UPDATE: The shareholders of Sierra Income Corporation, Medley Capital Corporation and Medley Management will vote on 8 February on the potential merger of MDLY and MCC into Sierra.

Moab Capital Partners, an investment firm that owns approximately 3 percent of MCC’s outstanding shares, released a public letter urging shareholders to vote against the proposed merger. The note cites disproportionate benefits to Medley shareholders, declining portfolio value and an “incapable” management team. Moab’s objections echo dissents voiced by FrontFour Capital Group and Roumell Asset Management.

“Since nobody at MCC is looking out for us, shareholders need to take matters into our own hands,” Moab president Michael Rothenberg said in the letter. “It starts with voting down this abhorrent transaction. Next, we can take steps to terminate MCC’s value-destructive management agreement with MDLY.”

With the latest opposition, the deal has received negative feedback from shareholders holding approximately 9 percent of all MCC’s shares.

Both firms declined to comment.

Original story:

The Medley Capital Corporation (MCC), Medley Management (MDLY) and Sierra Income Corporation merger is in turmoil, as the transaction faces a revolt from two of MCC’s largest shareholders.

FrontFour Capital Group, which owns 3.7 percent of the MCC’s outstanding shares, came out with a strong objection on Friday, urging fellow shareholders in a letter to vote against the merger. The firm had followed in the steps of fellow shareholder Roumell Asset Management.

The note by FrontFour argued that the potential merger undervalues MCC and will hurt its shareholders while disproportionately benefitting MDLY’s team and shareholders. Management changes or selling MCC on its own could have a better outcome, the firm argued.

Both FrontFour and MCC declined to comment.

The assertions made in FrontFour’s letter echoed similar thoughts voiced earlier this month in a correspondence by Roumell Asset Management, which owns 1.2 million, or approximately 2 percent, of MCC’s shares.

“On the day of the announcement, MDLY’s stock, with which Seth and Brook Taube own 80 percent of the company’s economic value, shot up by 50 percent, while MCC’s stock was basically flat,” Jim Roumell, a partner, portfolio manager and founder at Roumell Asset Management told Private Debt Investor. “That tells you everything you need to know about how fair the deal was structured for the different companies’ shareholders,” he added.

“In our view, the proposed transaction effectively bails out MDLY owners,” which are principally the Taube brothers, Roumell said in his firm’s letter.

Roumell said he doesn’t foresee the merger being passed by a shareholders’ vote.

As part of the deal, MCC and Sierra would merge into one publicly-traded business development company, and MDLY will be acquired by Sierra, which will trade on the New York Stock Exchange under the ticker SRA.

MCC shareholders would receive 0.8050 shares of the new stock for every share they own, while Medley Class A stock holders would receive 0.3836 Sierra shares, $3.44 cash consideration and a $0.65 special cash dividend. Medley unitholders would receive 0.3836 shares of common stock, a $3.44 cash consideration and a $0.35 special cash dividend.

The firms are pursuing the transaction to help scale the different entities and provide more portfolio diversification and liquidity for shareholders, a source familiar with the matter said.

Many of the suggestions made by the dissenting shareholders, such as selling MCC on its own, wouldn’t have worked based several factors, including the vehicle’s management structure, this person maintained.

A research note from BDC analyst Casey Alexander of Compass Point Research & Trading argued that it was the best option for shareholders who have had a “very rough road”, noting that no other BDC has expressed interest in acquiring MCC.

“It’s easy to say ‘sell it’, but it takes two to make a deal,” he wrote.

“While we understand the angst among MCC shareholders and we have no opinion on MCC shares,” Alexander concluded, “we believe there are actual benefits to the combination that may benefit shareholders in the long term.”

The merger has been unanimously approved by all three boards of directors, which contain many of the same executives, and is dependent on a shareholder vote.

MDLY has $4.8 billion in assets under management. An official date for the shareholders vote has not been set.

Editor’s note: The story has been updated to include information from the Compass Point research note.