BDC Shocker: Prospect Capital Bids for Allied Capital

Includes: AFC, ARCC, PSEC
by: Nicholas Marshi

This came out of left field. Apparently Prospect Capital (NASDAQ:PSEC) made an unsolicited offer to buy Allied Capital (NYSEARCA:ALD), and grab it away from Ares Capital (NASDAQ:ARCC), whose earlier offer has been approved by the Board but not yet the shareholders. Yesterday the Board of Allied Capital said thanks, but no thanks to Prospect. (See Allied Capital – Investor Resources : SEC Filings.)

We have no inside knowledge but the reasons given by Allied Capital for the decline make sense: the slightly higher price the ALD shareholders may have received from PSEC is offset by the fact that the new buyer is a much smaller company than Ares Capital, and the fact that the ARCC purchase is almost completed. We should also point out that there would be a cost to Allied Capital for turning its back on Ares: $30mn, according to the Wall Street Journal.

This is a very exciting development in the BDC industry. Until recently we never had a BDC acquire another. Then two transactions in a row were announced (PSEC buying Patriot Capital and then ARCC buying ALD). Now we have competing offers, with all the prospect for high drama that could ensue.

Our first reaction is that PSEC should have better things to do than seeking to make two major acquisitions in the space of a few weeks. One would think that integrating Patriot Capital’s assets into Prospect would keep management busy enough. The management of PSEC may be biting off more than they can chew. Of course buying ALD would boost fees and earnings considerably but at what risk to the shareholders ? Just the distraction of seeking to buy ALD and possibly failing down the road worries us.

Disclosure: Author holds no positions in ALD and PSEC; long position in ARCC