Activist Investors Propose REIT Conversion For Corrections Corp of America (CXW) ~ market folly

Thursday, April 5, 2012

Activist Investors Propose REIT Conversion For Corrections Corp of America (CXW)

Keith Meister's hedge fund Corvex Management just filed a 13D with the SEC regarding shares of Corrections Corporation of America (CXW). This activist filing signifies a brand new position for Corvex as they did not own it at the end of 2011 (the last disclosure).

Corvex has a 4.43% ownership stake in CXW with 4,410,000 shares. The 13D was filed due to regulatory thresholds being crossed on March 26th, 2012.

Longtime readers of Market Folly will recall that Bill Ackman's Pershing Square Capital previously owned a position in CXW (you can see their old thesis on CXW here). The hedge fund eventually sold out of the position entirely.

One of Pershing's former analysts, Mick McGuire, went on to form his own hedge fund: Marcato Capital Management. Marcato has actually joined Corvex in this activist endeavor as they own a 2.61% ownership stake in CXW with 2,596,023 shares.

Proposing a REIT Conversion

In the fine print of the 13D filing, the two hedge funds say that they think shares are undervalued and an attractive investment. They've had conversations with each other as well as management and the board to discuss various aspects of the business.

They've discussed enhancing shareholder value by converting the company into a real estate investment trust (REIT) for federal income tax purposes.

Corvex and Marcato believe that a REIT conversion would "result in a significantly lower cost of equity capital, increased growth prospects and a material increase in value for all the Issuer's shareholders based on current trading multiples of comparable publicly traded REITs."

This seems to be a trend as of late as American Tower (AMT) recently successfully converted to a REIT as well.

About Corvex

We've started covering Corvex because before founding the firm, Keith Meister was Carl Icahn's protege. He's now started his own event-driven firm and it's no surprise that he's taken an activist investment stance. It's been reported that Corvex was seeded with $300 million from Soros Fund Management.

Other senior managing directors at Corvex include Nick Graziano (formerly a portfolio manager at Leon Cooperman's Omega Advisors) and Michael Doniger (formerly a PM at SAC Capital's CR Intrinsic unit).

About Corrections Corp of America

Per Google Finance, CXW is "an owner and operator of privatized correctional and detention facilities and prison operators in the United States. As of December 31, 2011, the Company operated 66 correctional and detention facilities, including 46 facilities that it owned, with a total capacity of approximately 91,000 beds in 20 states and the District of Columbia."

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