CarrAmerica Realty Corp., a D.C.-based office developer and operator, is selling the bulk of its flexible work space business to a New York Internet-services company for $380 million.
FrontLine Capital Group will buy CarrAmerica's HQ Global Workplaces unit and combine it with its temporary office business, Vantas Inc., to form a new company retaining the HQ name.
The sale gives CarrAmerica cash to help finance its core commercial real estate business and reduce debt. Tax rules for publicly traded real estate investment trusts such as CarrAmerica require them to pay almost all of their income directly to shareholders, limiting their growth. CarrAmerica said it will also use up to $100 million from the sale to repurchase stock.
CarrAmerica's sale of HQ Global ends its three-year push to provide fast-growing companies with turn-key office centers equipped with high-speed Internet access, training facilities, video-conferencing equipment and other technology and service options, as an alternative to conventional office space.
HQ's operating revenue increased by $70 million to $168 million for the first nine months in 1999, compared with the same period in 1998.
But investors never gave CarrAmerica full credit for its HQ business, which frustrated company executives, said John Lutzius, an analyst with Green Street Advisors in California.
"This is a good transaction," he said.
CarrAmerica's stock closed yesterday at $22.12 1/2 a share, a 3.2 percent increase over Thursday's closing price of $21.43 3/4 a share.
CarrAmerica will retain a 19 percent stake in the new company, valued at $120 million, and continue to share in its profits.
The value of the combined HQ company is estimated at $1 billion, making it the world's largest flexible work space provider, according to CarrAmerica officials.
"The combination of these two companies will clearly dominate the U.S. market, which is where everyone wants to be," said Thomas A. Carr, chief executive of CarrAmerica. "It creates just a huge platform from which to really build barriers to entry over time."
The combined HQ will operate 463 executive office centers in 17 countries with 2,500 employees, serving 43,000 customers. Vantas will move its operations from New York to HQ's headquarters in Dallas.
The company's primary competitor is the London-based Regus Business Centres, which said it expects to bring in about $600 million in revenue this year. It disputed the claim that the combined HQ company would be the world's largest and said it will retain the position as the industry's global leader.
Regus, a nine-year-old company with business centers in 47 countries, entered the U.S. market last year.
Bob Gaudreau, senior vice president of Regus and chief of U.S. operations, said the HQ and Vantas merger is a plus for the growing industry.
"It gives the industry a certain level of credibility," Gaudreau said. "It's big business now."
He said the combined HQ, which he called "another serious player," should not hamper Regus's efforts to expand in the United States. The company has added 30 business centers in the past year.
In 1997 CarrAmerica bought the predecessor to HQ, the Atlanta-based OmniOffices Inc., for $50 million. Over the next three years the company spent more than $300 buying other temporary office businesses. Carr said the HQ sale will allow his company to retire $141 million in debt, reducing the company's consolidated debt level from 45.4 percent of its stock market value at the end of the third quarter in September 1999 to 40.8 percent.
CarrAmerica expects to see a pretax gain of about $81 million on the transaction.
It will keep one seat on the board of directors of the new company. HQ's current chief executive, Gary Kusin, will continue as CEO. Vantas's David Rupert will be president and chief operating officer.
FrontLine Capital, which is in the process of changing its name from Reckson Service Industries Inc., is a publicly traded operating company that is developing a network of business-to-business electronic commerce services companies. FrontLine's Vantas had been a competitor of HQ's in the U.S. market.
Kusin said that in one case, the companies already shared a mutual client, Houghton Mifflin's Computer Adaptive Technologies Inc., which is building professional testing sites throughout the country. Computer Adaptive hired HQ and Vantas because neither company individually could handle the entire job.
CAPTION: CarrAmerica's Thomas Carr says new firm will dominate U.S. market.