PE Tech Report


Like this article?

Sign up to our free newsletter

Ares Capital Corporation to acquire American Capital in USD3.4bn deal

Ares Capital Corporation and American Capital have signed a merger agreement whereby Ares Capital will acquire American Capital, excluding American Capital Mortgage Management. 

The combined company would have on a pro forma basis more than USD13 billion of investments at fair value as of March 31, 2016. The Boards of Directors of both companies have unanimously approved the transaction.

Under the terms of the Ares transaction, American Capital shareholders will receive approximately USD3.43 billion in total cash and stock consideration or USD14.95 per fully diluted share. In a separate transaction, American Capital also announced today that it is selling American Capital Mortgage Management, LLC to American Capital Agency Corp. (NASDAQ: AGNC) for USD562 million or USD2.45 per fully diluted share. Collectively, the transactions announced today represent total value for American Capital shareholders of USD4.0 billion or approximately USD17.40 per fully diluted share, representing a premium of 11.4 per cent to American Capital’s closing price on 20 May, 2016 and a premium of 21.6 per cent to American Capital’s unaffected closing price on 13 November, 2015.

American Capital shareholders will receive USD1.470 billion in cash from Ares Capital, or USD6.41 per share, plus 0.483 Ares Capital shares for each American Capital share, resulting in approximately 110.8 million Ares Capital shares, or USD1.682 billion in value or USD7.34 per share based on Ares Capital’s closing stock price of USD15.19 as of Friday, 20 May, 2016, issued in exchange for approximately 229.3 million American Capital shares. Following the transaction, Ares Capital shareholders are expected to own approximately 73.9 per cent and American Capital shareholders are expected to own approximately 26.1 per cent of the combined company.

As part of the aggregate consideration, Ares Management, L.P. (NYSE:ARES) will provide financial support to the transaction. Through its subsidiary, Ares Capital Management LLC, which serves as the investment adviser to Ares Capital, Ares Management will provide USD275 million of cash, or USD1.20 per fully diluted share, to American Capital shareholders at closing. In addition, Ares Management has agreed to waive up to USD100 million in Part I income based fees (ARCC Income Based Fees) payable for the ten calendar quarters beginning the first full quarter following the closing of the transaction, in an amount of up to USD10 million of ARCC Income Based Fees to the extent earned and payable to Ares Capital Management in such quarter, to support the expected profitability of the combined company during the integration and portfolio repositioning period for the two businesses.

The combined company will remain externally managed by Ares Capital Management LLC and all current Ares Capital officers and directors will remain in their current roles.

“The growing demand for capital from middle market borrowers has created the need for flexible capital providers like us to fill the financing gap as banks continue to retrench from the market,” says Michael Arougheti, Co-Chairman of Ares Capital’s Board of Directors. “We believe this transaction materially enhances our presence as a market leading direct lender with the size and scale to capitalise on the attractive competitive dynamics in the market today and for the foreseeable future.”

“Similar to the strategy we successfully utilized in our acquisition of Allied Capital in 2010, we plan to leverage our robust origination platform to redeploy American Capital’s portfolio into directly-originated investments generating a higher level of current income and ultimately improved risk-adjusted returns,” said Kipp deVeer, Chief Executive Officer of Ares Capital. “We are confident in our ability to maximise long-term value for both Ares Capital and American Capital shareholders.”

“We are excited to have entered into this mutually beneficial combination with Ares Capital,” says Malon Wilkus, Chairman and Chief Executive Officer of American Capital. “Our shareholders should benefit immediately from the stable dividend offered by Ares Capital and the fee waiver support provided by Ares Management. Moreover, we expect the combined company to have a more diversified portfolio and a stronger balance sheet that will position it well for future growth.”

Prior to closing, American Capital may continue its plans to monetise certain investments (in collaboration with Ares Capital) and the proceeds of any such sales would be used to retire indebtedness or to remain in cash balances as the company has ceased its stock repurchase program. Since 31 March, 2016, American Capital has announced sales of over USD550 million in balance sheet investments.

Elliott Management, holder of a 14.4 per cent interest in American Capital, strongly supports the transactions and will vote its shares in favour at the upcoming Special Meeting. Portfolio Managers Jesse Cohn and Pat Frayne said in a statement, “We are pleased with the result of the Strategic Review and thank the Independent Board Committee of ACAS for its hard work and success in delivering an excellent outcome for shareholders. We believe this transaction represents the best path forward for ACAS shareholders and creates a tremendous opportunity for value creation as shareholders of Ares Capital after the deal is completed. ACAS’s streamlined portfolio will benefit from management by an Ares team that has a stellar track record of delivering shareholder value.”

Like this article? Sign up to our free newsletter