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Nine days before shareholders were set to vote on a merger between American Realty Capital (NASDAQ:ARCT) and Realty Income (NYSE:O), the two companies have announced a revised agreement. Though the deal's exchange ratio calling for ARCT owners to receive .2874 shares of O will not change, there will be a one-time cash payment of 35 cents a share made to ARCT shareholders. In addition, Realty Income announced that when the deals closes, the annualized dividend payment for the combined entity will be $2.17, 22 cents higher than originally anticipated.

The 35 cent special payment increases net compensation to ARCT shareholders by about 3 percent. And based on recent share dealings of O at $42.00, the post-deal dividend yield would be about 5.16%, compared to the current 4.4% yield at O and 6% yield at ARCT. According to Realty Income's CEO Tom Lewis, the new terms represent his company's "best and final offer."

Though there had been some level of ARCT institutional and retail shareholder outcry regarding the deal, including an article I wrote about three weeks ago detailing what I considered the compensatory inadequacy of the exchange, it appears a negative report from Institutional Shareholder Services (ISS) was what caused O and ARCT management to spring into action. ISS routinely conducts due diligence on M&A activity and advises clients on whether to vote in favor of deals or not. While I have not read the report, apparently ISS has similar unenthusiastic inclinations from an ARCT shareholder perspective, as management spent a recent press release responding to ISS's decision. And with good reason, since roughly two-thirds of ARCT's shareholder base is institutional (according to Nasdaq.com).

How Will Shareholders React?

Thus, the revised merger seeks to quell some of the angst amongst ARCT faithful. I have to admit that the extra compensation and higher post-deal yield certainly allays some of my concern. I suggested in the comment thread to my prior article that had ARCT management negotiated an exchange rate of .3 -- a roughly 4.5% premium to the .2874 rate -- I probably would have supported the deal. The 35 cent spiff provides shareholders like me with cash and less of O's inflated currency, which I honestly find attractive, but perhaps still a day late and a dollar short.

With over a week until the meeting however, I'm in no rush to change my vote, as my convictions remain mixed. I'm still losing 75 basis points in yield and inheriting an expensive, albeit attractive end product. My confidence in ARCT management, continues to diminish, first over what appeared to be a weak negotiation process and now over their apparent disbelief that the company is worth more. Perhaps the best alternative is just to sell the stock and move on. And given the high volume and two percent gain in ARCT today, it appears many investors are taking the opportunity to do just that.

More important to the deal's future, however, will be how institutions react to the amendment. Will the one-time payment and improved yield outlook be enough to overlook the ISS opinion and vote in favor of the deal? Stay tuned.

Disclosure: I am long ARCT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.

Source: Drama Hits The Realty Income/ARCT Merger... Now What?