Thoughts on the American Capital Strategies Sale Rumor

| About: American Capital (ACAS)
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In the quiet world of Business Development Companies, market moving rumors are relatively rare compared to other industries such as, say, pharmaceuticals. Rarely, though, is not never and on Friday there was a big rumor headline (“American Capital Strategies Appears Poised For Purchase”) here on Seeking Alpha.

American Capital Strategies (NASDAQ:ACAS) is the once most successful BDC, which just managed to survive the Great Recession and is on the comeback trail (with the famous John Paulson as a new minority investor), but does not pay a dividend. ACAS lost so much money that it does incur any taxable income and is not required to make the distributions that most every other BDC does.

The article was written by Todd Sullivan, who is a Partner at Rand Strategic Partners, a hedge fund, and a frequent financial news commentator. He writes about a variety of stocks on his blog, but has turned to one of the standbys of the BDC industry, which is our bailiwick.


To summarize: There are rumors in the market that American Capital is considering a number of “strategic alternatives” due to its $600mn in tax loss carry-forwards, which its BDC structure may not allow it to take full advantage of. Sullivan says ACAS is considering various ways of creating shareholder value, and that might include a sale of the company to a third party who might take advantage of the presumed tax benefits of those monumental losses. We won’t reiterate the various scenarios that the article mentions, because the article and the note from which it quotes are self explanatory. The take-away is that the target price was around $14-$15, and the potential buyer was Carl Icahn and/or GE Capital.


Is it credible? Yes. Is it true? God and the insiders know. However, we were always a little surprised at John Paulson’s interest in ACAS, and wouldn’t be surprised if he supported a deal that would triple his investment in a relatively short period, and allow him to get his money out and on to other opportunities.

We’d also say that the senior managers of ACAS (as is the case of most public company managers) might be expected to less than enthusiastic about being gobbled up by a GE Capital or equivalent, but it does depend on the deal and the damage done to managers shareholdings by the drop in the company’s stock price may cause them to be more open to a combination.


In the interest of above and beyond disclosure, we hold a long positions in American Capital, and have been for awhile. It’s not the rumor that brought us in, but the expectation that the Company’s NAV will eventually increase to $12.0, and that the price will move in tandem. We note that in Mr Sullivan’s blog he quotes David Chiaverini (who we believe is an analyst at BMO Capital Markets, based on our Googling), who says he expects the company’s NAV to get to $12 by the end of 2011. We all seem to have drunk the Kool-Aid, and the consensus appears for ACAS to be at that level within 8 months. Is a $14 stock price enough of a premium to justify a sale ? It might be today with the stock under $10.0. Wait too long and it might not be towards the end of the year. But these are just musings.


The stock price did move up today to nearly $9.6, from an opening of $9.2, but has slipped back to $9.4. In the last month ACAS has traded as low as $8.53, so the nearly $1.0 run up since March 16th (when that low occurred) may be related to rumor buying or insider buying, or just the natural increase following the Japanese crisis.

Anyway, we appreciate Mr Sullivvan’s article and we will keep an eye on developments at ACAS.

Disclosure: I am long ACAS.