Geo Group to Acquire Rival Prison Operator Cornell

As the prison population in America continues to increase, there has been a movement towards the privatization of prisons and detention centers. Sadly, the business of owning or operating a prison has become a growth industry. Two prison operators who have benefited from this growth, Geo Group (GEO) and Cornell Cos. (CRN), agreed on Monday to a $685 million merger.

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The deal, which involves the assumption of $300 million in debt, comes to $24.96 per share for the shareholders of Cornell, which is a 35% premium over last Friday's close. The transaction is expected to close in the third quarter and is likely to see intense regulatory scrutiny.

A Powerful Combination

Besides managing private corrections and detention centers, the Geo Group also operates health and mental services for federal, state and local agencies. The company manages 61 facilities -- with 60,000 beds -- in the U.S., Australia, Canada, the U.K. and even Cuba. There are over 13,000 employees who handle things like facility design, financing, general administration, vocational training, counseling, food service and so on.

Last year, the Geo Group reported adjusted EBITDA of $183.1 million, up from $163.8 million in the same period a year ago. With its strong balance sheet, the company is definitely positioned to pull off a sizable acquisition.

Cornell also has a broad range of services and operates over 70 facilities. In 2009, revenues increased 6.6% to $412.4 million and income from operations came to $69.7 million, up from $62.2 million in 2008.

Cornell has continued to invest in its business, including facility expansions in the Great Plains Correctional Facility and the Walnut Grove Youth Correctional Facility. There is also the completed construction of a new Hudson Correctional Facility in Colorado.

Preparing for the Long Haul

The Geo Group expects the Cornell deal to boost revenues by $400 million to $1.5 billion and generate annual cost savings that range from $12 million to $15 million. The transaction is not expected to have an effect on earnings in 2010, but will be accretive in 2011. The Geo Group has a strong record with acquisitions -- and the Cornell deal should be no different. The company was also able to secure $150 million in committed financing from BNP Paribas.

But this deal is really about the long-term industry trends. For example, the prison population continues to grow in the U.S., with roughly one in every 100 adults in jail or prison -- the highest incarceration rate in the world. A study from Pew Charitable Trusts forecasts that there will be about 38,000 new inmates a year.

Further, private solutions are often cheaper, which is certainly appealing because of government budget pressures. Nearly 8% of the incarcerated population in the U.S. is already held in private facilities.

Again, these are grim figures but it is the reality. And for the Geo Group and Cornell, the trends should mean a promising future for investors.