American Capital plots strategic review

The Maryland firm has appointed a special committee and two investment banks to evaluate options to improve shareholder value.  

American Capital’s (ACAS) board of directors has instructed the company to improve shareholder value with a strategic review of alternatives.

The publicly-traded firm, which has been planning to spin off two separate business development companies (BDC), will consider options that could include replacing its investment manager. The board has appointed Goldman Sachs and Credit Suisse to assist with the review.

“The strategic review will consider all alternatives for maximising shareholder value, including a sale of the company or its various business lines in whole or in part,” ACAS said.

The review will be run by an independent committee of the board consisting of Neil Hahl, Kristen Manos, Kenneth Peterson and David Richards. Hahl, who will chair the review, is a long-time independent director, while newly-appointed Richards is a portfolio manager at credit specialist Pine River Capital Management.

ACAS, which has been trading at significant discounts to book value and engaging in share repurchases to bolster the stock price, has been planning to spin off about $6 billion of its $8 billion into two separate BDC vehicles.

Elliott Management, a hedge fund that owns an 8.4 percent stake in ACAS, announced last week that it opposed the BDC spin-off and thought it would entrench management and be a detriment to shareholder value. ACAS’s announcement today did not say whether Elliott’s criticism prompted the review.

“We continue to trade at a meaningful discount to our book value, even as we progress with our plans for the spin-off, which is intended to unlock shareholder value. Therefore, I am fully supportive of this strategic review, which will allow us to realise the optimal value for our shareholders,” said Malon Wilkus, chairman and chief executive of ACAS.

The firm has been trading at about 0.73x net asset value (NAV) for five years and fell to 0.68x book on the day of the announcement.

The board of directors also voted to expand its original stock buyback programme, which began in the third quarter, by increasing it to a range of $600 million-$1 billion from $300 million-$600 million. Under the programme, purchases will only be made at per share prices below 85 percent of the company’s NAV per share as of 30 September.

“We consider our stock to be a terrific bargain,” said Wilkus. “Having already purchased shares representing 34 percent of our shares outstanding when the programme started, we intend to purchase additional significant amounts as long as we continue to trade at a significant discount to our book value.”

Wells Fargo senior analyst Jonathan Bock said ACAS’s review and stock buyback plan bode well for the firm and the BDC industry at large.

“We see this as a major victory for the BDC shareholder that is material in that activist influence is gaining traction and delivering results. While other heavily discounted BDCs are in various phases of management versus shareholder battles, today’s news tells those shareholders that it’s worth the fight,” Bock said in a report.

Wells Fargo’s review added that the stock buyback programme showed that these can be tailored to improve shareholder value. “The programme would purchase up to a level of 0.85x 30 September NAV, showing that repurchase programmes are flexible and can be custom tailored to shareholder-oriented outcomes if management chooses,” it said.

Even though the BDC has grown its book value over the years, the long-time declines in price to book values could suggest that “the market simply prefers a different platform and these events make that a much more likely outcome in our view”, Bock said. “Shares should react strongly as we believe many shareholders never really thought a company sale was on the table.”

Wells Fargo is rating ACAS shares “outperform”, as the firm believes a potential restructuring could unlock shareholder value.