On June 30, Prison Realty announced that the deal had been "mutually terminated." For its part, Pacific Life was dissatisfied over key conditions that Prison Realty failed to meet. Pacific Life wanted Prison Realty to obtain a four-year extension on its bank credit and settle pending lawsuits for an amount not higher than the company's insurance coverage. Instead, Prison Realty arranged with its bank lenders to extend their credit line 18 months, and failed to resolve pending lawsuits.
The deal with its bankers also allowed Prison Realty to borrow $55 million to meet immediate funding needs. That, and a $760 million 10-year contract with the Bureau of Prisons to operate two federal prisons, gave Prison Realty management the confidence to restructure the company without outside help.
Wall Street analyst Robert Norfleet of Davenport & Co. said that terminating the Pacific Life deal sends a negative message to investors.
"A lot of people want to see them aligned with a strong financial partner," Norfleet told The Tennessean newspaper. The absence of a partner such as Pacific Life, which would have taken board seats and overseen a change in management, could create doubts about the future of the company.
Another Wall Street analyst dropped Prison Realty's share rating to "underperformed." Investors listened. The first full trading day after the Pacific Life deal was canceled saw Prison Realty's shares drop 9.3% to $3.06 a share. Three days later the price slid further, to $2.81, and three weeks later slipped to $2.38/share.
Money manager David Dreman, whose New Jersey-based Dreman Value Management LLC owns 11.3% of outstanding Prison Realty common stock, expressed outrage over the company's treatment of shareholders.
"It's a management that puts the shareholder's interests last," he told The Tennessean. Dreman says he favors a complete overhaul of Prison Realty's board. "These directors guided this company from disaster to disaster over the last few years."
On Prison Realty going it alone with the restructuring, Dreman said: "We don't view it favorably. We would prefer the involvement of outside professionals who know what they are doing."
Among the many lawsuits pending against Prison Realty is a breach of contract suit filed June 9, 2000 in the U.S. District Court for the Southern District of New York by Prison Acquisition Company LLC. Prison Acquisition is a limited liability company formed by affiliates of The Blackstone Group, Fortress Investment Group, and Bank of America, to carry out a proposed $350 million bailout of Prison Realty/CCA. As reported in the July PLN article, the Prison Acquisition agreement allowed for competing restructuring offers provided that Prison Acquisition could exercise its right to match the offer. When Pacific Life put forth its $200 million restructuring plan, Prison Acquisition declined to exercise its right to match the terms of the Pacific Life deal.
However, Prison Realty was "obligated to pay Prison Acquisition a termination fee of $7.5 million and a transaction fee of $15.7 million, and to reimburse prison Acquisition for out-of-pocket costs and expense incurred in connection with the Agreement... whether or not the [$350 million bailout] transaction was consummated," according to the lawsuit.
The same day that it declined to match the Pacific Life offer, Prison Acquisition requested payment of $24,053,502 from Prison Realty. According to the lawsuit Prison Realty, although it has publicly acknowledged in company press releases that it owed the $24 million obligation to Prison Acquisition, has failed to honor repeated demands for payment.
Sources: The Tennessean, Bloomberg Press, Reader Mail
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