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  • newMK newMK Feb 20, 2000 9:08 PM Flag

    Public Safety & a new deal

    In the CCA/PZN merger transaction, great care was
    taken to make sure that the new OPCO was legally
    separate from new PZN, so new PZN could be a REIT with the
    rules stretched to the limit. While it appears that the
    two companies combined have positive cash flow
    (although on a pro-forma basis it goes negative because of
    the new preferred dividends), their separateness is
    now killing them. OPCO didn't go as predicted, and is
    essentially bankrupt even with the adjustments made earlier
    this year. It can't pay its rent to PZN, and is close
    to default (or has defaulted)on its debt to outside
    parties (not to mention its debt to PZN). PZN can't give
    it any more relief without going (further) into
    default on its various debt obligations. This is all
    pretty well explained in the proxy.

    While the
    combined companies may be OK, as long as they are
    separate, they are essentially on the verge of bankruptcy
    at worst, or at best continuing default.

    wouldn't mind seeing PZN call its OPCO note in default and
    foreclose, taking back all the management contracts (RP
    would love this).That would have the same effect as the
    merger (and would give the current OPCO shareholders
    nothing), but unfortunately might jeopardize the contracts
    themselves. Too messy.

    The proposed merger is
    absolutely necessary (as some of us "yahoos" have been
    saying since before Blackstone ever heard of PZN), and
    will happen with or without Blackstone.

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    • Thanks for your well-informed

      Some time ago you mentioned that the value of the PZN
      fixed assets has been stepped-up twice. Can you give me
      a little bit of the history? I would love to be
      able to figure out the original cost or replacement
      cost of the facilities.

      I believe the best
      valuation analysis at this time would be to compare the
      equity valuation to the cost of the facilities less
      debt. If the market valuation is at a significant
      discount to the true value of the fixed assets then the
      stock is a good buy at current levels. If not then not.
      I did not see this issue addressed in the

      A market valuation significantly lower than the
      value of the assets would also show that the company's
      problems are primarily the result of inefficient
      operations that could be reformed by new

      Blackstone would not normally invest for an 18% return. My
      guess is that their internal target is 25%-30% on this
      investment. That would imply significant appreciation
      potential for the common stock.

    • You argue that a merger (Blackstone or other) is
      unavoidable. But the consensus of this board is that the
      merger leaves current shareholders with nothing. Why
      merge if it is equivalent to bankruptcy.

      could defer OPCO payments to the extent necessary to
      keep OPCO afloat, so that neither PZN nor OPCO goes
      bankrupt. If the merger is voted down, then the "pro-forma"
      preferred dividends are gone, and a positive cash flow is
      preserved. This is better than bankruptcy and it is better
      than a merger that is the economic equivalent to
      bankruptcy for current PZN shareholders.

      You have to
      show that there is some material economic value to
      current PZN shareholders in the proposed merger.
      Otherwise, you can not make your case that merger is
      inevitable. We can vote not, avoid bankruptcy, and replace
      management. Even a break-even cash flow preserves the chance
      that the economics will improve in the future. That is
      better than nothing.

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