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A case against the American Finance Trust-ARC - Retail Centers merger

The investment banking firm Robert A. Stanger & Co. Inc. is recommending that shareholders of American Realty Capital - Retail Centers of America Inc. reject the proposed merger with American Finance Trust Inc. in any upcoming vote.

In a four-page report dated Oct. 5 and titled "Trouble With the Curve," Stanger laid out a case against the pending deal, framing it as both a value-diminishing proposition for ARC - Retail Centers, whose portfolio has stronger focus and quality than that of American Finance, and a distraction from other value-creating opportunities. ARC - Retail Centers has the capacity on its own to improve its portfolio via acquisitions and, through its service provider, improve operations and portfolio value, the firm said.

"Simply put, in our opinion these two portfolios have no business being combined," the authors said.

Stanger also called into question the ARC - Retail Centers special committee's decision to pursue a "complicated, affiliated-party, non-cash, non-liquidity-providing" transaction — both companies are managed by Nick Schorsch's AR Global Investments LLC — that will likely be dilutive, instead of a beneficial one with an independent third party. The firm called the deal a "forced migration" for ARC - Retail Centers shareholders that will lock the company into a less attractive management contract with an adviser over which there already hangs a "cloud of uncertainty."

"Despite the size and property specific focus of the RCA portfolio which makes it an attractive and eminently financeable cash acquisition candidate, the special committee eschewed conducting an effort to market the portfolio and pursue an all-cash transaction with an independent, third-party institutional buyer or a merger with an existing independent, publicly traded company – both of which would have provided RCA investors with a liquidity option in a non-conflicted transaction," Stanger said.

What's more, if the combined entity ultimately is publicly listed, in a belated effort to maximize value, it would likely be penalized for its lack of asset class focus and external management, and would likely trade at a discount, Stanger said.

Notably, Stanger in its report cited New York REIT shareholders' successful campaign to terminate the company's planned merger with JBG Cos., and its ongoing campaign to install a new independent board to effect its liquidation, as an example to potentially follow.

"Like New York REIT, once the voice of the shareholders is heard, the special committee of RCA may ultimately consider replacing its advisor, terminating the merger agreement (with reduced broken deal costs) and/or delaying a strategic transaction until the higher broken transaction fees payable to AFIN are burned off," the authors said.

AR Global did not respond to a request for comment.