Everything was fine right? CCA and PZN working hand in hand, everybody happy. WHC thinks it such a good idea it spins off CPV which lowers their tax bracket and gives needed cash to WHC. Now the plot thickens.
CPV has 5,854 beds. It paid roughly $30k/bed and has used up all it's cash and 2/3's of it's $100MM credit line to do it. WHC has 3,000 more beds to sell them too. The problem lies in their stock price. The market is now valuing their 5,854 beds at $18.27/bed ($15*7,130,000/5,854). Since they need more equity to get more debt that means they need to sell more new shares, in essence, at $18.27/bed to turn around and pay $30k/bed for them. Doesn't make much economic sense does it?
Sam Zell realized this last summer with his REIT's and decided to just buy shares back with his extra cash instead....smart.
Thanks to merger with CCA, the opco's can pay high lease rates(11%+ verses CPV's 9.5%)and flow through enough extra cash, PZN can pay a high enough dividend rate to keep it share price high enough ($73k/bed...110MM*$20/30,000beds)to buy/build new beds at half that price($30-40k/bed). This makes the whole process accretive for old and new shareholders. Brings in new equity which allows for new debt which allows for more and more profitable spreads whichs allows for dividend and share price appreciation....easy, right? Did I do the math correct?