Investment adviser Adrian Day discusses the merger announced today between Ares Capital and American Capital.
This morning came the announcement that two of the Business Development Companies on our list would merge. Ares Capital Corp. (ARCC:NASDAQ, 14.66) will buy American Capital Ltd. (ACAS:NASDAQ, 15.70).
Ares will pay $6.41 in cash plus 0.483 of a share for each share of American Capital. In addition, American Capital Agency Corp. (a separate public company) will purchase its external manager, American Capital Mortgage Management, LLC (part of ACAS) for an additional $2.45 per share.
Modest price paid. . .
As is usual after such acquisitions, the acquirer’s stock price fell, with Ares down $0.51 in the morning (while American Capital’s rose). At the current price of Ares, the transaction is worth $15.94. On Friday’s closing prices, the premium was a tad over 10%.
The transaction price is disappointing, given that Ares is buying American Capital at a significant NAV discount of almost 20%, with only a modest premium to pre-announcement stock prices, and particularly since American Capital had been selling assets at premiums to its carrying cost (over $1.1 billion in sales this year). Indeed, some blood-sucking West Coast ambulance chaser announced the possibility of a lawsuit half an hour after the conference call describing the deal finished (7:15 a.m. local time).
But creates even better BDC
However, for long-term shareholders it’s a positive transaction. Ares is a great company; it’s already on our list of current recommendations. By combining the two largest BDCs into a company more than twice as big as its closest competitor, Ares will add scale and diversification, giving it the ability to originate larger transactions. Ares acquired Allied Capital a few years back, and was very successful in consolidating that company and getting value out of …read more