Deal Reporter
Campus Crest Communities (NYSE: CCG) is a likely target for private equity firms seeking to cash in on a turnaround story, according to two industry bankers and a person familiar with the matter.
Apollo Global Management (NYSE:APO), Canyon Partners, Harrison Street Real Estate Capital and Starwood Capital are among the potential suitors, these sources said.
But shareholders may decide against a sale, opting instead to endorse a proposal by activist investor Clinton Group to shakeup management and eventually acquire competitor Campus Evolution Villages, they added.
In February, Charlotte, North Carolina-based Campus Crest announced plans to review strategic alternatives, including a sale. The following month, Clinton Group outlined a plan to purchase the management company of Campus Evolution for less than USD 10m and replace Campus Crest’s interim management with executives from the competing campus housing operator.
As part of the deal, Campus Crest would receive a call option on the property currently managed by Campus Evolution, which is worth about USD 300m, according to a person familiar with the matter.
Clinton Group has repeatedly criticized Campus Crest’s poor financial performance and a steadily declining stock price. The company’s stock price has declined more than 40% since its IPO in 2010. Campus Crest CEO Ted Rollins and CFO Donnie Bobbitt stepped down in November and the company has not announced replacements.
Campus Crest declined to comment for this story.
The potential acquirers are probably hoping to purchase Campus Crest at a modest premium, restore performance and then resell it later on at a higher price, the industry bankers said, adding that shareholders may be better off if Campus Crest orchestrates a turnaround itself.
Clinton Group expects that by improving operating metrics such as occupancy rates and operating income, which lag industry peers, the new executives will lift Campus Crest’s stock price to around 13 USD per share in less than a year, according to the person familiar. The stock price is currently trading below USD 7.50.
Campus Crest could attain additional growth by using a restored stock price as a currency to purchase the remaining properties of Campus Evolution, which would initially be held in a joint venture and managed by Campus Crest, the person said.
Clinton Group nominated four independent board members in December. Shareholders will vote on the nominees during Campus Crest’s annual meeting on 15 May.
The activist is willing to see out the current sale process being run by Campus Crest management and would not interfere with a deal, the person familiar said, adding that a sale in the next couple of months would likely value Campus Crest at around USD 9 per share.
If the current process fails to produce an acceptable deal, the board members nominated by Clinton Group would not advocate for a second formal process in the future but would “always be receptive to inbound inquiries,” the person familiar said
If Clinton Group’s proposal succeeds in improving Campus Crest’s performance, an institutional investor may still seek to acquire Campus Crest in order to apply the REIT’s operating platform to its other real estate holdings, one of the industry bankers said, adding that a deal under these circumstances would probably be better for shareholders.
The other industry banker said that shareholders may opt for a sale at a reasonable premium in the near term because Clinton Group’s proposal requires delaying returns and internalizing the downside risk that the management brought on from Campus Evolution could fail.