The extent to which the buyout of American Community Properties Trust (APO) by Federal Capital Partners is flawed was revealed in the company’s recent proxy filing. One of the unhappy shareholders, Paul J. Isaac, was given the opportunity to continue to own ACPT even after the buyout. The other shareholders will forgo the opportunity to get full value for their shares.
The Wilsons and Issac together own 69% of the shares and have the ability to force the deal through, at least in theory. However, we believe that this transaction should be conditioned on an approval by the majority of the unaffiliated shareholders and expect that the vote will be restructured in this way. But even that would do nothing to appease shareholders who are forced to sell their shares along with the Wilsons in a fire sale.
Going private was not the only option available to the company. The proxy statement reveals that going private was an outcome that came about almost incidentally. ACPT is unable to qualify for taxation as a REIT because of the large number of shares held by the Wilson family. The IRS requires a more diversified investor base before it grants REIT status. The company tried to get outsiders to invest in ACPT. No takers. Given the control exercised by the Wilsons over the company, nobody was willing to become a minority shareholder. Then the Wilson family offered to sell its stake. Three bidders emerged at prices between $6 and $7.75 per share. FCP bid $7.15 under the condition that it could acquire the entire firm, not just the Wilson interest. Here is where it gets interesting: the Wilsons accepted the proposal if FCP were to pay $7.50/share. The Wilsons effectively closed the deal on behalf of the company. When the special committee was formed, it more or less rubber-stamped the Wilsons' deal and as a token gesture to shareholders, negotiated a $0.25 increase to $7.75 per share.
It should be noted that another buyer had made a preliminary offer for $8 per share; it is not clear to us why this buyer did not perform additional due diligence. This could have been caused by a genuine lack of interest or by a realization that the deal with FCP was more or less done and that the Wilsons were seeking speed over price.
One of the alternatives considered by the board was quite dumb: “going dark.” This refers to the company deregistering from the SEC with the stock continuing to be traded over-the-counter. It is an option often pursued by small companies but mostly ends with the stock losing value due to the lack of trust by public investors in non-reporting companies whose financial statements, if available, are not subject to the strict Sarbanes-Oxley requirements. Fortunately, some minority investors the board spoke to rejected this proposal outright.
FBR acted as the investment banker for ACPT, so we are not surprised by the low merger price. FBR also acted as adviser to Wilshire Enterprises (WOC), a long and painful story that we covered previously and which led to a significant destruction of shareholder value. Their repeatedly poor performance make us think that they are probably not the best choice for small real estate companies seeking an investment banker.
It is an irony that Paul J Isaac is now part of the problem. Initially, the firm’s representative on the board, Ross Levin, resigned citing the unfair nature of ACPT’s sales process. We think that Isaac’s desire to join the buyout group rather than fight it demonstrates how much value is left in ACPT. We continue to believe that the transaction undervalues the shares of ACPT and believe that shareholders may end up with more than $7.75. The strongest indication that the shares are worth more comes from one of the participants in the buyout, Paul J Issac: his firm bought additional shares above $8 prior to announcing that he was going to join the buyout group.
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 firm.