Ares Capital Corporation has closed its $3.62 billion acquisition of American Capital, further cementing its position as the largest business development company.
The sellers’ stockholders received $18.06 per share for the deal, which broke down to $14.41 per American Capital share, $1.20 per share of cash provided by an Ares Management affiliate and $2.45 per share in the acquisition of American Capital Mortgage Management. The mortgage unit was acquired from American Capital Agency Corporation in a separate transaction.
Even before the transaction, Ares was already the largest BDC, with $9.1 billion in assets as of 30 September, according to figures provided by the firm. Now that the merger is closed, Ares lists $12.3 billion in assets.
The deal closing brings an end to a process that began in May when the two firms announced the transaction, which came after American Capital put itself on the block in January 2016.
“The most challenging part of the deal was signing the merger agreement. It was a competitive process,” Ares Capital chief executive officer Kipp deVeer said, noting there were sophisticated players involved in the deal. “It was a situation where you had a group of institutional shareholders that was looking to sell the company.”
That group was led by Elliot Management. In November 2015, the New York-based firm took an 8.4 percent stake in American Capital. Elliott waged a campaign urging its shareholders to reject a spin-off of American Capital’s business development company assets into a new BDC.
This would “put valuable assets at risk, serve to entrench management and significantly limit options for future stockholder value creation”, Elliott senior portfolio manager Jesse Cohn and portfolio manager Patrick Frayne said in a letter to the American Capital board.
Not even two weeks later, American Capital said it retained Goldman, Sachs & Company and Credit Suisse Securities as financial advisors to conduct a strategic review, which was one of Elliott’s proposals. It also increased its share buyback programme from $300 million to $600 million, to $600 million to $1 billion.
In January 2016, the firm said it would put up the entire firm or its business lines on the block.
“After careful consideration, the board unanimously concluded that soliciting proposals at this time provides the best and most expedient path to unlock shareholder value,” Neil Hahl, chair of American Capital’s independent strategic review committee, said in a statement.
Then in May, Ares and American Capital announced the merger as well as the separate transaction with American Capital Agency Corp. That deal closed 1 July.
In the days after the announcement, American Capital sold some of its assets. Among those were its energy portfolio, consisting of four investments, and brought in aggregate proceeds of $108.6 million. On 15 December, both Ares and American Capital shareholders voted in favour of the merger.
On Tuesday, Marble Point Credit Management said it bought American Capital CLO Management, which included majority equity positions in seven collateralised loan obligations. Financial terms of the deal were not disclosed.
The American Capital merger isn’t completely unfamiliar territory for Ares, as the firm merged Allied Capital in a deal announced in October 2009 and closed in April 2010. Ares co-chairman Michael Arougheti explained both mergers stemmed from similar circumstances.
“Both companies got into trouble for a similar reason – heavily orienting their models to control buyout,” Arougheti said. He said the BDC model is not a good fit for those types of transactions, partly because there is more valuation volatility in private equity than senior lending.
However, the market conditions are very different, something Arougheti also noted.
“We started dialoguing with Allied Capital early in 2009, right on the heels of Lehman [Brothers’ bankruptcy],” Arougheti said. “They were going through a pretty heated balance sheet restructuring, and there wasn’t a lot of support in the market for valuations. Juxtapose that against where we are now: much less volatility and frankly much less anxiety over financial assets.”
Another difference between the American Capital and Allied deals is who was the driving force behind the mergers.
“While the Allied Capital transaction was driven by pressures from lenders and the American Capital transaction was due to pressure from its shareholders, at the end of the day, shareholders benefitted in both acquisitions,” deVeer said.