Ares Capital (ARCC) has held firm on its original offer for Allied Capital (ALD) through several unsuccessful counter offers from Prospect Capital (PSEC), a dissatisfied letter from a major ALD shareholder and many months. Today, just as we were sitting down to hear the joint presentation by ARCC and ALD’s senior management about the prospective merger, ARCC blinked a little. As the press release indicates, should ALD shareholders vote for the ARCC merger they will receive a special dividend on closing of the merger of $0.20 a share. That’s a $36mn increase in the price, and paid in cash no less.
Both managements swore up and down that the Special Dividend, which was not mentioned in the Joint Proxy Agreement, has nothing to do with the heat caused by the unsolicited Prospect Capital offer. Yeah, right. But what else could they say?
The losers in all this are the Ares Capital shareholders who will have $36mn less in cash at closing. On the other hand, it seems a reasonable enough price to pay for buying Allied at a discount to FMV at a time when most BDCs are seeing their asset values begin to appreciate.
The presentation itself didn’t break much new ground. We did hear that a quarter of Allied’s staff would be retained after the merger but none of senior management. This is essentially an asset purchase by Ares. We didn’t get much reassurance, though, that operating expenses as a percentage of income or assets would get reduced by the greater scale.
NAV per share is expected to increase a substantial $2 a share from the merger to $13.58. ARCC’s currently trade at $13.62, so the market seems to buy these pro-forma valuations.
Will all this be enough to close the deal? We think so because the real alternatives for Allied Capital are so bleak. It’s paying too much to borrow, 75% of asset sales go to loan repayment rather than new asset formation and the Company is vulnerable to even a mild economic downturn. Of course, anything can happen, but our money (literally and figuratively) is on ARCC closing this acquisition.
Disclosure: Long ARCC, Long PSEC, No Position ALD