The holidays always seem to bring bad news for investors. It starts out pretty enough, with the "Santa Claus effect" taking the stock market up a couple hundred points. This lulls all of us financial watchers into a happy (false) sense of security, leading us to deck the halls with holiday purchases.
But the bad news is inevitable, as some poorly faring firm chooses the quiet news time of the holidays to drop a bombshell. Investors are on vacations, enjoying their new toys and breaking their legs on the slopes, so ailing corporate citizens are free to unleash the news of their demise quietly, going gently into that good night in hopes of preserving what little capital they have left.
So it was this year for Prison Realty Trust Inc. (NYSE: PZN), whose top management found pink slips in their stockings on Christmas morning.
The real estate investment trust, which has been skating down the slippery slope of poor REIT market conditions and bad circumstance for months, has elected to drop its favorable tax status for a C Corp designation.
The company will undergo a total restructuring, as well as an equity shot of between $315 million and $350 million through the sale of new convertible preferred stocks and warrants to a group that includes interests from Fortress Investment Group, Blackstone Group and Bank of America.
The deal is expected to close in the second quarter, at which time the chairman and his merry band will flee the sinking chip.
You may remember that Prison Realty Trust was a spin-off from Corrections Corporation of America in 1997. Prison took the land, and CCA took the operating contracts in hopes of maximizing earnings through the REIT tax plan.
Despite Wall Street disenchantment with REITs overall and a sorely lagging stock price, major investment houses were high on Prison Realty as recently as last May, when several firms had strong buy and buy recommendations on the stock.
But with this week’s announcement, the stock dropped another 10 percent and all bets were off. Investment houses now rank Prison Realty among market underperformers, now that obviously incompetent management is being combined with typical corporate tax treatment.
Now all is as it was, with Prison Realty being folded back into CCA, while one of that company’s founders will serve as interim CEO.
Shareholders can expect to see nothing but additional pain. Dividends already had been watered down to a clear bullion through previous efforts to save the sinking ship. Now the new investors are offering the old a piece of the action that few will find attractive enough to take.
And the rats immediately began to flee, with a 3 million plus share sell-off just hours after the announcement of the restructuring deal.
Published: December 29, 1999
Use of this article without permission is a violation of federal copyright laws.
Editor's Note: This article reflects the opinions of Lesley Hensell only and not necessarily the views of this or any other publication, organization or Website owner.
