American Realty Capital (ARCP) to Acquire ARCT IV in $3.1B Deal
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American Realty Capital Properties, Inc. (Nasdaq: ARCP) and American Realty Capital Trust IV, Inc. ("ARCT IV") announced that they have signed a definitive merger agreement whereby ARCP will acquire all of the outstanding shares of ARCT IV for stock and cash in a transaction valued at approximately $3.1 billion. As a result of this and other previously announced acquisitions, ARCP will own 2,579 single tenant properties net leased to 470 tenants across 29 industries in 48 states. ARCP's projected pro forma enterprise value will be approximately $10 billion, with annualized rent of more than $527 million, of which 57% will be from investment grade tenants. The merger agreement has been approved by the independent directors of both companies, and is subject to customary closing conditions, including stockholder votes by both companies. The acquisition is expected to close by the end of the third quarter of 2013. Stockholders of record for each company as of July 2, 2013 will be entitled to vote on the proposals related to the merger.
Pursuant to the terms of the merger agreement, each outstanding share of ARCT IV will be converted into a right to receive, at the election of each ARCT IV stockholder, a fixed exchange ratio of 2.05 shares of ARCP common stock, valued at $31.02 based on ARCP's volume weighted average stock price of $15.13 for the five trading days ended July 1, 2013, subject to adjustment or cash payment at ARCP's option to establish a guaranteed floor value of $30.62 per share. Alternatively, an ARCT IV stockholder may elect to receive $30.00 per share in cash, limited to the consideration paid with respect 25% of the ARCT IV shares outstanding. The portion of the consideration consisting of ARCP shares will be tax-free for ARCT IV shareholders. ARCP shares issued to ARCT IV stockholders will not be subject to any "lockup."
As a result in part of this pending acquisition, ARCP has increased its 2014E adjusted funds from operations ("AFFO") guidance to $1.19 - $1.25 per share, equivalent to approximately 31% growth over 2013E AFFO per share at the midpoint of the respective ranges. This projected AFFO growth rate leads the net lease industry. In addition to the projected impact of the acquisition of ARCT IV, revisions to 2014 guidance include the reduction of outstanding debt as well as refinancing of certain short- and medium-term borrowings to longer term indebtedness in order to maintain financial flexibility and further ARCP's intention to seek an investment grade corporate credit rating. Further, ARCP will increase its annualized dividend to $0.94 per share, effective upon the earlier to occur of the close of this merger and the close of ARCP's previously announced merger with CapLease, Inc. The dividend increase will be ARCP's 7th consecutive quarterly dividend increase.
ARCP Strategic, Financial and Portfolio Benefits
AFFO Growth: Pro forma combined company AFFO is estimated to grow dramatically by approximately 31% from previously issued guidance for 2013E of $0.91 to $0.95, to updated guidance for 2014E of $1.19 to $1.25.
Enhanced Portfolio Diversification: The pro forma combined company will have greatly enhanced portfolio diversification by increasing the number of distinct corporate credit tenants to 470 (formerly 302 for ARCT IV and 229 for ARCP), number of industries to 29 (formerly 16 for ARCT IV and 27 for ARCP) and 2,579 properties located in 48 states, plus Puerto Rico.
Increased Lease Duration: The pro forma combined company will have 10.0 years of remaining lease duration as of year-end 2013.
Increased Size and Scale: On a combined basis, the merged entities will have an enterprise value of $10.2 billion (assuming the close of previously announced transactions), making the combined company the 2nd largest publicly-traded net lease real estate investment trust ("REIT"), which is expected to further improve the company's balance sheet flexibility, cost of capital, float and provide other benefits afforded to larger -sized companies.
Operating Synergies and Cost Reduction: $8 million of expected G&A synergies and reduction of costs by eliminating overhead and other non-essential expenses.
