Schorsch snares the brass ring he missed the first time with Cole deal

Acquires rival that rebuffed him earlier in the year for $11.2B

Oct 23, 2013 @ 12:34 pm

By Bruce Kelly

Nicholas Schorsch, CEO of American Realty Capital
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Nicholas Schorsch, CEO of American Realty Capital

Nicholas Schorsch finally got his prize Wednesday when American Realty Capital Properties Inc. said it had acquired rival Cole Real Estate Investments Inc. in a deal valued at $11.2 billion.

With this merger, the acquisitive Mr. Schorsch, chief executive of American Realty Capital Properties and other related real estate companies, will gain control of a net-lease real estate investment trust that he had made an aggressive run at in the spring. He was rebuffed by an entrenched Cole management team that claimed publicly that Mr. Schorsch never made an honest offer for the REIT.

(In Depth: A look at Nicholas Schorsch's year-long buying binge)

Expected to close by the middle of next year, the ARCP-Cole merger will create the largest net-lease REIT, with an enterprise value of $21.5 billion, according to the two companies. The offer has two parts: $7.2 billion in stock or cash and $4 billion in assumed debt.

Cole shareholders will receive $13.82 per share in cash or $14.59 per share in American Realty Capital Properties stock, which was a 13.8% premium over the closing price for Cole shares Tuesday. ARCP will increase its annual dividend to $1 per share, from 94 cents, once the merger closes.

The announcement of the merger was made just barely six months after ARCP launched a hostile takeover bid for Cole's predecessor, a nontraded REIT called Cole Credit Property Trust III. Cole summarily rejected ARCP's unsolicited bids for the company, the first for $12 per share and a follow-up for $12.50 in cash per share or $13.59 in ARCP stock.

The ARCP offers came on the heels of Cole Credit Property Trust III's announced acquisition of its manager, Cole Holdings Corp., for $127 million. Such transactions, called “internalizations” of company management in the nontraded REIT industry, have recently been roundly criticized as a layer of management fees that erodes shareholder value.

The broker-dealer community was “frustrated” that Cole Credit Property Trust III rejected ARCP's bid of $12.50 in cash per share, said Daniel Wildermuth, CEO of Kalos Financial, a broker-dealer that focuses on alternative investments.

The merger is “an effort on Cole's part to gain some credibility back in the market,” Mr. Wildermuth said. “At different due diligence conferences, there was talk about the general unhappiness at [Cole III] not taking the $12.50 offer. Cole can look at this and say, 'Everybody wins.'”

In an interview after the deal was announced, Mr. Schorsch took the blame for the fractious negotiations between the two companies, which resulted in top executives at Cole characterizing Mr. Schorsch's offer as “illusory” and “misleading” in a letter to investors.

That letter was signed by Marc Nemer and Chris Cole, respectively, CEO and chairman of Cole Holdings Corp., the management company for the REIT.

“In reality, Mark and Chris had a strong vision of their company, and I probably went about it the wrong way,” Mr. Schorsch said. “Things got off on the wrong foot, and today we're a better partner,” he said, adding that ARCP's recent string of acquisitions, reaching “investment grade” status, and issuing preferred shares as important steps in making the company a more attractive partner for Cole.

“Mark and Chris had an open mind” to sit down and get the deal done, he said. “There's no acrimony.”

Before last week, the share price for Cole Real Estate Investments, which listed on the New York Stock Exchange in June, had not closed at the $12.50 per share that Mr. Schorsch had previously offered. It jumped to a high of $14.61 a share Wednesday morning before falling back slightly to $13.99 by afternoon.

“Most of our shareholders are invested as part of Cole Credit Property Trust III,” the nontraded REIT, Mr. Nemer said. “They invested at $10 per share, and now, let's call it $14. If you add the price appreciation onto the dividend, it's a terrific result for our shareholders.”

Mr. Schorsch has been on an acquisition tear this year. Through ARCP, he has closed or announced seven separate acquisitions, including the Cole deal. Through RCS Capital Corp., a holding company, and its entities, he has announced acquisitions of two independent broker-dealers and one alternative-asset manager.

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