Even though American Realty Capital Properties Inc. has withdrawn its bid to acquire Cole Credit Property Trust III, the controversy over the merger of the REIT with its manager is just getting going.
Even though American Realty Capital Properties Inc. has withdrawn its bid to acquire Cole Credit Property Trust III, the controversy over the merger of the REIT with its manager lingers.
At least three shareholder lawsuits have been filed against Cole III since the real estate investment trust announced in early March that it planned to merge with Cole Holdings Corp. and go public. The suits allege that Cole's internal merger benefited Cole management, not REIT shareholders.
In withdrawing its offer last Thursday, ARCP said it faced serious risks if it pursued the bid, including “numerous pending class action and [shareholder] derivative lawsuits.”
“If we were to buy, and any of this litigation had a cost attended to it ... we would bear that cost,” said Nicholas Schorsch, ARCP's chief executive. “That's a risk we can't take.”
ARCP's decision to step away could bolster the shareholder suits, said Matt Edling, an attorney at Cotchett Pitre & McCarthy LLP, who represents Cole shareholders in one of the claims.
“The fact that there is no longer a bid clarifies what the damages are to the [Cole III] shareholders,” he said.
By rejecting the offer, it has become clear that “Cole is depriving shareholders [of] the $150 million Cole is paying itself in the internalization,” Mr. Edling said.
ARCP launched its hostile bid for the nontraded REIT on March 19, offering $12 per share. After Cole management quickly rejected the offer, ARCP upped its bid to $12.50 in cash or $13.59 in ARCP shares.
Mr. Schorsch pegged the total value of Cole at $9.7 billion.
The withdrawal of ARCP's bid came nearly a week after Cole III closed on its previously announced acquisition of Cole Holdings. The REIT paid $20 million in cash and 10.7 million of its shares at the April 5 closing, with future share payouts contingent on performance.
Cole plans to take the combined company public in June. Mr. Schorsch, however, sees the pending litigation as an obstacle to Cole's plans for an initial public offering.
“I think [the IPO] is going to be a problem,” he said. Cole refused to negotiate with him, he said, “and therein lies the liability for the board” of Cole III.
A Cole spokesman late last week declined to comment about Mr. Schorsch's remarks.
In a statement Thursday responding to ARCP's withdrawal, Cole said: “Recent public activities have highlighted, if nothing else, the ... robust value of our portfolio and business model. We thank all of our broker-dealers, financial advisers and stockholders for their support.”
Several advisers with money in Cole programs gave the thumbs-up last week to Cole III's plan to go public as an internally managed REIT.
“In my humble opinion, ARCP was being a bully and trying to silence their competition,” said Gary Battenberg, an adviser at Royal Alliance Associates Inc.
Mr. Battenberg feels that his clients will do better over the long term with Cole management.
Both ARCP and Cole are major players in the triple-net-lease property market, in which high-quality tenants — not the REIT sponsors — are responsible for maintenance, insurance and tax costs for the properties.
Eric Reinhold, an adviser with Ameriprise Financial Inc., supports Cole III's plan and hopes the IPO comes out “somewhere between $13 and $14, or slightly higher.”
If shares are offered below the $12.50 in cash that ARCP was offering, however, “that won't look good,” he said.
But with the market rallying lately, Cole is “probably in the sweet spot right now” in terms of getting an IPO done, he said.