ARCT IV Transaction Rationale
Attractive Return to ARCT IV Stockholders: Minimum total return of 31% to ARCT IV stockholders, including a full return of gross invested capital, a 22.5% share premium (assuming the guaranteed floor stock consideration value) and dividends paid since inception, assuming 100% stock election.
Increased Dividend Yield: ARCT IV's annualized dividend per share is expected to increase by $0.28, or 17%, from $1.65 to ARCP's annualized dividend per share of $0.94 ($1.93 per share after adjusting for the 2.05x exchange ratio).
Combined Lower Cost of Capital: ARCP's average cost of debt is priced at a fixed interest rate of 2.45%, which is significantly accretive to overall corporate earnings. Additionally, the potential ability for the shares to trade at a higher AFFO multiple, in line with the peer set, could result in an overall lower cost of equity.
Tax-Free Exchange: The transaction is tax free for ARCT IV stockholders to the extent of ARCP stock received.
ARCP Raises 2014 Earnings Estimates
ARCP has revised 2014 AFFO, which is expected to range from $1.19 to $1.25 per share, an increase of approximately 31% over the previously issued guidance 2013 AFFO per share of $0.93. The Street sees AFFO of $1.12.
The AFFO per share estimate for 2014 is based on the following assumptions:
* Acquisition of investment properties totaling $1.0 billion (70% long-duration and 30% mid-duration), capitalized with 65% equity and 35% debt;
* Increased duration of outstanding indebtedness by new issuance of long term senior unsecured notes; and,
* Estimated fully diluted common shares and share equivalents outstanding of 396 million shares and share equivalents.
Transaction Advisors
Citigroup Global Markets Inc. is acting as financial advisor and Duane Morris LLP is acting as special legal counsel to ARCP in connection with the transaction. BofA Merrill Lynch is acting as financial advisor and Weil, Gotshal & Manges LLP is acting as special legal counsel to ARCT IV in connection with the transaction. RCS Capital, the investment banking division of Realty Capital Securities, LLC, is acting as financial advisor and Proskauer Rose LLP is acting as corporate counsel to ARCP and ARCT IV.
Timing and Closing Process
ARCP's acquisition of ARCT IV is contingent upon the approval by ARCP's stockholders of the issuance of ARCP common stock in connection with the merger and the approval by ARCT IV's stockholders of the merger. A registration statement is expected to be filed in the near future and, following its effectiveness, a joint proxy statement, prospectus and proxy voting card will be mailed to each company's stockholders. The transaction is expected to close shortly following the receipt of approval from both ARCP's and ARCT IV's stockholders.
Pursuant to the terms of the merger agreement, each outstanding share of ARCT IV will be converted into a right to receive, at the election of each ARCT IV stockholder, a fixed exchange ratio of 2.05 shares of ARCP common stock, valued at $31.02 based on ARCP's volume weighted average stock price of $15.13 for the five trading days ended July 1, 2013, subject to adjustment or cash payment at ARCP's option to establish a guaranteed floor value of $30.62 per share. Alternatively, an ARCT IV stockholder may elect to receive $30.00 per share in cash, limited to the consideration paid with respect 25% of the ARCT IV shares outstanding. The portion of the consideration consisting of ARCP shares will be tax-free for ARCT IV shareholders. ARCP shares issued to ARCT IV stockholders will not be subject to any "lockup."
As a result in part of this pending acquisition, ARCP has increased its 2014E adjusted funds from operations ("AFFO") guidance to $1.19 - $1.25 per share, equivalent to approximately 31% growth over 2013E AFFO per share at the midpoint of the respective ranges. This projected AFFO growth rate leads the net lease industry. In addition to the projected impact of the acquisition of ARCT IV, revisions to 2014 guidance include the reduction of outstanding debt as well as refinancing of certain short- and medium-term borrowings to longer term indebtedness in order to maintain financial flexibility and further ARCP's intention to seek an investment grade corporate credit rating. Further, ARCP will increase its annualized dividend to $0.94 per share, effective upon the earlier to occur of the close of this merger and the close of ARCP's previously announced merger with CapLease, Inc. The dividend increase will be ARCP's 7th consecutive quarterly dividend increase.
