This morning came the announcement that two of the Business Development
Companies on our list would merge. Ares Capital
Corp. (ARCC:NASDAQ, 14.66) will buy American
Capital Ltd. (ACAS:NASDAQ, 15.70).
Ares will pay $6.41 in cash plus 0.483 of a share for each share of
American Capital. In addition, American Capital Agency Corp. (a separate
public company) will purchase its external manager, American Capital Mortgage
Management, LLC (part of ACAS) for an additional $2.45 per share.
Modest price paid. . .
As is usual after such acquisitions, the acquirer's stock price fell, with
Ares down $0.51 in the morning (while American Capital's rose). At the current
price of Ares, the transaction is worth $15.94. On Friday's closing
prices, the premium was a tad over 10%.
The transaction price is disappointing, given that Ares is buying American
Capital at a significant NAV discount of almost 20%, with only a modest premium
to pre-announcement stock prices, and particularly since American Capital had
been selling assets at premiums to its carrying cost (over $1.1 billion in
sales this year). Indeed, some blood-sucking West Coast ambulance chaser
announced the possibility of a lawsuit half an hour after the conference call
describing the deal finished (7:15 a.m. local time).
But creates even better BDC
However, for long-term shareholders it's a positive transaction. Ares is a
great company; it's already on our list of current recommendations. By
combining the two largest BDCs into a company more than twice as big as its
closest competitor, Ares will add scale and diversification, giving it the
ability to originate larger transactions. Ares acquired Allied Capital a few
years back, and was very successful in consolidating that company and getting
value out of its assets. The playbook will be much the same with American
Capital, to rotate over time out of non-yielding equity investments and move
into yielding assets, giving it the ability to increase its dividend over
time.
Ares fully covers its dividend, and has spillover income amounting to
$0.82 per share to make up any dividend short-fall in the near term. Ares
management will also waive up its fee, up to $100 million, over 10 quarters.
Both sets of shareholders must approve the transaction, which is expected
to close by the end of this year. American Capital's second-largest
shareholder, Elliott Management, which launched an activist investment last
year, supports the transaction.
We are holding American Capital. Given the decline in Ares stock, already
an attractive holding, we will be looking for opportunities to buy more. The
current yield is 10.4%.
One sale closes, another progresses Sunridge Gold
Corp. (SGC:TSX.V; SGCNF:OTCQX) closed the sale of its assets, de-listed
its shares, and announced that the first distribution, expected this week,
will be CA$0.36. The second distribution, anticipated within six months, and
secured by a bank guarantee, is expected to be an additional 4 or 5 cents.
In accounting for the sale in our "Closed Positions" table,
we will assume a total payout of $0.40. We will adjust our return once the
second distribution has been made (depending on the amount and the U.S.
conversation thereof). Our loss is aggravated by the weakness in the Canadian
dollar; in U.S. dollar terms, we have a loss of 45% on the sale. (We will
adjust once the distributions have been made.)
Reservoir
Minerals Inc. (RMC:TSX.V, CA$8.57) exercised its right-of-first-offer to
match Lundin's offer for part of Freeport's interest in the Timok joint
ventures, with Nevsun fronting the cash, both for that and for exploration at
Timok, now Reservoir's responsibility. If Nevsun's acquisition of Reservoir
does not complete, these funds are immediately repayable.
Though there is no certainty of another offer, Reservoir remains
undervalued and the risk/reward favors holding.
Disclosure: 1) Adrian Day: I or my family own shares of the following
companies mentioned in this article: American Capital, Ares Capital and
Reservoir Minerals. I personally am or my family is paid by the following
companies mentioned in this article: None. My company has a financial
relationship with the following companies mentioned in this article: None.
Clients of Adrian Day Asset Management own shares of the following companies
mentioned in this article: American Capital, Ares Capital, Reservoir and
Sunridge. Clients of Adrian Day Asset Management own over 5% of the shares
outstanding of Reservoir. I determined which companies would be included in
this article based on my research and understanding of the sector. Statement
and opinions expressed are the opinions of Adrian Day and not of Streetwise
Reports or its officers. Adrian Day is wholly responsible for the validity of
the statements. Adrian Day was not paid by Streetwise Reports for this
article. Streetwise Reports was not paid by the author to publish or
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