New offer cools tussle over control of Cole III

Nascent signs of a thaw emerged last week in the acquisition battle between two giants in the real estate investment trust world, but how it plays out remains anyone's guess. American Realty Capital Properties Inc. last Wednesday raised its bid for Cole Credit Property Trust III, a nontraded REIT, to no less than $13.59 a share in stock or $12.50 a share in cash after Cole disclosed more-detailed information about its properties. Publicly traded American Realty Capital's revised bid came a week after its initial, unsolicited offer of $12 in cash and stock for Cole III was summarily rejected by the REIT's board. Last Thursday, a special committee of outside board members said it would review the revised offer, but it also said it is committed to its own buyout plan. Under that scenario, the REIT would merge with Cole Holdings Corp., its management company, and the combined entity would be taken public.

"THRILLED'

“I'm thrilled they're open to our offer,” said American Realty Capital chief executive Nicholas Schorsch, adding that the two sides are working to set up a meeting. “Our offer is compelling, and obviously, [Cole is] taking it that way,” he said. Cole officials were not available for comment. Whether a deal can be struck remains up in the air, even though the war of words — Cole accusing American Realty Capital of making a lowball offer with its first bid, and American Realty Capital countering that Cole management simply wants to line its own pockets by having the REIT buy its management company — appears to have cooled a bit. Cole has said the REIT, whose client roster includes Home Depot Inc., Wal-Mart Stores Inc. and Lowe's, could be worth as much as $15.46 a share. Cole III was launched in 2009, with most investors buying in at $10 per share. For their part, investors appear pleased with the offer and are not focusing on the tit for tat. American Realty Capital's offer “seems like a nice way out,” said accountant George Peinado, who has about $50,000 invested in Cole III. Mr. Peinado said he thinks that if Cole rejects the latest offer, the company risks litigation. The new $12.50-a-share cash offer is “terrific,” said James Ball, co-founder of Ball Financial Services Co. But evaluating how stock in the merged entity would trade is much more difficult, he said. Mr. Ball and some of his clients are investors in Cole III. “If it's overleveraged, that will cause a drop in the [ARC] stock price,” Mr. Ball said. “And it's hard to know ... the leverage American Realty Capital would need — they need to borrow over $1 billion for this.” By contrast, Cole can use cash on hand and REIT shares to cover the upfront costs of buying the management company, he said. In a filing with the Securities and Exchange Commission, Cole said American Realty Capital's initial plan would create leverage “well above public peers'.” ARC would finance the deal primarily with floating-rate debt, Cole said in its filing.

"A NORMAL AMOUNT'

“Our leverage would go up, but our debt is already so low, we'd [be] going up from a very low number to a normal amount,” Mr. Schorsch countered. Under the Cole III plan, the REIT would buy the management company for $20 million upfront in cash, plus 10.7 million shares of the REIT at closing. Future share payouts would be made contingent on performance. Mr. Schorsch said Cole's plan amounts to $165.5 million upfront, which he called an “internalization” payment similar to roll-up deals of the past. Mr. Ball disagrees. “This is compensation for the acquisition of the entire Cole Holdings entity, and all the future revenues that come with it,” he said. True internalizations “typically [send] a skeleton crew to the REIT for an egregious sum, with no future benefit to the REIT other than the elimination of [management] fees,” Mr. Ball said. In fact, he thinks there could be significant upside to Cole's proposal, which is similar to the successful merger last October of the nontraded Corporate Property Associates 15 Inc. with its parent, the publicly traded real estate manager W.P. Carey & Co LLC. Shares of the new Carey REIT (WPC) have gained about 50% since the transaction closed. Mr. Schorsch said his stock also offers upside potential, and by merging the Cole REIT with the publicly traded American Realty Capital, the risks of an initial public offering can be avoided. Cole III, with $ 4.8 billion in equity raised from investors, is the second-largest U.S. REIT in terms of its market cap, according to investment bank Robert A. Stanger & Co. Inc.