In-Depth Look into ARCP/Cole Merger

Two former competitors will become the world’s largest net-lease REIT, worth about $21 billion, as American Realty Capital Properties acquires Cole Real Estate Investments in an “epic transaction” for $11 billion.
Marc Nemer, of Cole

Marc Nemer, Cole CEO

Two former competitors will now become the world’s largest net- lease REIT worth about $21.5 billion as American Realty Capital Properties Inc. acquires Cole Real Estate Investments, Inc., in an “epic transaction” for $11.2 billion, the two companies announced today.

“It does create a juggernaut. It does create a category killer,”  ARCP chairman & CEO Nicholas Schorsch said during a morning conference call that also included Cole CEO Marc Nemer, who will be stepping down along with Christopher Cole, founder & executive chairman of the Phoenix-based company, once the merger is completed.

Christopher Cole, who was not on the conference call, said in a joint news release that the decision by Cole and its board to merge the companies under Schorsch’s leadership “is entirely forward-thinking.”

“Our two companies are far better and more powerful together than apart,” he said. “Our union provides immediate and obvious benefits of size, scale and diversification. This transaction represents a major step in achieving our goal of creating the premier real estate company that delivers best-in-class long-term results to our clients.”

He said the deal “provides compelling value and significant equity upside potential for Cole stockholders at a time when we believe the industry is consolidating.”

The merger of the New York-based ARCP and Cole will create a company with 3,732 properties leased to more than 600 tenants occupying more than 100 million square feet in 49 states and Puerto Rico. Nearly half of its annual rents will be coming from investment-grade tenants like Walgreens, CVS, FedEx and AT&T. The portfolio will be 99 percent occupied with an average remaining lease term of 11 years. ARCP said its combined enterprise value would total more than $21.5 billion, 64 percent more than its largest competitor in the net lease sector – Realty Income Corp.

The deal also includes Cole’s Private Capital Management business, a net lease REIT sponsor, described by Jeff Holland, Cole’s current president & COO, as “an attractive profitable business.” Holland will remain on as president of the capital markets group, Schorsch said.

“There appears to be a lot of upside with that piece and how they’re going to integrate the advisory business,” Brad Thomas, editor of The Intelligent REIT Investor, told Commercial Property Executive.

Other Cole executives staying on with the merged company will be Stephan Keller, currently executive vice president, CFO and treasurer, and Kirk McAllaster, executive vice president and CFO of non-listed REITs, he added. Schorsch said he would be acting CEO and chairman for the time being but searches were on for C-suite level executives. Cole and Nemer will retain significant ownership stakes in the company, according to Nemer. Cole has more than 100 employees, most of whom are also expected to stay with the merged company.

The boards of both companies have approved the merger but approval of stockholders of the two companies is needed to move forward. ARCP said it has secured $2.75 billion in financing from Barclays in connection with the transaction, which is expected to close in the first half of 2014. Meanwhile, Schorsch said ARCP’s $2.2 billion merger with CapLease Inc. is expected to close within the next 10 days and the $3.1 billion acquisition of American Realty Capital Trust IV, Inc. is also expected to be completed shortly.

The deal calls for ARCP top pay 1.0929 common shares valued at $14.59 for each Cole share or $13.82 in cash, 14 percent higher than Cole’s closing price on Tuesday.

Benefits would include $70 million in savings on expenses in the first year and ARCP increasing its dividend upon closing from 6 cents to $1 per share. ARCP also notes that the merged company would be well-positioned for possible inclusion in the S&P 500 Index, enhancing its investor base and visibility and adding liquidity.

The planned merger comes six months after Cole Credit Property Trust III, a non-listed REIT, fended off a nearly $10 billion hostile takeover bid by ARCP and chose instead to be acquired by its sponsor and asset manager, Cole Holdings Corp. The new entity, Cole Real Estate Investments, Inc. went public June 20, when it became listed on the NYSE.

The battle between Schorsch and Cole’s executives grew heated over a five-week period during March and early April, when CCPT III rejected several offers from ARCP and Schorsch finally backed down. Both Schorsch and Nemer addressed their previous stormy relationship and admitted that the companies are stronger now than they were back in the spring.

“This merger makes sense. The companies are better together than apart and that’s what makes a good marriage,” Schorsch said during the conference call.

Compared to the spring when he accused the Cole executives of not cooperating with his company’s attempts to negotiate, Schorsch said Wednesday, “We have a lot more clarity. This was a quote unquote friendly process. We were able to go through the numbers.”

Schorsch said he couldn’t go into too many details about how the two sides came together but he credited Nemer, Christopher Cole and the rest of the company’s leadership and admitted they all put aside their personal feelings and focused on business.

“Men got together. We sat down. We had a clear understanding of what both companies wanted. We did it in a much more amicable situation,” Schorsch said, adding that they spent time socializing and getting to know each other.

“We found there was a meeting of the minds,” he said.

Nemer said ARCP, which went on an aggressive acquisition spree after Cole rejected it, spending about $12 billion in mergers and acquisitions, was a “much more compelling strategic partner” now than in the past. ARCP is now investment graded, worth more than $10 billion before the merger and in the process of becoming self-managed by the end of this year.

“It makes all the sense in the world,” Nemer said. “One plus one equals five in this.”

Calling Schorsch “one of the best negotiators in the world,” Thomas said he wasn’t all that surprised that Schorsch went after Cole again.

“He made an offer. They turned it down. He made another offer. They turned it down,” Thomas recalled. “He came back and got the deal. When I look at this event, I give Nick a lot of credit for his patience and his gift for negotiating deals.”

ARCP has grown from a value of $250 million in September, 2011, when it began trading on the Nasdaq to an expected $21.5 billion value once the Cole merger is completed.

“Nick and his team have demonstrated the ability to grow their net lease business rapidly, yet deliberately, realizing value for their stockholders with every carefully mapped step,” said Christopher Cole.

Thomas said once this deal is concluded it may be harder for ARCP to have such substantial growth in the net-lease sector.

“The question is how will a company that size generate external growth,” Thomas added. “To grow 10 percent you have to go find some big whales out there and there just aren’t. Once this deal closes, it’s harder to move the needle. You’re really just bringing dividends at that point, not buying a lot of growth. When you have a merger like this, you start thinking who else is out there?”

Barclays and RCS Capital, the investment banking division of Realty Capital Securities, L.LC., are acting as financial advisors to ARCP. Proskauer Rose L.L.P., led by Peter Fass, is legal counsel to ARCP for the transaction. Goldman, Sachs & Co. is acting as exclusive financial advisor to Cole. Wachtell, Lipton, Rosen & Katz, Venable L.L.P., led by Robin Panovka, Ronald Chen and Donald Casey,  and Morris, Manning and Martin, L.L.P., are acting as legal counsel to Cole. Sullivan & Cromwell, L.L.P. is acting as special counsel to Christopher Cole and several other Cole executives for the transaction.