"Medley Capital Corporation is a closed-end, externally managed business development company (“BDC”) that trades on the New York Stock Exchange (NYSE: MCC). Medley Capital Corporation’s investment objective is to generate current income and capital appreciation by lending to privately-held middle market companies, primarily through directly originated transactions, to help these companies expand their businesses, refinance and make acquisitions. Our portfolio generally consists of senior secured first lien loans and senior secured second lien loans. In many of our investments, we receive warrants or other equity participation features, which we believe will increase the total investment returns."
The Merger Investor Presentation can be found at the following link:
The focus of this article is to highlight the potential upside of the completed merger as it relates to MCC stock.
DELAWARE COURT AND SETTLEMENT
In March 2019, the Delaware Court of Chancery ruled that certain members of MCC's BOD did not act in a fiduciary manner in regards to proposed merger. The Plaintiff (FrontFour Capital) and the Defendant (Medley) subsequently agreed upon Settlement Terms which would compensate MCC shareholders in the amount of $17 million in cash ($0.31 / share) and $30 million ($0.55 per share) in Combined Company stock upon completion of proposed merger. Also, the Settlement appointed David A. Lorber from FrontFour Capital and Lowell W. Robinson to MCC's Special Committee as independent directors. And finally, a 60 day "Go Shop" or market test would take place.
More information on the Settlement can be found on the link below:
The Delaware Court reconvened on October 24, 2019 to consider approval of Settlement and to determine what amount of plaintiff fees to be awarded. The Judge asked for both parties to submit briefs to change certain language in the Settlement. Those briefs were filed on October 31, 2019 in which both plaintiff and defendant recommended approval of Settlement.
This coming Tuesday, November 19, 2019 there will be a court meeting by teleconference at 11 am EST. It is my expectation that the Judge will approve the Settlement Term Agreement and rule on the amount of plaintiff fees.
The approval of the Settlement Terms will set forth the final stages for the merger completion. The merger also requires the SEC to grant exemptions to allow a Business Development Company (Sierra) to own an Asset Manager (MDLY).
Below you can find out specifically what exemptions are being requested from the SEC:
Of course, the final stage of any merger is a vote of shareholder approval. It is anticipated that shareholders from all three companies will vote in favor of merger.
The uncertainty surrounding completion of the merger first proposed in August 2018 and the fact that MCC currently does not pay a dividend has taken a toll on the share price.
POST MERGER EXPECTED PRICE RANGES
MCC as a standalone company closed at $1.95 per share on 11/15/2019 which is 42.85% of its NAV ($4.55 as of June 30, 2019).
In the amended merger agreement filed on August 29, 2019, the agreement stipulates that MCC shares will be converted into Combined Company at a conversion rate between 0.66x to 0.68x NAV of Sierra Income.
As of September 30, 2019, Sierra Income's NAV was reported at $6.03.
The table below is an indication of the expected post-merger share price range of MCC taking into account the likelihood the Combined Company will trade at discount to NAV and the Settlement Terms compensated to MCC shareholders.
|Expected Trading Range of Combined Company (% discount to NAV)||60% of NAV||70% of NAV||80% of NAV||90% of NAV|
|MCC Post Merger Price||$2.42||$2.83||$3.23||$3.64|
*assumes 0.67x conversion
|$0.31 / Share Dividend||$0.31||$0.31||$0.31||$0.31|
|Post Merger MCC Share Price||$3.06||$3.52||$3.98||$4.44|
Total Return from closing price of $1.95 on 11/15/2019
"Go Shop" Results
Buried in the 157 page SEC filing this past week regarding request for relief exemptions were the "Go Shop" results that were deemed not a Superior Proposal by the MCC Special Committee as compared to the Amended Merger Proposal. On pages 138-139 of the linked SEC filing are these "Go Shop" results.
Excerpts from above SEC filing detailing "Go Shop" results
"After the meeting of the MCC Special Committee on July 29, 2019, the MCC Special Committee finalized its engagement letter with Houlihan Lokey pursuant to which the MCC Special Committee retained Houlihan Lokey to assist in soliciting, evaluating and potentially entering into negotiations with parties that could make Competing Proposals under the Amended MCC Merger Agreement. On the same day, at the direction of the MCC Special Committee, Houlihan Lokey began contacting potential counterparties to an alternative transaction with MCC in connection with the go-shop process. During the Go-Shop Period, Houlihan Lokey contacted 194 potential buyers and strategic partners, including Party A and Party B, to solicit interest in making a proposal, resulting in 27 parties executing non-disclosure agreements with MCC. These parties were provided access to certain information regarding MCC. Over the next several weeks, seven parties submitted initial indications of interest with a total of 12 proposals. Following discussions between these parties and Houlihan Lokey, three of these parties, including Party A and Party B, submitted revised indications of interest with a total of four proposals. On September 26, 2019, Party A submitted a further revised indication of interest proposing, among other things, that: (I) MCC enter into an external investment advisory agreement with an affiliate of Party A; (II) Party A contribute a minimum of $30 million of cash in exchange for shares of MCC valued at 80% of MCC’s current fair market value (“FMV”); and (III) a Party A affiliate contribute a manager premium of up to 6.5% of gross investments (valued at 80% of MCC’s current FMV) or $20 million of cash, whichever is lower, to MCC Stockholders in the form of a special distribution (the “Party A Proposal”).
Also on September 26, 2019, Party B submitted a further revised indication of interest proposing that MCC enter into an external investment advisory agreement with a wholly-owned subsidiary of Party B and Party B make an $82 million cash contribution to MCC in the form of: (I) a $65 million cash equity investment in exchange for a number of newly issued shares of MCC valued at 70% of MCC’s NAV per share immediately prior to the mailing of a proxy statement for the proposed transaction; and (II) $17 million in cash for payment of a special distribution to MCC Stockholders as of the record date set forth in a proxy statement for the proposed transaction (the “Party B Proposal”). The Party B Proposal was accompanied by draft investment management, registration rights and stock purchase agreements."
The expected three-way merger of MCC, MDLY and Sierra could result in a significant total return to MCC shareholders.
The "Go Shop" results prove there were outside parties willing to invest at 70%-80% of MCC's NAV or $3.18 - $3.64 per share and pay shareholders a one-time dividend.
The current stock price of $1.95 for MCC shares is significantly undervalued.
Disclosure: I am/we are long MCC.
Additional disclosure: The Common Stock reported herein by Glacier Point Advisors, in its capacity as investment adviser, is owned by clients who have granted discretionary authority to dispose of or direct the disposition of the shares. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities.