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PLN mentioned in business article profile of CCA

Nashville Business Journal, Jan. 1, 2009.
PLN mentioned in business article profile of CCA - Nashville Business Journal 2009

Friday, December 18, 2009

Private prison operator builds financial strength, battles social skepticism

Nashville Business Journal - by Brandon Gee Staff Writer

When Damon Hininger took over as president and CEO of Nashville-based Corrections Corporation of America in October, it capped a 17-year journey from his first job with the company as a correctional officer in his hometown of Leavenworth, Kan.

Hininger now presides over a corporation that many believe could make a similarly meteoric rise out the recession — and one that continually confronts skepticism and critics’ philosophical opposition to what the company does.

CCA (NYSE: CXW) is the nation’s largest private prison company and the fifth-largest prison manager in the country behind the federal government and three states. The company has nearly 87,000 prison beds in the United States. Its closest competitor, The GEO Group (NYSE: GEO), has 53,000 beds in the United States and 60,000 worldwide. CCA’s revenue was $1.6 billion in 2008, up $500 million since 2004.

Corrections Corp. manages 65 facilities in 19 states and the District of Columbia, 44 of which the company also owns. Managed facilities in Tennessee include the Metro-Davidson County Detention Facility in Nashville and five other prisons.

In a recent interview with the Nashville Business Journal, Hininger said the company offers its customers the best of both worlds: the oversight and accountability of government, and the innovation and cost effectiveness of business.

Critics, however, worry about the dangers of introducing a profit motive into the penal system, fearing it may lead to cost-saving measures that put inmates and the public at risk.

Most people see prisons when they think about CCA. Bill Ackman saw a high-quality real estate business with credit-worthy tenants (governments), low maintenance costs and competitive advantages.

His investment firm, Pershing Square Capital Management, has recently purchased 10.9 million shares of the company, a 9.5 percent ownership stake, according to filings with the U.S. Securities and Exchange Commission.

In a recent presentation at the Value Investing Congress, Ackman noted several things he likes about the company including its national footprint, balance sheet and ability to both capture incremental growth in prisoner populations and also relieve existing overcrowding in federal and state prisons.

T.C. Robillard, an analyst with Signal Hill Capital Group in Baltimore, is similarly impressed with the company.

"They’ve got a real solid balance sheet and a strong management team," he said, noting that only 8 percent of the nation’s prisons are privately managed. "There’s clearly a lot of runway in terms of growth ..."

But while Ackman sees CCA as a bargain investment, Robillard believes the company’s value is appropriately built into its share price of about $25. He has a hold rating on the company and believes competitors GEO and Cornell Cos. are better investments.

Anticipating growth

CCA has adopted a strategy of increasing its bed capacity faster than it adds inmates, so that it can quickly meet customers’ needs.

"We have learned ... that when a state agency or federal government wants to make a purchase, they make a decision at the very last minute with overpopulation and budget constraints," he said. "They want the beds as soon as possible."

CCA more than doubled its capacity of beds through the third quarter of this year. While its average population grew 4.5 percent, its average available beds jumped 9.2 percent.

CCA has weathered the recession well — revenue is at $1.2 billion through the third quarter of this year, up about $70 million — but Hininger said the prison business is impacted by states’ budget deficits. To confront budget woes, some states, including Tennessee, have looked at releasing prisoners early. This month, CCA announced it will close a Minnesota facility because the two states that house prisoners there have been reducing their populations.

Still, Hininger believes the company’s mid- to long-term prospects are favorable.

"You will have some states where, even with tough budgets, they will have to expand due to overcrowding," Hininger said. "And states have little money to build new facilities themselves."

Hininger said CCA can build a prison in a fraction of the time and for half the cost of government by taking advantage of market conditions. For example, he said the company recently built a prison for its largest state customer, California, in Arizona to take advantage of lower construction, labor and real estate prices in that state.

Profit concerns

Hearing incarceration discussed in such cut-and-dry business terms grates on the ears of those who fear the profit motive could lead to negative consequences in the penal system.

"Freedom is a core right of the American people and only government should have the right to take it away," said Amy Fettig, staff counsel for the American Civil Liberties Union’s National Prison Project in Washington.

Fettig said private prison companies achieve lower costs through cutbacks in training, rehabilitation services, medical care and compensation.

CCA denies such allegations. Louise Grant, CCA’s vice president of marketing and communication, and Hininger argued that it is precisely because they are under such a microscope that their facilities are safe.

"We have more incentive to operate even more safely and securely because there is such a demand for accountability by the government partners," said Grant, who said a government "contract monitor" works in each CCA facility.

Overall research on the quality and cost of private versus public prisons is inconclusive and often biased.

Studies in support of private prisons include those funded by Corrections Corp. or authored by pro-privatization think tanks. Critical reports often come from sources such as Nashvillian Alex Friedmann, a convicted felon and former prisoner in a CCA prison, associate editor of Prison Legal News and vice president of the Private Corrections Institute.

Some critics contend there is a fundamental problem with prisons being run by for-profit entities that have no financial interest in seeing prisoners rehabilitated. Hininger acknowledges that the company is paid on a per-inmate basis, but forcefully denies allegations that it lobbies for stricter sentencing, against early release or tries to influence prisoner populations.

According to the Center for Responsive Politics, CCA has spent $770,000 lobbying at the federal level this year and has spent as much as $3.4 million in one year, 2005.

Grant said "anybody who provides services to government uses lobbyists" and that CCA is no exception. She said the company may use lobbyists to fight bans on private prisons or otherwise try to make gains in unpenetrated markets.

While most of the negative publicity about private prisons has been focused on immigration prisons in the Southwest, CCA also has been dragged into the spotlight locally, most notably when inmate Estelle Richardson died in CCA’s Nashville facility in 2004. The death was ruled a homicide, but charges against four CCA officers were ultimately dropped.

On a recent tour of the same Nashville lockup where Richardson died, addictions treatment manager Bobby Aylward said to look no further than him for proof that CCA cares about its inmates. Aylward was incarcerated for a total of nearly five years. His last stint was at the Nashville facility, where he graduated from the addiction treatment program he now runs 12 years later.

"I would argue (criticisms of CCA) with every fiber of my soul," Aylward said. "CCA didn’t give me back my life. CCA gave me a life, and then they believed in me enough to give me an opportunity to work for them."

Staying ahead

One of Corrections Corp.’s strategies is to speculatively increase its capacity of beds to be positioned to immediately meet government needs. The company builds beds faster than it adds prisoners, lowering its occupancy rate.