NORWALK, Conn. (HedgeWorld.com)-Pirate Capital LLC believes that there is value to be unlocked in the for-profit prison administration industry but doesn’t believe that the existing board of directors of Cornell Companies Inc., Houston, is up to the job.
Cornell held its annual meeting in June, re-electing its board of directors without opposition. After some pressing by Pirate in July, Cornell disclosed that substantial votes had been withheld in that election-37% in the case of the chairman of the board and chief executive, Harry J. Phillips Jr., indicating serious shareholder dissatisfaction Previous HedgeWorld Story.
In August, Zachary George, a research analyst with Pirate, which currently owns 9.8% of the equity in Cornell, wrote to the directors asking that they rescind the company’s “poison pill,” that they remove Mr. Phillips and that they hire an investment adviser to sell the company.
His letter referred to Cornell’s continuing troubles with the Moshannon Valley project, Pennsylvania, on which Cornell began construction in 1999 under a contract from the federal Bureau of Prisons. Disputes about environmental impact and building design held up this project. In October 2003, Cornell received final approval from the Bureau of Prisons for a revised design. It expects to resume work in the third quarter of this year for a facility that will have a population of 1,300 low-security or minimum-security offenders.
As of June 30, Cornell said in its 10-K, it had incurred approximately US$18.6 million “for the design, construction and development costs and capitalized interest related to the Moshannon Valley Correctional Center facility. The Company is in the process of submitting a claim to the BOP for reimbursement of costs related to the original construction efforts incurred beginning in 1999.”
Mr. George, writing to the directors, said that under Mr. Phillips, Cornell has been underperforming the other players in its industry and that “contracts which should have been finalized ‘years ago’ like Moshannon Valley are still not finalized.” He said that the management has been trying to characterize his views as those only held by hedge funds. He said that this “spin” is faulty and quoted a principal of a mutual fund, Columbia Management Group Inc., who said in the second quarter earnings conference call that Columbia is “highly frustrated with the continuing string of disappointments … we’re getting far too many mistakes.”
On Aug. 25, Mr. Phillips responded. He characterized Mr. George’s proposal as a “fire sale” of the company. He said that although the company is open to offers, it has not and won’t hire an investment adviser for the purpose of selling it, because that would lead to an undervaluation of the company and would risk violation of the board’s fiduciary obligations. He also said that the “poison pill” (or the “rights plan,”) serves a valuable purpose in protecting against such undervaluation and won’t be redeemed.
On Sept. 1, Mr. George wrote again. He denied the “fire sale” characterization.
“As you know, a typical sale process can easily take five to nine months,” he wrote. “This process should be initiated now, regardless of the status of projects such as Moshannon Valley, which should be resolved within this time frame. As an indication of the interest in Cornell’s assets and the timeliness of exploring its sale, one of several strategic buyers has conveyed to us that they are willing to make a scaled bid that is tied to the success of important projects that you have been unable to finalize. If you are concerned that the sale of the company would put the directors at risk of breaching their fiduciary duties, the best way to eliminate this risk is to ask shareholders to vote on the matter.”
The private corrections industry, which was virtually unheard of 20 years ago, now represents 6% of the total incarcerated population in the United States. Cornell’s chief competitors in the field are Corrections Corp. of America and the Geo Group.
Contact Bob Keane with questions or comments at: [email protected].