Realty Income Corp (NYSE: O) will acquire all of the outstanding shares of American Realty Capital Trust (ARCT) in a transaction valued at approximately $2.95 billion. The board of directors of both companies have unanimously approved the agreement.

Following a shareholder vote by both companies, the transaction is expected to close during the fourth quarter of 2012 or early in the first quarter of 2013. Upon completion, it is anticipated that Realty Income will be the 18th largest REIT in the US, based on total pro forma equity market capitalization, and twice as large as the next largest net lease REIT.

The acquisition will be financed by Realty Income directly issuing $1.9 billion of its common stock to American Realty Capital Trust shareholders, the assumption of approximately $526 million of debt, and the immediate repayment of approximately $574 million of outstanding debt and transaction expenses. Under the terms of the agreement, American Realty Capital Trust shareholders will receive a fixed exchange ratio of 0.2874 Realty Income shares for each share of American Realty Capital Trust common stock that they own.

Based on Realty Income’s closing stock price of $42.48 on September 5, 2012, this consideration would be equivalent to $12.21 per share. Upon closing of the transaction, American Realty Capital Trust shareholders are expected to own approximately 25.6% of Realty Income’s shares.

“This acquisition comprehensively advances Realty Income’s strategic objectives of increasing its revenue generated by investment grade tenants and further diversifying its portfolio outside of the retail industry," said Tom A. Lewis, Chief Executive Officer of Realty Income in a statement. "This transaction is immediately accretive and is expected to generate approximately $0.20-$0.22 per share in additional Funds from Operations (FFO) annually and, upon closing, is expected to allow us to increase our annualized dividends to shareholders by approximately $0.13 per share to an annualized rate of approximately $1.94 per share.”

Approximately 75 percent of the rental revenue added in this transaction will be generated by investment-grade tenants including: FedEx, Walgreen’s, CVS, the GSA, Dollar General, Express Scripts, PNC Bank, and Whirlpool. The addition of these tenants to Realty Income’s existing portfolio increases the company’s revenue generated by investment-grade tenants from approximately 19% to 34% of pro forma total revenue.

With the addition of these properties to the portfolio, the pro forma rental revenue generated by Realty Income’s 10 largest industries declines from 73% to 64%, its largest 15 tenants declines from 49% to 42%, and its revenue from retail properties declines from 86% to 77%. This added diversification further strengthens the sources of the lease revenue supporting the payment of monthly dividends.

Based on June 30, 2012 data, the overall occupancy of the combined real estate portfolio will increase to 97.7% from 97.3%, pre-transaction. The average remaining lease term, after the transaction, will increase to 11.4 years as compared to 11.1 years, pre-transaction. In addition, Realty Income will also reduce its exposure to near-term lease expirations, with no significant lease rollover occurring until 2020.

Upon closing of the transaction, based on current prices, Realty Income would have a pro forma enterprise value of approximately $11.4 billion, a pro forma total equity market capitalization of $7.6 billion, and will be the largest publicly traded net lease REIT by a factor of two times.

None of the employees of American Realty Capital Trust will remain with Realty Income, and Realty Income anticipates hiring only four to six additional employees as a result of the transaction. In addition, Realty Income, upon closing, will maintain its current board membership and structure.

BofA Merrill Lynch and Wells Fargo Securities acted as exclusive financial advisors to Realty Income on the transaction and Latham & Watkins LLP acted as legal counsel. Goldman, Sachs & Co. acted as exclusive financial advisor to American Realty Capital Trust and Proskauer Rose LLP acted as legal counsel.

Realty Income’s acquisition of American Realty Capital Trust is contingent upon the approval of both companies’ shareholders. A proxy statement is expected to be filed in the near future and, following its effectiveness, a proxy statement and vote card will be mailed to shareholders. The transaction will close upon receiving approval from Realty Income and American Realty Capital Trust shareholders.