Realty Income Scoops Up American Realty in $2.95B Deal

Realty Income (NYSE:O) inked a deal on Thursday to buy American Realty Capital Trust (NASDAQ:ARCT) in a transaction valued at $2.95 billion, a move that will enhance the credit quality of its real estate portfolio and provide it with greater flexibility.

Nearly 75% of the rental value that will be added if the transaction is approved are generated by investment grade tenants like FedEx (NYSE:FDX), Walgreen (NYSE:WAG), CVS Caremark (NYSE:CVS) and Dollar General (NYSE:DG).

Their addition to Realty Income’s portfolio would increase the company’s revenue generated by investment grade tenants to 24% from just 19%.

The transaction, approved by the board of directors of both companies, is slated to close in the fourth quarter or first quarter of 2013 following a shareholder vote.

The combination will make Realty Income the 18th largest real estate investment trust by market cap in the U.S., twice as large as the next biggest net lease REIT.

Under the terms of the deal, American Realty shareholders will receive 0.2874 shares of Realty Income for each of their American Realty shares. Based on their Sept. 5 closing price, the consideration is equal to about $12.21 a share.

Escondido,Calif.-based Realty Income will finance the deal using $1.9 billion of its common stock, the assumption of $526 million of debt and the immediate repayment of about $574 billion of outstanding debt and transaction fees.

Following its consummation, American Realty shareholders are expected to own about 25.6% of Realty Income’s shares.

"This acquisition comprehensively advances Realty Income's strategic objectives of increasing its revenue generated by investment grade tenants and further diversifying its portfolio outside of the retail industry,” Realty Income CEO Tom Lewis said in a statement.

The transaction is expected to be immediately accretive to Realty Income’s earnings, generating about 20 cents to 22 cents a share in additional funds from operations annually – a key growth metric for retail trusts.

The additional flexibility will allow the company to increase its annualized dividends to shareholders by about 13 cents a share, or 7.1%, to an annualized rate of approximately $1.94 a share.

Shares of Realty Income climbed 3.5% and touched a new high of $44.22 on Thursday, while those of New York-based American Realty climbed more than 5% to a life-time high of $12.74.