a deal that returned, at minimum, a 20% appreciation. This is a marketable, tangible track record of investing and returning investor capital. Throw in the Spirit / CCPT II deal, which is still trading at more than the original $10 per share for CCPT II investors, and Cole has two huge wins for investors. Remember CCPT II invested a large portion of its portfolio before the credit crisis / recession, which makes its greater than par value performance all the more impressive.

Anonymous said...

Why don't you think they couldn't get that same 20% (or even better) with their merger of the advisor and subsequent listing? This is not a typical internalization (ala, Inland, CNL, Wells, etc...). This is an acquisition of a sponsor that has significant revenue. The end result is a company hat does look very much like the structure of WPC, a company trading at a much lower yield than ARCP.

Rational Realist said...

Last Anonymous, I didn't say that a Cole listing couldn't get $12. I know that ARCP's offer is $12 and that is now the baseline price Cole has to exceed. I hope this stock - who ever ends up controlling it - trades for $14, or $15, or more. I don't have the figures to know whether WPC and Cole are similar - same percentage or revenue and earnings coming from syndications - to make a valid comparison. ARCP's yield is 6.2% and WPC's yield is 4.8%. Another company in the mix is NorthStar Realty Finance (NRF) which is a mortgage REIT that is offering non-traded REITs. It trades a 7.6% yield, but again haven't looked at the contribution of its syndication business to its revenue and profitability.

Anonymous said...

Cole's 8K filed today provides more information and the declination. Makes sense.

Anonymous said...

According to Cole's recent filing, the management company is forecasted to produce $29 million in EBITDA excluding revenues from Cole 2 and 3. If you place a cap rate on that acquisition, it equates to a 22.8% cap (29mm/127mm). So it seems Trust 3 is making out well and Chris Cole has a 3 year phase-out in shares. I like this move by Cole considering the potential IPO being higher than $12 and the added revenue form the parent. Lets also not forget, Cole Trust 3 eliminates $50mm in management fees by acquiring the company. I'm sure Nick Schorsch would love to have that in his pocket if his external manager acquires Cole 3.

Anonymous said...

Looks like ARC made a better offer then Cole could deliver.