Private Prison Operator Cornell Companies Agrees To Acquisition By Competitor Geo Group

Long time readers know that Bill Ackman's Pershing Square pitched Cornell Companies' competitor Corrections Corp of America (CXW) last fall (see pitch here). Today, one of Correction Corp's biggest direct competitors Cornell Companies agreed to be taken out by another comp, Geo Group, for a 35% premium, further consolidating the private prison industry (link to press release). TILB views this as very positive for the private prison industry as it further improves the oligopolistic characteristics of an industry that already has reasonable competitive dynamics.

While municipal financial difficulties are a cyclical headwind to any and all budgetary items, our view is the secular tailwind is intact as their scale, expertise and flexibility make them an attractive alternative to states investing huge capital in their own public systems.

Corrections Corporation Of America - Value Investing Congress Presentation By Bill Ackman Of Pershing Square

As with many other things, TILB is the first or one of the first to bring interesting investment related documents to the public internet. Mr. Ackman's firm, Pershing Square, often circulates his presentations a few days after the actual public talk with the tacit acknowledgement of its subsequent public dissemination. We hold Bill in high regard and believe his case for CXW is compelling (as disclosed earlier: we have been owners of CXW at various times over several years including now and the past few months).

You can find some of our prior discussions of Ackman here.

See below for his Corrections Corp. thesis.

Prisons' Dilemma - FINAL (10!21!09)

[link to our scribd in case the embedding doesn't work]

Bill Ackman's Value Investing Congress Pitch: Corrections Corp. of America (CXW)

Pershing Square's Bill Ackman is in the middle of a presentation entitled: Prisons' Dilemma about CXW. Details to follow.

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Update with more detail from the presentation:

Long CCA (Ticker "CXW")

Rehashing the same ole private prison thesis:
Only 7.8% of nationwide inmates are housed in private facilities.
CCA does it cheaper, and "better".
In 2007, private prisons took ~50% of incremental industry "growth". (Trend is sloping up and to the right).
Currently industry (public + private) is operating at 94% occupancy. Doesn't see that declining as states can't afford to build new, current are overcrowded, and nationwide # of prisoners trends up and to the right [not sure why I'm channeling Dennis Gartman right now].

Catalysts:
1) Recession is good for prison operators • More Crimes • States/Munis constrained to build new facilities
2) Operating Leverage from incremental prisoners is very high
3) Stock Buyback

Bought 8% of stock back in Feb / March (at $10.61, now trading at $24.50)
After-tax ROIC are 20-30% (low/high case). # of beds has increased from 46k to 61k in last 3 yrs, should be very accretive as occupancy on new beds increases.

5% of equity held by the Board.

##Bill made the point that he views this as a passive investment.

VALUATION
13x FCF, 12.2% Cap Rate (above where he thinks Realty Income will trade - Bill thinks its a good pair trade - see prior TILB post on Ackman's O short here)

Key Qualitative Investment Factors:
CRE Business
Govt is sole tenant
Triple-Net Lease (sorta)
LT Secular Growth
Low Maintenance Capex (~2%)
High ROIC
Local Monopoly/Nationwide Oligopoly
Best comp is a Healthcare REITs (trade at 7% cap rate)

From 1997 to 1999 operated as a REIT. Had to give up REIT status as a result of a large acquisition at the time. But at least it created a lot of NOLs.

Company makes much higher margins on owning & operating than just management contracts. Recently expanded # of beds in owned facilities. Increasing margins. 25-

33% of contracts roll each year, so decent predictability [TILB note: also allows for replacing in an inflationary environment].

All in all very simple.
Clearly a lot of regulatory risk, but Bill thinks its mitigated by supply / demand dynamics in incarceration industry.
Pershing owns 9.5% of company.