A pair of activist investors ratcheted up the pressure Wednesday on CommonWealth REIT, filing a lawsuit to stop a proposed stock offering and reiterating its proposal to acquire the real estate company outright.
Corvex Management, a hedge fund run by Keith Meister, and Related Companies, led by its chief executive Jeff Blau, have turned heads on Wall Street with an aggressive attack on CommonWealth, a Newton, Massachusetts-based business that owns more than 500 office buildings across the country.
On Tuesday, the investors disclosed a 9.8 percent stake in the company and demanded the cancellation of a proposed stock offering that it said would damage existing shareholders. Later the same day, they offered to pay $25 a share to purchase the company, giving it a value of roughly $2.1 billion. If the company did not agree to enter into buyout discussions, they said, they would move to oust its management and board.
Shares of CommonWealth spiked 54 percent to $24.40, up $8.55, on Tuesday. Intheir correspondence with CommonWealth, the investors said they believed that its real estate was worth about $40 per share.
“For reasons unbeknownst to us, you have yet to respond to any and all of our requests, while simultaneously continuing the marketing efforts for your value destructive equity offering,†said the letter, filed with securities regulators early Wednesday morning. “We believe this reaction (or lack thereof) is indefensible and ultimately a dereliction of your fiduciary duties.â€
Less than an hour after the investors unveiled the lawsuit, CommonWealth issued a statement announcing that, after considering the investors’ demands, its board determined that the share offering was in the “best interests†of the company.
Corvex and Related disclosed their position in response to CommonWealth’s proposed 27 million share offering announced on Monday. The investors objected to the offering, arguing that CommonWealth’s executives have an incentive to raise ! money because of a perverse structure that pays them based on their assets under management. A Citigroup research report highlighted this in a report, arguing that management was “incentivized to acquire assetsâ€" regardless of the quality â€" and we believe the company has an incentive to issue as much stock as possible to fund acquisitions.â€
Another large investor has expressed support for Corvex’s and Related’s stance. Luxor Capital Group, a New York money manager that owns more than eight percent of CommonWealth shares, also sent a letter to the company demanding that it cancel the “ill-advised offering.â€
The lawsuit seeking to prohibit CommonWealth’s stock offering, a draft copy of which was filed with regulators, is expected to be filed in Maryland state court on Wedensday morning. The investors are represented by the law firm Gibson Dunn & Crutcher.
Corvex and Related are part of a wave of hedge funds and others investors who in recent months have taken aim at company anagement with activist tactics, launching proxy fights to oust boards and agitating for other corporate governance changes.
Mr. Meister, the head of Corvex, a roughly $3 billion fund started in 2010, worked for years under Carl Icahn, the pioneering activist investor. His partner in the campaign to shake-up CommonWealth is Related, a large New York-based real estate company that built the Time Warner Center and has broken ground on Hudson Yards, a 26-acre
development on the west side of Manhattan.
The investors said that they would not have to raise any debt to finance an acquisition of CommonWealth, but instead fund the purchase with money from funds provided by a Related investment vehicle, the Corvex fund, and other investors who have expressed an interest in the proposed transaction.
