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Apollo/AR Capital Deal Falls Apart

A deal between private-equity firm Apollo Global Management LLC (NYSE: APO) and real estate mogul Nicholas Schorsch’s AR Capital has been mutually terminated, according to a joint press release issued early Monday morning. RCS shares plummeted 45 percent following the announcment, with shares trading at $0.51 each at the time of publication.

Apollo was expected to take control of Schorsch’s $19 billion real estate investment empire in October, but anonymous sources cited in a Wall Street Journal article on Friday indicated that investigations into the widely publicized American Realty Capital Properties accounting scandal and other financial problems negatively impacted the deal.

The DI Wire reported in August that Apollo was to purchase a 60 percent majority interest for $378 million in AR Global Investments, a new company that would own the asset management business of AR Capital. AR Capital manages approximately $19 billion of alternative assets across a variety of real estate investment trusts, business development companies, mutual funds and other partnerships. Schorsch would have served on the board of directors and as a senior managing director of the new company. The deal would have also provided an opportunity for Schorsch and other senior ARC executives to earn up to $900 million in other compensation.

In addition, Apollo was expected to acquire RCS Capital’s (NYSE: RCAP) wholesale distribution business for $25 million in cash, which would have become part of AR Global Investments. In conjunction with the transaction’s termination, AR Capital is buying back the $25 million of RCAP preferred stock held by Apollo for $25.6 million and, according to a second press release issued by Apollo, amending the original agreement.

Under the amended agreement, RCS Capital will sell its wholesale distribution business, including Realty Capital Securities and Strategic Capital, to Apollo for $6 million in cash, subject to certain purchase price adjustments. RCS Capital’s profitable transfer agent and transaction management businesses and certain other employees will not be part of the amended transaction. The amended transaction will no longer be conditioned on the closing of a transaction between Apollo and certain affiliates of AR Capital, LLC. The transaction includes all of RC Securities and Strategic Capital existing selling agreements and dealer manager agreements. The transaction is expected to close early in the first quarter of 2016.

Apollo’s Marc Rowan and Anthony Civale have resigned from RCS Capital’s board of directors, effective immediately.

Schorsch and his real estate empire have been under intense scrutiny following the October 2014 ARCP (now known as VEREIT) accounting scandal. The huge net lease REIT founded by Schorsch and his partners at AR Capital (William Kahane, Brian Block, Michael Weil and Peter Budko), restated seven consecutive quarters of financial information after $23 million in accounting irregularities were disclosed. Executive chairman Schorsch and fellow executives resigned following the revelations, and subsequently, the stock price plummeted.

In other AR Capital news, Schorsch and other former executives of ARCP have been named in a recent lawsuit filed by various funds and entities affiliated with The Vanguard Group. According to the lawsuit, “the case arises from a multi-year fraud and attempted cover-up orchestrated by the top corporate executives of ARCP, one of the largest real estate investment trusts in the world.”