ipopba/iStock via Getty Images

ipopba/iStock via Getty Images

The REIT investor community has been taken by surprise on the 15th of September when it was announced that the long-time investor favorite STORE Capital (NYSE:STOR ) is being acquired by Singapore's GIC and Blue Owl's Oak Street partnership through an all-cash deal valued at approximately $14 billion. If everything goes according to plan, the deal is expected to close sometimes in the first quarter of next year, and owners will receive $32.25 per share of STOR owned.

Following the announcement, merger arbitrageurs almost immediately filled the gap during pre-market, as shares of the REIT stabilized at around $31.90 after some initial volatility. On the face of things, the deal allows for instant shareholder gratification, given that the agreed-upon price represents a roughly 20% premium to the pre-deal announcement closing price of the stock. However, things are much more complex than that, as the deal price implies a controversially low valuation that remains below the company's historic valuation trends. A quick look at the shareholder structure reveals that there is almost no one to mount an opposition to the deal, meaning it is almost certainly getting through and is about to leave shareholders with no options and a bad after-taste.

Under the terms of the agreement, STOR shareholders will receive $32.25 per share, representing a premium of approximately 20.4% to Wednesday's closing price and a premium of 17.8% to the 90-day volume-weighted average stock price through that date. The arbitrage opportunity has been almost immediately priced in during pre-market trading and after some initial volatility, the REIT closed today at $31.90 per share. Taking into account management's FFO guidance of $2.25 to $2.27 for 2022, the deal price itself implies that STORE Capital was sold at 14.26x P/FFO.

Cynics might recall at this point the rather abrupt departure of Chris Volk, a highly admired and well-respected steward who co-founded and ran the company for slightly more than 10 years and even on occasion shared his thoughts on Seeking Alpha. It becomes difficult not to speculate that early discussions about a potential buyout deal might have played a role in the decision-making process that has seen Volk leave the company.

Historic P/FFO and P/AFFO Multiples (Author Spreadsheet IQ Capital Data)

Historic P/FFO and P/AFFO Multiples (Author Spreadsheet IQ Capital Data)

At this point, it would be interesting to take a look and analyze the historic P/FFO and P/AFFO multiples for STORE Capital. The effect of the pandemic can be immediately seen and it significantly distorts the picture, but we can isolate two main takeaways. Firstly, the deal pretty much implies that the REIT was sold at the 1-year average P/FFO multiple. Secondly, management sold STOR Capital noticeably below the historic P/FFO average of 15.36x. So, while it remains true that REIT was sold at a 20.4% premium to the last pre-deal closing price, the deal also values STOR at roughly 7.16% below its average historic P/FFO multiple, which would see the REIT priced at roughly $35 per share.

Net Lease Valuation (Author Spreadsheet)

Net Lease Valuation (Author Spreadsheet)

It is also fair to point out that other net-lease REITs have also suffered down-pressure in the past period and henceforth even if the deal price could be considered "at a discount", owners of the company will be able to redeploy capital and capture the "same discount" at other REITs if that is what they would like to do. STORE Capital could be compared to REITs such as Realty Income (O), currently selling at 15.87x P/FFO, or W.P. Carey (WPC) on the other hand, which is currently trading at 16.57x P/FFO. Almost all REITs on the list have experienced selling pressure as of late, with the ever-degrading macroeconomic environment raising many concerns with the business model.

An additional development that did not resonate well with shareholders is the fact that the deal effectively suspends any further dividend payments after the distribution of the upcoming third quarter dividend. If the deal does in fact close sometime during the first quarter of 2023, it would obviously leave the shareholders without the Q1 distribution which is usually set to be paid out on the 30th of March, but even more problematically, it leaves STOR owners without their fourth quarter distribution which is usually scheduled for the 30th of December. The bottom line here is that shareholders will lose one quarterly dividend or $0.385 per share of STOR owned due to this decision.

Under the terms of the definitive merger agreement, STORE Capital will declare and pay its third quarter cash dividend in the ordinary course. Thereafter, the Company has agreed to suspend payment of any further regular quarterly dividends through the closing.

Store Capital - Acquisition Press Release

Now, as previously noted, the deal still has to get shareholders' approval, meaning there is going to be a vote on whether or not it goes through. With that in mind, let us take a look at the shareholder structure of STORE Capital and see if there is any chance of this getting blocked.

With the recent popularization of passive investment approaches such as "index investing" and the rise of asset management giants that carry trillion-dollar balance sheets and always side with the "majority", I vaguely recall situations in which I've encountered a shareholder structure that doesn't have the same reoccurring faceless names. Recent examples to the contrary that come to mind are the Redstone family's control over Paramount (PARA), formerly known as ViacomCBS, or the Mittals controlling a large portion of the steel behemoth, ArcelorMittal (MT). While "family-owned" companies represent almost the polar opposite of the STOR situation, there are also other examples where shareholders' interests are more closely represented. I have recently written about Franchize Group (FRG), a company in which management controls 30% of the business and keeps buying more. Either way, Mr. Market generally tends to view strong and influential shareholders with the ability to exert control as fundamentally unattractive. Yet, it is exactly situations such as this one that make me look at those types of companies in a different, and much more positive light. I believe that STOR shareholders would like to have someone on board with a more "personal" approach and possibly having some "skin in the game". However, that is simply not the case. I do not see anyone on the list with either a willingness or interest to care enough to go against the deal.

The definitive merger agreement includes a 30-day "go-shop" period that will expire on October 15, 2022, which permits STORE Capital and its representatives to actively solicit and consider alternative acquisition proposals. There can be no assurance that this process will result in a superior proposal, and the Company does not intend to disclose developments with respect to the go-shop process unless and until it determines such disclosure is appropriate or is otherwise required.

Store Capital - Acquisition Press Release

Instead of major owners having the interest to block the deal, a saving grace for shareholders might be the 30-day "go-shop" clause in the deal, which is set to expire on October the 15th and enables the board to review and possibly accept better offers than the currently agreed acquisition price during the period. At face value, if one believes that the deal does undervalue STOR Capital and its potential, it might not be entirely unreasonable to expect another bid to land on the table.

The bottom line, and the rather ironic part in all of this, is that the deal falling apart is likely the worst thing that can happen now to shareholders. If management truly believed that selling STOR for 32.25$ a share was a good idea, then the deal falling through would likely end up pulling the price back even more aggressively. Management already threw their towel in the ring, as they have obviously signaled to the market that they view the prospects of STOR surpassing the $32.25 per share mark "naturally" any time soon as highly unlikely, or at the very least not with them at the helm.

On a more personal note, I remain largely dissatisfied with the deal. On one end, I am able to see the economic realities of the current degrading macroeconomic situation and how it creates multiple headwinds for STORE Capital. But on the other end, I am also not able to shake the feeling that the current premium is simply not high enough given the quality of the business. I am of the opinion that aiming closer to the historic P/FFO average and selling the REIT in the $36-37 range would have quelled most of the dissent and is a much fairer assessment of its far value. Given that there are no real shareholders to raise their concerns over this, the deal is almost certainly getting approved, and the best thing shareholders can hope for is that another, better deal lands on the table during the go-shop period. Either way, a great company is leaving the public trading floors in a manner that leaves a bad aftertaste. Ultimately, I cannot escape the conclusion that better deals have been made while staring down the barrel of a gun.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of STOR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.