Thanks for posting the Tobias piece. As of last Friday, 60 blank check companies have gone public and raised $4.1 billion. There are another 34 blank checks currently is registration looking to raise another $2.5 billion. It is getting difficult for the MSM to ignore them.
Grubb & Ellis Creates Industry Stir
New Investment Business Has an Operating Structure With a Contentious Past
By Jennifer S. Forsyth
Wall Street Journal
April 26, 2006
Last month, Grubb & Ellis Co. added missing weapon to its arsenal – and caused a stir in the industry – by jumping into the investment-management business.
I wasn’t the real-estate services firm’s move into investment property that turned heads. It was the way Grubb & Ellis did it. Instead of opening a division or subsidiary – the approach many of its competitors took – Grubb & Ellis completed an initial public offering on the American Stock Exchange for a separate company. The new company, called Grubb & Ellis Realty Advisors, Inc. is structured as a “blank-check company,” a controversial structure so named because investors buy shares before the company identifies what it will acquire.
Mark Rose, chief executive of Chicago-based Grubb & Ellis Co., said the company’s corporate network of 5,000 people in 38 states will help identify undervalued properties in secondary and tertiary markets that the new company could purchase, improve and resell. Grubb & Ellis Co. would receive management and leasing fees, as well as disposition fees when the properties are sold.
The IPO raised $143 million, selling more than 23 million securities at $6 each. Much of that money will be placed in escrow and will be returned to shareholders if the company doesn’t complete a deal within 24 months. Grubb & Ellis Co. made a capital contribution of $2.5 million plus origination costs and will have an initial 22% ownership in the company, giving it a share of future profits, called “carried interest.” The offering was underwritten by Deutsche Bank Securities Inc.
Blank-check companies, which consist of an empty shell company and a management team whose purpose is to raise capital to purchase an operating business, caused investor scandals in the ‘80s when promoters hyped stocks to artificially high prices, then sold their shares and halted promotional activities. The Securities and Exchange Commission responded with safeguards, including a requirement that a blank-check company’s initial acquisition be approved by 80% of its shareholders.
David Menlow, founder of IPOfinancial.com, a Millburn, N.J., independent research firm, described the pairing of Grubb & Ellis’ corporate name with blank-check company as “discordant” – the quality name of Grubb & Ellis with the scandalous history of blank-check companies. In a phone interview, Mr. Rose discussed why Grubb & Ellis chose its approach.
WSJ: Why didn’t you just open an investment-management division?
Mr. Rose: It’s not like we woke up one morning and said ‘Let’s do a blank-check company and raise money and get a carried interest.’ We looked for a strategy that would play to the core strengths of Grubb & Ellis and would deliver above-market returns to our shareholders. And the strategy just happened to come out as a blank-check company structure. Plus, it’s transparent. As a publicly traded company, Grubb & Ellis Realty Advisors will rest on its own merits. People can look at it, value it, judge it and make their decisions whether they want to own it or sell it.
WSJ: Why as a blank-check company the best structure?
Mr. Rose: We have offices all across the county to find deals to buy undervalued assets. We want to buy them, reposition them and sell them. That means we may want to use, say 75% debt-to-value levels and we may want to hold assets for three years or less. That was preferable to forming a real-estate investment trust, which typically are leveraged at about 40% of value and have longer hold periods. Moreover, if we were to raise money at the corporate level and just acquire properties, we would be competing with our own clients, which we would never do.
WSJ: In theory, won’t you still compete with them? Hypothetically, Grubb & Ellis could represent the seller of a building and could bring it to Grubb & Ellis Realty Advisors as an undervalued property.
Mr. Rose: With the way we’ve set this up, I don’t believe we would be in a position to purchase assets that are being heavily competed for and sold by us or any one else. We’re going to be looking for secondary, suburban, tertiary deals. So by definition, we’re probably not going to be looking at an asset with a broker assigned to it who is heavily competing out there and driving prices up.
WSJ: Under the structure of a blank-check company, you have to get an initial acquisition completed no later than 24 months or return investors’ money. Could that pressure you to move too quickly and pay too much?
Mr. Rose: If we thought it would take 18 to 24 months to actually originate a deal, we would have told our investors. Instead, we feel very comfortable that given our size, given our skill sets, that we will be able to find something sooner rather than later. We are not going to do a deal just to do a deal. And if we tried to push through a deal that didn’t make sense, our shareholders on this first deal can actually vote it down.
WSJ: Could the shareholder-approval requirement slow you down if there are numerous bidders for a property?
Mr. Rose: Yes, if we were going into a highly competitive market, we would be at a disadvantage. But we’re looking in secondary and tertiary markets for undervalued properties where we believe there would be fewer bidders.
WSJ: Did you have trouble overcoming the bad connotation that blank-check companies have had in the past?
Mr. Rose: No. As a matter of fact, we addressed that up front with each of the prospective investors. We told them that it just so happened that the blank-check company worked for our structure and then explained all the reasons why. We have a commitment to the investors and we have put in place a structure of shareholder protections. That story transcends any type of vehicle. |
