Putting an end to all speculations about possible sale or
restructuring,
American Capital, Ltd.
ACASannounced the sale of its operations for $4
billion through two separate deals.
New York-based specialty finance company, Ares Capital
Corporation
ARCC, is set to acquire American Capital for
$3.43 billion in a cash and stock deal. The deal will boost Ares
Capital’s position as a major business development company in the
nation and a direct lender to middle market companies. Upon closure
of the transaction, shareholders of Ares Capital are likely to own
around 73.9% while shareholders of American Capital will own the
remaining 26.1% of the combined entity.
The deal however, excludes American Capital Mortgage
Management, LLC, which is being sold to American Capital Agency
Corp.
AGNCin a separate transaction for $562 million.
The combined deals value American Capital at $17.40 per
share, reflecting a premium of 11.4% to its closing price on
Friday.
The Ares Capital's acquisition is subject to several
conditions including American Capital and Ares Capital shareholder
approvals. Also, the deal is subject to the completion of the sale
of the mortgage wing of American Capital to American Capital
Agency. Upon fulfillment of the conditions, the deal is expected to
close within the next 12 months and be immediately accretive to
Ares Capital’s core earnings per share.
Malon Wilkus, Chairman and Chief Executive Officer of
American Capital stated, "Our shareholders should benefit
immediately from the stable dividend offered by Ares Capital and
the fee waiver support provided by Ares Management."
Financial advisors to American Capital were The Goldman Sachs
Group, Inc.
GSand Credit Suisse Securities (USA) LLC.
A Surprising Move?
The latest move by American Capital, does not come as a
surprise as in January the company had announced the conclusion of
the initial phase of its strategic review and its plan to proceed
with soliciting offers.
The Maryland-based private equity firm and asset manager
announced the strategic review process last November stating that
it will fully review alternatives including the sale of the company
or partly sale of various business lines as well as review of its
spin off plans. Interestingly, the announcement came in less than
two weeks after billionaire investor Paul Singer's hedge fund
Elliott Management Corporation
voiced concerns over the proposed spin-off plansof American
Capital.
The activist hedge fund, which currently holds around 14.4%
interest in American Capital, had then initiated a campaign urging
shareholders of American Capital to vote against the spin-off
proposal, which it considered to be a “Poison Pill” ensuring hefty
fee structures for management while minimizing shareholder rights.
Apart from proposing the withdrawal of the spin-off plan, Elliott
Management proposed several recommendations including setting up of
a Strategic Review Committee to look for all available options in
order to maximize stockholder value.
Elliott Management now “strongly supports” the latest deals
of American Capital. In a statement, portfolio managers of the
hedge fund, Jesse Cohn and Pat Frayne mentioned, “ACAS's
streamlined portfolio will benefit from management by an Ares team
that has a stellar track record of delivering shareholder value."
Moody's Stance
Following the announcement of the deals, Moody's placed
American Capital’s B2 Corporate Family, B2 Senior Secured, and B3
Senior Unsecured ratings on review for upgrade. However, the
rating agency affirmed Ares Capital’s Ba1 Corporate Family and
senior unsecured ratings and changed the rating outlook to
negative.
On placing American Capital’s ratings for potential upgrade,
Moody’s expects the transaction to likely reduce the possibility of
default for American Capital’s creditors, considering the
relatively stronger credit profile of Ares Capital. Also, Ares
Capital anticipates repaying the outstanding debt of American
Capital at the closure of the transaction.
Moody's stated that the revised negative outlook for Ares
Capital reflects the incremental risks to the company's
operating performance and capital position from acquiring American
Capital’s higher risk portfolio of middle market debt and
equity investments. Also, Ares Capital is exposed to risks
tied with the approval and completion of the deal, as well as
integration of operations of American Capital.
American Capital currently carries a Zacks Rank #3 (Hold).
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