In July 1997 the Corrections Corporation of America (CCA) spun off a related company, the Prison Reality Trust, which was formed to purchase CCA's prisons under a lease-back arrangement [ PLN Dec. 97]. Prison Realty is a real estate investment trust, or REIT, which offers certain corporate tax advantages. Nine months later, on April 20. 1998, CCA stunned investors by announcing it planned to sell itself to Prison Realty Trust in a $3 billion stock swap that would create a combined "super REIT."

There had already been controversy regarding the inter-connected corporate directorships of CCA and Prison Realty Trust: Doctor R. Crants, CCA's C.E.O., is also chairman of Prison Realty: his son is Prison Realty's president, former CCA officers sit on Prison Realty's corporate board, and both companies share the same Nashville office. Crants & company deny there is a conflict of interest.

The proposed merger would split CCA into three companies, all under the CCA name, with two managing prisons and jails not owned by the REIT and the third handling contracts for REIT-owned facilities. This convoluted arrangement is necessary to squeeze the CCA Prison Realty merger into IRS regulatory guidelines, which limit the types of revenue that REITs can receive. Prison Realty also plans to buy out the real estate assets of U.S. Corrections Corporation, the third largest private corrections company in the United States, thereby adding to CCA's market share of the for-profit prison industry.

Apparently Wall Street didn't appreciate the incestual marriage between CCA and its sister corporation -- in the weeks following the announced merger CCA's stock dropped almost 25%. Several investment analysts downgraded their ratings of CCA stock, and one firm, Paine Webber, criticized the merger and stated it would result in a "shell corporation with very little capitalization behind it." At least nine investors have filed shareholder suits against CCA, claiming the proposed merger puts the personal gain of corporate officers before the interests of stockholders. Following the merger Crants would own 1.9 million shares in the combined companies.

Meanwhile, Wackenhut, the nation's second ranking for-profit prison contractor, announced that it was creating a REIT of its own, the Correctional Properties Trust, which would purchase eight of Wackenhut's privately-owned facilities. Although Correctional Properties Trust will be run by two former Wackenhut executives. Wackenhut C.E.O. George Zoley made it clear that his company didn't plan to follow in CCA's footsteps by pursuing a merger. Eager investors looking to cash in on the profitable private prison industry took him at his word; while CCA's stock plummeted, shares in Wackenhut's newly-formed REIT rose 15% on its first day of trading.

Sources: Palm Beach Post, New York Times, Wall Street Journal, Tennessean