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GEO Group completes takeover of Cornell

The GEO Group completed its takeover of Houston-based Cornell Companies last week, and yesterday announced the results of Cornell shareholder vote on the takeover.  There has been little analysis of this deal, and how it will effect exisiting Cornell facilities, including its 10 facilities in Texas or otherwise. 

The exception is, as usual, Scot Hensen at Grits for Breakfast, who argues that the deal may add to GEO's problems being highly leveraged:

The same warning was included in Geo's most recent 10K, but after the purchase of Cornell it deserves to be amplified. The more debt the company has, the greater risk they must "dedicate a substantial portion of our cash flow from operations to payments on our indebtedness." (They'll also be dedicating a portion of their revenue, btw, to pay the board chairman's son-in-law a fat $144K salary plus stock options, which is the kind of executive hire that to me raises a red flag.) 

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I'd also pointed out back in 2007 that GEO making its debt payments required the company to rely on payments from subsidiaries that it could not guarantee:

The 10-K declares that Geo relies on "distributions" (i.e., "profits") from its subsidiaries to pay its increasingly large debt. Profits from subsidiaries made up more than 28% of Geo revenue last year, but the 10-K cautions that "Our subsidiaries are separate and distinct legal entities and are not obligated to make funds available for payment of our other indebtedness in the form of loans, distributions or otherwise."

In other words, we're not solvent without payments we can't ensure will keep coming, and our subsidiaries are "separate and distinct legal entities" who we don't control. That works out nicely for Geo if they go bankrupt, doesn't it?

That was written when subsidiaries made up 28% of Geo's revenue. Today, according to Geo's 10K, "For the fiscal year ended January 3, 2010, our subsidiaries accounted for 50.1% of our consolidated revenue, and, as of January 3, 2010, our subsidiaries accounted for 59.0% of our total segment assets." If the Cornell acquisitions are treated as subsidiaries, that risk will be even further magnified. The Geo Group is a heavily leveraged company.

Scot's article is worth a full read, and feel free to check out our past coverage of the GEO Group.

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