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Allied Capital (ALD): Unhappy Shareholder Seeking Last Minute Better Offer

|Includes:Allied Capital Corporation (AFC), ARCC, PSEC

As the Wall Street Journal reveals a large Allied Capital shareholder is talking down the proposed merger with Ares Capital (NASDAQ:ARCC) , at least on the current terms. British hedge fund Centaurus Capital, which owns 3.7% of ALD, says the Ares offer undervalues Allied and “no longer represents the best interests for Allied shareholders”.

Does Centaurus really want Allied’s Board (which has just voted for this long standing merger) to reverse itself ? The hedge fund points to the fact that the rival bid from Prospect Capital (NASDAQ:PSEC) shows Allied can “extract more value”. Centaurus does not say that Allied should accept PSEC’s offer instead. Indeed, Centaurus does not even say (in what I’ve seen) that they’re going to vote against the Ares deal. This is code (and not a very complex one) that Centaurus would like Ares Capital to raise its offer for ALD, or face the possibility of a No vote on the merger.

Centaurus makes the nonsensical suggestion that Allied Capital should allow anyone who makes a preliminary offer greater than 10% of what ARCC has offered the opportunity to undertake a full due diligence. This is nonsensical because it’s unlikely that Ares would be prepared to be a stalking horse after all these months for every other prospective buyer to lob in an offer, spend months undertaking due diligence and lining up financing.  If Allied’s Board took up Centaurus’ suggestion, reversed its approval of the ARCC deal and threw the Company open to all comers the chances are Ares would take its $30mn fee and go home. That would leave Allied with huge expenses (over $5mn in the fourth quarter alone) in professional fees, a still tentative  offer from Prospect Capital that most institutional shareholders have been unimpressed by, and a questionable future as an independent company.

Centaurus also suggests that it’s unhappy that Allied shareholders are not being offered i) enough of a share in ARCC; ii) any cash. Again this seems code for what Centaurus would like to see from Ares. We’ll stick our necks out and say cash consideration on any material scale is unlikely from Ares Capital. Certainly the Company could probably find some cash. However, given that Allied’s portfolio continues to have substantial bad debt issues (what’s happening with Ciena ? Nobody seems to know), and ARCC has already cherry picked many of Allied’s best assets over the last few months, why would Ares pay out cash ? As for increasing the share of the combined companies that Allied shareholders would receive it’s not impossible. However, Ares has not budged all these months even when Prospect was upping its offer. It’s a game of chicken, but our guess (and it’s just that) is that Ares will stand pat until it becomes clear which way the voting by the shareholders is going through.

Disclosure: No Position: ALD, Long ARCC,Long PSEC