Realty Income Corporation (O) has agreed to snap up Maryland-based VEREIT, a real estate operating company, in an all-stock deal, which will create a combined entity with an enterprise value of $50 billion. Following the announcement, VEREIT shares jumped 16% on April 29.
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Per the terms of the deal, shareholders of VEREIT (VER) will receive 0.705 shares of Realty Income stock for each share held. The transaction, which awaits both companies’ shareholder approval and certain other approvals, is likely to close in the fourth quarter of this year.
Upon completion of the merger, the companies are likely to spin off all the office properties of both companies into a new, independent, publicly-traded REIT (SpinCo). Following the merger and the spin-off process, Realty Income will act as the surviving public entity. Existing VEREIT shareholders will own 30% of the combined entity and SpinCo, while the remaining 70% will be owned by shareholders of Realty Income.
The deals are expected to be more than 10% accretive to Realty Income’s AFFO per share in the first year. Furthermore, on a run-rate basis, estimated annual corporate cost synergies of $45-$55 million are expected, along with an estimated $35-$40 million of annualized synergies on a cash basis. Notably, three quarters of the savings are likely to be achieved in the first year following the closure of the deal. (See Realty Income stock analysis on TipRanks)
Realty Income CEO Sumit Roy said, “We believe the merger with VEREIT will generate immediate earnings accretion and value creation for Realty Income’s shareholders while enhancing our ability to execute on our ambitious growth initiatives. Together, our company will enjoy increased size, scale, and diversification, continuing to distance Realty Income as the leader in the net lease industry. VEREIT’s real estate portfolio is highly complementary to ours, which we expect to further enhance the consistency and durability of our cash flows.”
Following the deal announcement, Raymond James analyst RJ Milligan maintained a Buy rating on O stock.
Milligan said, “On a net basis, we view the transaction as a positive for O, believing the immediate accretion and future refinancing opportunities will more than offset the slight deterioration in portfolio quality and the increased difficulty in achieving meaningful annual earnings growth through acquisitions.”
Wall Street analysts are cautiously optimistic about the stock’s outlook. The Moderate Buy consensus rating breaks down into 2 Buy ratings versus 3 Hold ratings. The average analyst price target stands at $68.75 and implies that shares are almost fully valued at current levels. That’s after shares jumped 26.2% over the past year.
TipRanks data shows that financial blogger opinions are 92% Bullish on Realty Income, compared to a sector average of 69%.
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