Cole III rejects latest offer from American Realty Capital

After more than two weeks of wrangling, Cole Credit Property Trust III said Friday it was rejecting the latest hostile takeover bid by American Realty Capital Properties Inc. to acquire the real estate investment trust, but ARCP said it might raise the offer once again. A committee of Cole III's board of directors determined the ARCP offer, even after it had been raised and revised to make it more appealing, was not in the best interest of the REIT and its shareholders. American Realty Capital Properties initially made its hostile bid for Cole III on March 19, with the Cole board quickly rejecting it. ARCP maintained its pursuit, upping the bid from $12 per share in cash and stock to no less than $13.59 a share in stock or $12.50 in cash. After learning of Cole's rejection, ARCP chief executive Nicholas Schorsch said the board of ARCP had not quite yet given up its quest to buy Cole III and could perhaps increase its offer. “We're even willing to consider 100% cash, but we can't do that without constructive negotiation,” he said. “It's a question of, do you want the money? All the rest of this is noise.” Coming weeks after Cole III said it was going to buy its investment manager, Cole Holdings Corp., for $127 million and then prepare to list on the NYSE in June, the ARCP bid set off a firestorm of ill will and animosity between the “net lease” rivals. American Realty Capital Properties argued that a merger would be positive for investors, with $1 billion going to Cole clients. Meanwhile, Cole III said the rival bid failed to acknowledge the full value of the REIT and larded on excessive and risky debt to the combined entities. “We're not that highly levered and we have plenty of money,” Mr. Schorsch said in response to Cole III's claims about ARCP's shortcomings. “Investors are mad, the advisers are mad, the broker-dealers are mad. I didn't cause that.” American Realty Capital Properties has a market capitalization of $2.26 billion. Cole III has $7.5 billion in assets. American Realty Capital Properties' initial bid of cash and stock was for $5.7 billion. ARCP later revised its bid to include a greater amount of cash. Both the nontraded Cole III and the publicly traded American Realty Capital Properties buy “triple net lease” properties, meaning the tenant pays for costs such as maintenance, taxes and insurance. Such REITs have been widely popular with financial advisers since the credit crisis because of the credit quality of the tenants and the stability of the cash flow from the leases. Mr. Schorsch has been a lightning rod in the deal. His American Realty Capital sponsors a number of REITs that share the American Realty Capital brand, including the aforementioned ARCP. Earlier this week, Mr. Schorsch blasted the Cole III board for being unresponsive to the offer. The Cole board said it had considered the offer and that Mr. Schorsch didn't have his facts straight. The contention between the two sides has clearly done damage to the reputations of both sides involved in the negotiations. In a meeting with InvestmentNews on Wednesday, a half-dozen advisers attending an American Realty Capital training meeting in New York were highly critical of Cole III's intense aversion to Mr. Schorsch's offer. The advisers said Cole's skepticism about ARCP's bid was damaging to advisers' trust in Cole, and they said they would like to see some type of shareholder vote on the proposal. The advisers also said they were worried a rejection by Cole of the American Realty Capital Properties bid would be another black eye for the nontraded REIT industry, which has drawn intense scrutiny from regulators questioning how advisers sell the REITs to investors. “What I want is the best thing for my clients,” said adviser John Morrow of MI Financial Services. “What I think [the Cole executives] should understand is those people who have invested $30,000 or $40,000 and taken the income off that, they need that money to live in.” “What Cole should look at is how they can make a profit on the deal, but also do the best thing for the shareholder,” Mr. Morrow said. Shareholders bought a nontraded REIT, but rolling Cole's investment manager into the REIT transforms the entity into something that the shareholder didn't initially buy, he said. “It's not what they bought,” he said. “All of a sudden, the investors own a stock when they didn't buy one. They bought the Cole REIT in the first place because it's very stable and gives them a stable dividend.” Of course, other advisers approve of Cole III rejecting the bid. The REIT has plenty of value, those advisers argue, and they are willing to wait for Cole III go public and list on the NYSE in June. “I would prefer to go public and if ARCP wants to buy (Cole III), buy it then,” said Joe Keifer, an adviser with Cornerstone Wealth Management in St. Louis. “It seems to me ARCP is interested in buying Cole III at an attractive valuation. Common sense tells me their offer is at a discount that market will eventually price Cole III.”