Surprise, surprise! American Community Properties Trust (APO) is selling itself. And you won’t even get market value for your shares: while ACPT trades between $8.35 and $8.50 the buyout will happen at $7.75.
The sudden sale at a discount to the market price comes out of the blue for shareholders who still remember the failed attempt by the Wilson family, the 50.68% owners, to take the company private in 2007. The Wilsons had engaged a financial adviser, Granite Partners, which was ultimately unable to raise the funds for the buyout. The stock has since underperformed REITs. Since the July 17, 2007 announcement the Dow Jones REIT index has fallen 45%, whereas ACTP shares have lost 60% of their value.
The buyer of ACPT is a fund run by Federal Capital Partners, a Washington, D.C. based private equity firm founded by two alumni of the Carlyle Group, Esko I. Korhonen and Lacy I. Rice. The firm managed to raise $230 million for its first fund, FCP Fund I, in 2008 just before the market imploded. The firm focuses on the Washington, D.C. area and Maryland, so ACPT is right on its home turf.
The big question is why the Wilson’s are selling in a depressed market for $7.75 even though they were willing to take the firm private at top prices during the boom. After all, there are alternatives to selling: other options the firm was looking at include a breakup of the firm and a restructuring of some of its assets into a REIT. We suspect that the sudden sale at a discount may have more to do with the Wilson’s own need for liquidity rather than anything else.
We are not alone with our suspicion. On September 2, the company suddenly formed a special committee to explore its sale. The formation of the committee was disclosed only on September 14 after Ross Levin, one of the independent trustees and representative of Arbiter Partners/Paul J. Isaac, a 6.5% shareholder, resigned from the board. Justifying his resignation he sent a letter to the company that shows that the Wilsons wanted to sell their shares but were unable to find a buyer. So they had to sell the whole firm to obtain liquidity:
“ACPT is under no particular pressure to sell itself […] the Wilson process excluded a particular identifiable potential bidder and excluded the universe of potential bidders for the whole company uninterested in bidding on only the Wilson family stockholding” Levin’s letter, 8-K on September 14
Investors waiting for some help from the two activists who have been circling ACPT may be in for a disappointment. Chapman Capital, which has been invested for a decade, began selling its stake in 2008. Leeward Capital recently suffered a setback when Eric Van Der Porten passed away. So any hopes of pressure from activists are likely to be dashed.
Nevertheless, we believe that outside shareholders have a good case to make about the legality of the sale. Levin’s resignation was triggered by his dissatisfaction with the sales process:
“I have been troubled by the current strategic process of the company and I do not believe that it is in the best interest of the company’s shareholders. […] I believe that the company should be marketed as widely as is practicable. The board seems to be relying on the fact of a preceding Wilson family stake sale process as a de facto marketing of the whole company justifying a less than exhaustive company process. […] I believe that a higher price would be realized for the company’s shareholders if the company were marketed as a whole in a more open process.” Levin’s letter, 8-K on September 14
Clearly, the board has failed to do its job and a higher price should be achievable. A 2/3 majority is required to approve the merger agreement, and the Wilson’s themselves have almost 51% of the votes. We recognize that this is not a management buyout but wonder whether a vote of the majority of the minority would not be appropriate here since the sales process was driven primarily by the Wilson’s desire to sell. In addition, the special committee seems to be a farce: the decision to sell had been taken before the committee was established, and it only served to rubber-stamp the sale. The record speed between the establishment of the committee (September 2) and the signing of a term sheet (September 14) that gave FCP exclusivity precluded any real effort to shop the company. The public only found out that the company was for sale when FCP was given exclusivity. The 30-day go shop period, during which other potential buyers can make bids, is too short and no more than a cosmetic exercise to pretend others could buy it. Unfortunately, appraisal rights are not available to shareholders of publicly traded Maryland companies. If ACPT were a Delaware company, the Netsmart ruling would apply (shopping a small or micro cap company to only a limited set of buyers is a breach of fiduciary duty); unfortunately, it is a Maryland trust, where it is more difficult for shareholders to seek legal recourse.
We anticipate that we have not yet heard the last of ACPT’s sale. The market clearly agrees with us, trading 5-6% above the acquisition price. The only question is what the trigger for a higher bid will be.
Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of American Community Properties Trust and is in litigation with the company. He is the author of the book Merger Arbitrage: How to Profit from Event-Driven Arbitrage (Wiley Finance, 2009).