STORE Capital Stock: Unimpressive Acquisition Transaction

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The REIT investment community was taken by surprise on September 15 when it was announced that long-time investor favorite STORE Capital (NYSE: STOR) is being acquired by GIC Singapore and Blue Owl’s Oak Street partnership through an all-cash deal valued at approximately $14 billion. If all goes according to plan, the deal should close in the first quarter of next year and the owners will receive $32.25 per share held by STOR.

Following the announcement, merger arbitrageurs almost immediately closed the gap during the pre-market, with shares of the REIT stabilizing at around $31.90 after some initial volatility. On the face of it, the deal allows for instant shareholder gratification, given that the agreed price represents a premium of around 20% over the pre-deal announcement closing price. However, things are much more complex than that, as the transaction price involves a controversial valuation that remains below the company’s historical valuation trends. A quick look at the shareholding structure reveals that there’s hardly anyone to oppose the deal, which means it’s almost certainly going through and it’s about to leave shareholders with no options and a bad aftertaste.

Evaluation

Under the terms of the agreement, STOR shareholders will receive $32.25 per share, representing a premium of approximately 20.4% to Wednesday’s closing price and a premium of 17.8% to at the 90-day volume-weighted average price up to that date. The arbitrage opportunity was priced in almost immediately in premarket trading and after some initial volatility, the REIT closed today at $31.90 per share. Given management’s FFO forecast of $2.25 to $2.27 for 2022, the trade price itself implies that STORE Capital was sold at 14.26 x P/FFO.

Cynics might recall at this point the rather abrupt departure of Chris Volk, a much-admired and well-respected steward who co-founded and ran the company for just over 10 years and even shared his thoughts on Seeking Alpha at times. . It’s getting hard not to speculate that early talks of a possible takeover deal could have played a role in the decision-making process that saw Volk leave the company.

STOR Capital Mean P/FFO and P/AFFO Author Spreadsheet using IQ Capital data

Historical P/FFO and P/AFFO multiples (spreadsheet by IQ Capital Data author)

At this stage, it would be interesting to look into and analyze the historical multiples of P/FFO and P/AFFO of STORE Capital. The effect of the pandemic is immediately visible and significantly distorts the picture, but we can isolate two main takeaways. First, the deal roughly implies that the REIT was sold at the average 1-year P/FFO multiple. Second, management sold STOR Capital well below the historical P/FFO average of 15.36x. So while it remains true that the REIT was sold at a 20.4% premium to the last closing price before the trade, the deal also values ​​STOR at around 7.16% below its P multiple. / average historical FFO, which would see the REIT priced around $35 per share.

Valuation of comparable companies

Net lease valuation (author’s spreadsheet)

It is also fair to point out that other net lease REITs have also come under downward pressure in the last period and that now, even though the transaction price could be considered “at a discount”, the Company owners will be able to redeploy capital and get the “same discount” in other REITs if that is what they would like to do. STORE Capital could be compared to REITs such as Realty Income (O), which is currently trading at 15.87x P/FFO, or WP Carey (WPC) on the other hand, which is currently trading at 16.57x P/FFO . Almost all of the REITs on the list have recently come under selling pressure, with the steadily deteriorating macro environment raising many concerns about the business model.

An additional development that didn’t sit well with shareholders is the fact that the deal effectively suspends all further dividend payments after the next third-quarter dividend is distributed. If the deal does in fact close in the first quarter of 2023, that would obviously leave shareholders without the first quarter distribution which is generally expected to be paid on March 30, but more problematically, it leaves STOR owners without their distribution. of the fourth quarter which is generally scheduled for December 30. The bottom line here is that shareholders will lose a quarterly dividend or $0.385 per STOR share held as a result of this decision.

Under the terms of the definitive merger agreement, STORE Capital will declare and pay its third quarter cash dividend in the ordinary course. Subsequently, the Company agreed to suspend payment of any further regular quarterly dividends until closing.

Store Capital – Acquisition press release

Who should say yes?

Now, as previously reported, the deal still needs to get shareholder approval, which means there will be a vote on whether or not it closes. With that in mind, let’s take a look at STORE Capital’s shareholding structure and see if there’s any chance it could be locked in.

STORE Capital shareholders as reported by TIKR Terminal

Shareholding structure (TIKR Terminal)

With the recent popularization of passive investing approaches such as “index investing” and the rise of asset management giants that carry trillion-dollar balance sheets and still side with the “majority “, I vaguely remember situations in which I have encountered a shareholding structure that does not have the same recurring faceless names. Recent examples to the contrary that come to mind are the Redstone family’s control of Paramount (PARA), formerly known as ViacomCBS, or the Mittals controlling much of the steel giant, ArcelorMittal (MT) . While “family” businesses represent almost the polar opposite of the STOR situation, there are also other examples where shareholder interests are more closely represented. I recently wrote about Franchize Group (FRG), a company where management controls 30% of the business and keeps buying more. Either way, Mr. Market generally tends to view strong and influential shareholders who can exert control as inherently unattractive. Yet it is precisely situations like this that make me see these types of businesses in a different and much more positive light. I believe STOR shareholders would like to have someone on board with a more “personal” approach and possibly some “skin in the game”. However, this is simply not the case. I don’t see anyone on the list who is willing or interested enough to care enough to go against the deal.

The definitive merger agreement includes a 30-day “go-shop” period that will expire on October 15, 2022, which allows STORE Capital and its representatives to actively solicit and consider alternative acquisition proposals. There can be no assurance that this process will result in a superior proposal, and the Company does not intend to disclose developments regarding the go-shop process unless and until it determines that such disclosure is appropriate or otherwise required.

Store Capital – Acquisition press release

Instead of the major owners having an interest in blocking the deal, a saving grace for shareholders could be the 30-day “go-shop” clause in the deal, which is due to expire on October 15 and allows the board to administration to examine and possibly accept offers better than the currently agreed acquisition price during the period. On the face of it, if the deal is thought to undervalue STOR Capital and its potential, it might not be entirely unreasonable to expect another deal to land on the table.

Final Thoughts and Conclusions

The bottom line, and the rather ironic part in all of this, is that the failure of the deal is probably the worst thing that can happen to shareholders right now. If management truly believed that selling STOR for $32.25 per share was a good idea, then the failure of the deal would likely end up driving the price down even more aggressively. Management has already thrown its towel in the ring, as it has obviously signaled to the market that it views the prospects of STOR topping the $32.25 per share mark “naturally” at any time as highly unlikely, or at all. least not with them at the helm.

On a more personal note, I remain largely dissatisfied with the deal. On the one hand, I am able to see the economic realities of the current degraded macroeconomic situation and how it is creating multiple headwinds for STORE Capital. But on the other hand, I also can’t get rid of the feeling that the current premium just isn’t high enough considering the quality of the company. I’m of the view that aiming closer to the historical P/FFO average and selling the REIT in the $36-37 range would have assuaged most of the dissent and is a much fairer assessment of its far-off value. Given that there are no real shareholders to voice their concerns about it, the deal is almost certainly in the process of being approved, and the best thing shareholders can hope for is that another, better okay, lands on the table during the go-shop period. Either way, a great company leaves the public prosecutor’s office in a way that leaves a bad aftertaste. In the end, I can’t escape the conclusion that better deals have been made while staring down the barrel of a gun.

Sallie R. Loera