October 31, 2014

Privatization: Acquisition Mission

John Finotti | 11/1/2003
The clock is ticking for Wackenhut Corrections Corp. The Boca Raton-based operator of private prisons has until April to reinvest some $52 million it got from the sale of a British joint venture, or it will be required to hand over the money to its lenders to pay down debt.

While the company won't tip its hand about possible buyout targets, Wackenhut executives say they intend to meet the deadline with one, perhaps two acquisitions that bolster the company's growth strategy.

While the company is leaving its options open, it most likely will be looking at businesses involved in running prisons or mental health facilities for governmental entities.

Wackenhut has a war chest of nearly $100 million, consisting of cash on hand plus the $52 million from the sale in July of its 50% interest in Premier Custodial Group to partner Serco. "We've identified several companies, and we've engaged an investment banker firm to help us," says George Zoley, chairman and chief executive officer. "We've grown to a $600-million (sales) company without any acquisitions. We plan to be a multibillion-dollar company. It's all within our reach."

But the company also has a heavy debt load. As part of its repositioning in July, Wackenhut issued $150 million in 10-year notes. The proceeds were used to buy back 12 million shares, or 57%, of its common stock from the controlling shareholder Group 4 Falck. The giant Danish security firm acquired the shares last year when it purchased Wackenhut Corp., the former parent of Wackenhut Corrections.

With steeper interest payments on some $250 million in long-term debt, Wackenhut will need to make acquisitions that contribute to earnings from the get-go.

Good timing
In the 1990s, big drops in crime rates coupled with overbuilding of prisons by state governments and private companies hurt revenue growth for companies like Wackenhut and Corrections Corp. of America, the nation's largest private operator of correctional facilities. "New business has been hard to come by," says James McDonald, an analyst who follows the industry, including Wackenhut Corrections, at First Analysis Securities Corp. in Chicago.

But several factors are expected to produce greater demand for correctional services. While crime rates have dropped, many states, including Florida, have passed laws requiring prisoners to spend a higher percentage of their sentences behind bars. "There's a surplus of inmates because inmates are not leaving the system as soon," says Alan Duffee, executive director of Florida's Correction Privatization Commission, the agency that oversees the state's five private correctional facilities, two of which are operated by Wackenhut.

There's also been an uptick in the national inmate population, according to the Federal Bureau of Prisons. In fact, Florida saw its inmate admissions unexpectedly shoot up three consecutive months this summer. To handle the influx, Florida legislators, during a special session this summer, approved $66 million for new state-run prison beds.

And in what might be a sign of what's in store for private prison operators, legislators, during the same special session, initially approved, but later dropped, a new 1,800-bed private prison in Graceville. Still, the Correction Privatization Commission did approve expanding the private prisons by 1,086 inmates.

Meanwhile, the federal government, thanks in large part to Homeland Security, is spending more money on detention. "The industry in general will benefit from the increased activity," McDonald says. The federal government, Florida and Texas accounted for 50% of Wackenhut's overall revenue in 2002.

Homing in
Investors already have picked up on these trends. Shares of publicly traded correctional companies such as Corrections Corp. of America, Cornell Cos. and Wackenhut are trading at the top end of their 52-week ranges. Wackenhut, for example, trades for about $19 a share, more than double the $8.34 it fetched early this year.

Although Wackenhut executives remain mum about their acquisition plans, McDonald says there's a potential candidate sitting just across the state. Sarasota-based Correctional Services Corp., which operates 31 facilities, has struggled to keep pace with the rest of the pack. Its stock trades at an appetizing $2.64 a share, for a total market cap of $27 million. "They're such a distant player, they should be taken over," McDonald says. One big negative: A Texas jury awarded $35 million in damages against the company in a wrongful death suit filed by the family of an inmate.

Is Wackenhut Corrections interested? Says Zoley: "I can't comment on that."

Tags: North Central

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