April 19, 2010 / 12:08 PM / 9 years ago

UPDATE 3-Geo Group to buy rival Cornell for $374 mln

* Geo to also assume about $300 mln of Cornell’s debt

* Deal values Cornell at $24.96/share

* Offer at 35 pct premium to Cornell’s Friday close

* Geo, Cornell reaffirm Q1 profit views

* Cornell’s shares jump 35 pct (Adds details, analyst comments)

By Viraj Nair

BANGALORE, April 19 (Reuters) - Prison operator Geo Group Inc (GEO.N) agreed to buy rival Cornell Cos CRN.N for about $374 million in cash and stock as it expands to meet an increasing demand for private correctional and detention facilities.

While private prison operators currently house about 9 percent of the states’ and federal government’s inmates, growing inmate population and prison overcrowding have led to more than half of new inmates being housed in private prisons in some states.

Budget constraints have seen U.S. states increasingly outsource a part of their corrections systems to private operators like Geo and larger rival Corrections Corp of America (CXW.N).

The deal, which values Cornell at $24.96 a share, a 35 percent premium to the stock’s close Friday, will create the sixth largest adult correctional organization in the United States, Geo’s Chief Executive George Zoley said.

The enterprise value of the deal is $685 million, including assumption of $300 million of debt, Geo said.

Geo expects the deal, slated to close in the third quarter, to add to its 2011 pro forma earnings and result in annual cost efficiencies of $12 million to $15 million.

SunTrust Robinson Humphrey analyst Tobey Sommer said Geo’s offer price was “pretty good” considering that the deal is expected to add to the company’s earnings and save costs.

But Sommer feels the cost savings estimate was conservative. SunTrust Robinson Humphrey makes a market in the securities of Geo and Corrections Corp.

Geo said it will use a part of its $150 million of committed financing by BNP Paribas and its available credit to finance all cash transactions in the deal.

LONG-TERM GAINS

Dawson James Securities analyst Robert Wasserman said the merger made a lot of sense as Geo looks to capitalize on the growing needs of the U.S. prison systems and realizes the cost synergies.

But Geo could have got a better price for Cornell in the short term, he said.

In the long term, however, Wasserman said the deal offers good value to Geo as the company reaps the benefit from incorporating Cornell into its fold in 2011 and beyond.

The combined company, based in Boca Raton, Florida, will manage or own 97 correctional and detention facilities with a total capacity of about 76,000 beds and 32 behavioral health facilities, drawing revenue of about $1.5 billion.

The deal will give Geo a presence in a number of new states, including Illinois, Pennsylvania, Alaska, Colorado and Ohio, CEO Zoley said on a call with analysts.

Under the terms, Cornell shareholders can choose to receive 1.3 shares of Geo’s common stock for each share held.

They also have an option to elect to get cash equivalent to 1.3 Geo shares or 1 Geo share plus $6, whichever is higher, with a 20 percent cap on the cash portion of the deal.

Cornell had about 15 million shares outstanding as of Feb. 19.

Both companies reaffirmed their earnings outlook for the first quarter.

Shares of Cornell jumped 35 percent to touch a high of $24.92, while Geo’s shares shed about 5 percent to a low of $18.23 in afternoon trade Monday on the New York Stock Exchange. (Reporting by Viraj Nair; additional reporting by Anne Pallivathuckal; Editing by Vinu Pilakkot and Gopakumar Warrier)

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