ARCP Strategic, Financial and Portfolio Benefits
AFFO Growth: Pro forma combined company AFFO is estimated to grow dramatically by approximately 31% from previously issued guidance for 2013E of $0.91 to $0.95, to updated guidance for 2014E of $1.19 to $1.25.
Enhanced Portfolio Diversification: The pro forma combined company will have greatly enhanced portfolio diversification by increasing the number of distinct corporate credit tenants to 470 (formerly 302 for ARCT IV and 229 for ARCP), number of industries to 29 (formerly 16 for ARCT IV and 27 for ARCP) and 2,579 properties located in 48 states, plus Puerto Rico.
Increased Lease Duration: The pro forma combined company will have 10.0 years of remaining lease duration as of year-end 2013.
Increased Size and Scale: On a combined basis, the merged entities will have an enterprise value of $10.2 billion (assuming the close of previously announced transactions), making the combined company the 2nd largest publicly-traded net lease real estate investment trust ("REIT"), which is expected to further improve the company's balance sheet flexibility, cost of capital, float and provide other benefits afforded to larger -sized companies.
Operating Synergies and Cost Reduction: $8 million of expected G&A synergies and reduction of costs by eliminating overhead and other non-essential expenses.
ARCT IV Transaction Rationale
Attractive Return to ARCT IV Stockholders: Minimum total return of 31% to ARCT IV stockholders, including a full return of gross invested capital, a 22.5% share premium (assuming the guaranteed floor stock consideration value) and dividends paid since inception, assuming 100% stock election.
Increased Dividend Yield: ARCT IV's annualized dividend per share is expected to increase by $0.28, or 17%, from $1.65 to ARCP's annualized dividend per share of $0.94 ($1.93 per share after adjusting for the 2.05x exchange ratio).
Combined Lower Cost of Capital: ARCP's average cost of debt is priced at a fixed interest rate of 2.45%, which is significantly accretive to overall corporate earnings. Additionally, the potential ability for the shares to trade at a higher AFFO multiple, in line with the peer set, could result in an overall lower cost of equity.
Tax-Free Exchange: The transaction is tax free for ARCT IV stockholders to the extent of ARCP stock received.
ARCP Raises 2014 Earnings Estimates
ARCP has revised 2014 AFFO, which is expected to range from $1.19 to $1.25 per share, an increase of approximately 31% over the previously issued guidance 2013 AFFO per share of $0.93. The Street sees AFFO of $1.12.
The AFFO per share estimate for 2014 is based on the following assumptions:
* Acquisition of investment properties totaling $1.0 billion (70% long-duration and 30% mid-duration), capitalized with 65% equity and 35% debt;
* Increased duration of outstanding indebtedness by new issuance of long term senior unsecured notes; and,
* Estimated fully diluted common shares and share equivalents outstanding of 396 million shares and share equivalents.
Transaction Advisors
Citigroup Global Markets Inc. is acting as financial advisor and Duane Morris LLP is acting as special legal counsel to ARCP in connection with the transaction. BofA Merrill Lynch is acting as financial advisor and Weil, Gotshal & Manges LLP is acting as special legal counsel to ARCT IV in connection with the transaction. RCS Capital, the investment banking division of Realty Capital Securities, LLC, is acting as financial advisor and Proskauer Rose LLP is acting as corporate counsel to ARCP and ARCT IV.
Timing and Closing Process
ARCP's acquisition of ARCT IV is contingent upon the approval by ARCP's stockholders of the issuance of ARCP common stock in connection with the merger and the approval by ARCT IV's stockholders of the merger. A registration statement is expected to be filed in the near future and, following its effectiveness, a joint proxy statement, prospectus and proxy voting card will be mailed to each company's stockholders. The transaction is expected to close shortly following the receipt of approval from both ARCP's and ARCT IV's stockholders.
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