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Ares to buy Allied Capital for $648m

Publicly traded ‘business development company’ Allied will be merged with rival Ares. Allied recently reached a restructuring agreement with lenders.

Business development company (BDC) Ares Capital is buying fellow BDC Allied Capital for $648 million in a transaction that comes shortly after Allied entered an extensive debt restructuring to save itself from bankruptcy.

The transaction values Allied’s shares at $3.47 per share, a 27.3 percent premium over Allied’s closing stock price on 23 October. Los Angeles-based Ares will own about 65 percent of Allied once the deal closes. Allied stockholders will continue to own about 35 percent of the company.

Under the terms of the deal, Allied stockholders will get .325 Ares Capital shares for each Allied share, resulting in the issuance of about 58.3 million Ares shares in exchange for about 179.4 million outstanding Allied shares.

The deal is expected to close in the first quarter of 2010. Ares Capital’s chairman, Bennett Rosenthal, president Michael Arougheti and chief financial officer Richard Davis will remain in their roles at the combined company. Ares said it expects that one member of Allied Capital’s board will join the board of the combined company.

The Ares acquisition will create a mid-market provider of capital with about $11 billion under management. Ares is looking to reposition Allied’s portfolio into higher-yielding assets and to lower its financing costs, Ares said in a statement.

The size of the company “will allow the combined company to commit greater amounts of capital in a single transaction, which should drive higher fee income and greater control over portfolio composition”, Ares said.

Ares also agreed to buy Allied’s interest in a senior secured loan fund for $165 million in cash. The fund has about $3.6 billion in committed capital to invest in “unitranche” debt, a way to combine traditional senior and junior debt terms in a single senior debt facility to help private equity firms close on deals quicker. Allied Capital is credited with creating “unitranche” debt.

Ares Capital is a subsidiary of Ares Management, which was created by Apollo Global Management co-founder Tony Ressler in 1997 after he left the mega-buyout firm. Ares Capital invests in first and second-lien loans and mezzanine debt and, to a lesser extent, makes equity investments.

Allied’s share price has been flogged over the past few years, dropping from $30.20 on 12 October, 2007, to $5.62 on 27 October, 2008. The BDC has been struggling in the financial downturn, sustaining a $1 billion loss in 2008. Allied reached a restructuring agreement with lenders in September, cutting its debt load by $174 million to $841 million.

The restructuring sliced Allied’s debt burden into three levels and pushed back the maturities of the three levels, starting in 2010.

With Allied’s future now certain, another struggling BDC, American Capital, continues to negotiate with lenders to find a way to avoid bankruptcy.