Stanger: ARC-Retail Merger a Valentine’s Day Massacre for Shareholders
Robert A. Stanger & Co issued another special report blasting the controversial merger of two AR Global non-traded REITs, American Realty Capital Retail Centers of America and American Finance Trust, that was narrowly approved by shareholders on February 14th.
This is the fourth special report issued by the investment bank in recent months excoriating an ARC/AR Global orchestrated merger involving one of its externally advised real estate investment trusts. The first report critiqued a handful of ARC-sponsored REITs for filing proxy statements attempting to eliminate certain investor protections in their charters while the companies were in an ongoing strategic review process and undisclosed REIT roll-up. Stanger then rebuked the then-pending merger of ARC Retail and American Finance Trust, and last week it issued a scathing horror-themed report critiquing the recently announced transaction between American Realty Capital Hospitality Trust and Brookfield Strategic Real Estate Partners II.
In the latest report titled St. Valentine’s Day Massacre, Stanger drew comparisons between the merger and the brutal 1929 St. Valentine’s Day massacre of seven gang members in Chicago by affiliates of Al Capone.
“The 2017 St. Valentine’s Day Massacre of the RCA shareholders is one for the ages in terms of assaults on the sensibilities of investors,” said Stanger. “The investors are now at the mercy of an apparently conflict ridden board and an onerous management agreement with a brutal exit clause that will likely overhang the value of the merged entity. The only remaining safety valve may be a pending class action lawsuit that may seek to recover the damages inflicted upon the RCA investors.”
ARC Retail investors approved the merger with 50.21 percent voting for it, a transaction that Stanger believes will likely “cripple the value of the [its] investors’ holdings.”
ARC Retail investors were not informed of the current value of American Finance Trust, yet were given a total per share consideration of $0.95 in cash and 0.385 shares of American Finance Trust. Additionally, Stanger noted that the proxy statement disclosed a transaction price of $10.26 per ARC Retail, but that the value is likely hovering in the $8s.
One of the most eye-opening aspects of the transaction is the 20-year, virtually non-cancellable management agreement with AR Global and a potential internalization fee payable to AR Global of over $110 million.
“We will not be surprised to see AR Global monetize that contract sometime in the future in a huge payday by selling it to a third-party management company – a payday bought at the expense of the RCA investors,” said Stanger.
ARC Retail shareholders recently filed a class action lawsuit alleging that the REIT’s officers and directors were soliciting shareholders’ approval through a materially false and misleading proxy statement, and in breach of their fiduciary duties. Plaintiffs are demanding a jury trial.