FEATURE-U.S. private prison firms shift focus to treatment

By Allyce Bess

NEW YORK, June 27 (Reuters) - Faced with a declining crime rate, poor stock performance and bad publicity, private U.S. companies that operate some prisons are shifting their focus to drug treatment and rehabilitation to boost both revenue and their image.

And, while measures in California and New York calling for drug treatment instead of prison for first-time offenders puts further pressure on prison companies, the companies see it as a new opportunity.

Corrections Corp. of America (NYSE: CXW) and Wackenhut Corrections Corp. (NYSE:WHC) continue to operate mostly prisons, but they are also moving toward mental hospitals and substance abuse clinics. Cornell Cos. Inc. (NYSE:CRN), already heavily focused on drug treatment, has plans to open more high schools for juvenile delinquents.

And, getting away from their image as the tough controllers of unruly criminals, the companies say they are seeking to cast themselves as caregivers focused on preventing crime, rather than profiting from it.

``Our industry is still robust, but it's changing because the government is starting to get smart, not soft, on crime,'' said Steve Logan, chief executive of Cornell, which operates nine prisons and dozens of treatment facilities.

``Instead of offering the cheapest solution, we are offering the best value, which is treatment and prevention,'' he said.

In a move that illustrates the new trends, prison operators set up the Association of Private Correctional and Treatment Organizations in May and chose Logan, whose company operates many more treatment facilities than prisons, as its head.

Analysts say the new approach should eventually pay off for the industry, which has had a rough ride since its inception in the 1980s.

``You don't have to build an entire prison for a drug treatment program, so they will have lower capital costs,'' said Jim MacDonald, who follows Wackenhut Corrections for First Analysis in Chicago. ``My outlook is pretty favorable.''

PAST DIFFICULTIES

Wackenhut Corrections, which is 57 percent owned by security firm Wackenhut Corp. (NYSE:WAK), is branching out specifically in the areas of psychiatric care and mental health. Wackenhut opened a 520-bed facility in Kyle, Texas, for drug treatment and recently the 350-bed South Florida State Hospital.

Wackenhut Corrections Vice Chairman and CEO George Zoley said he expects 20 to 30 percent of overall revenues eventually to come from mental health and drug treatment correctional facilities.

MacDonald, the only analyst who covers Wackenhut Corrections, expects earnings of 90 cents per share this year, down from 91 cents last year. For the second quarter, he expects earnings of 25 cents per share, compared with 23 cents a year earlier.

Wackenhut shares, which are well below their 1996 high of around $45, have risen from a low of about $9 per share in January to $14.50 in early June, after the company said in May it had won a contract to design, build and operate a 600-bed secure civil confinement and treatment facility for sexually violent predators in Florida. It closed at $12.95 on Tuesday.

Corrections Corp. of America (CCA), the biggest prison operator with 61,462 beds in 65 facilities, is still reeling from a breakout by six prisoners from Youngstown, Ohio, in 1998 and is trying to sell off or fill its empty facilities and reduce its debt.

``We will be looking at other services our industry can provide,'' said CCA Chief Executive John Ferguson. ``We've developed a good substance abuse treatment program called Lifeline, and we're looking at the aging population and the mental health field as potential areas to expand.''

CCA has seen its stock price drop 97 percent from its high near $45 in 1998, and completed a ten-for-one reverse stock split in May. It closed on Tuesday at $13.82. No analysts currently follow the company, according to research firm Thomson Financial/First Call.

Cornell, in addition to operating nine adult prisons, has 38 juvenile facilities, including eight accredited high schools, and 21 pre-release facilities. In early June, the Arkansas Division of Youth Services awarded Cornell a contract to take over a 134-bed youth facility.

Red Chip Review analyst Bryn Harmon said he foresees a steady earnings rise for Cornell.

The four analysts who follow Cornell expect, on average, earnings of 89 cents per share for the year, up from 84 cents last year, and 18 cents for the second quarter, compared with 23 cents.

NOT SO FAST

Roy Ross, who heads the leading drug treatment facility operator in the United States, CiviGenics, cautioned that the transition to treatment may not be as easy as some prison 'companies think.

``This is not something you can move into overnight,'' Ross said. ``You need an understanding of the interface between treatment and security which, historically, has been a point of tension in corrections.''

And the companies still face a serious image problem, especially since six prisoners escaped from CCA's Youngstown, Ohio facility in 1998, and a guard was killed in a 1999 riot in a Wackenhut facility in New Mexico.

The prison operators respond by noting that the media has paid more attention to their problems than those of public prisons.

``We may have disturbances periodically such as escapes and suicides,'' said Wackenhut's Zoley. ``But if you compare our incidents to any comparably sized organization, we believe we come out well.''

``Our performance has been no worse than what the public sector provides,'' said CCA's Ferguson.

Meanwhile, the Nebraska legislature is considering a ban on building private prisons in the state, French food service giant Sodexho Alliance S.A. recently dumped its 8 percent share in CCA after protests from its university clients.

Industry leaders say they still have something to offer the public, whether it builds a prison, clinic or psychiatric hospital, saying it usually takes 12 to 18 months to build a facility while it can often take the government up to three to five years.

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