Ares Capital today announced it will acquire its struggling peer Allied Capital, for $648 million. The deal came as a surprise to some, as the struggling BDC has only recently secured a debt restructuring after receiving a “going concern” notice from lenders in March. The restructuring was expensive, but Allied would have been able to make its 2010 payments, thanks to liquidity from a number of asset sales. That includes the auction of Callidus Capital Management LLC, which Bloomberg reported earlier this month. It’s not clear how today’s deal will affect that auction.
We won’t get any insight into management’s thinking until next week, when Allied combines its conference call on this announcement with its scheduled earnings call.
What we know at this point is that Ares Capital got Allied at a good price. Judging by trading since the announcement, the stock market favors the deal, as Allied shares had traded up by 34% as of publication. (With a negative spread, perhaps they’re even expecting a higher offer?) The price represented a 23.78% premium from Friday’s closing price. Allied Capital has around $11 billion in committed capital under management. By contrast, Ares Capital had approximately $30.0 billion of committed capital under management as of this quarter this year.
The reason for the discount is the Allied asset sales I mentioned above. According to Stifel Nicolas analyst Troy Ward, Allied has “scrubbed its portfolio pretty hard,” selling many of its best-performing assets. “What they have left is what they have to worry about, and that’s built into the pricing,” he said.
Up until this point, Ares Capital has managed to avoid distress in its own portfolio, with only one non-accrual. With Allied Capital’s assets under its umbrella, it will be working out distressed assets. Ward said he believes Ares is capable of working out the loans. “They have proven themselves to be a very good credit management team,” he said.
Allied Capital received its going concern notice around the same time its competitor, BDC American Capital, posted major losses and breached covenants on its credit line. American Capital reached an expensive forbearance agreement with its lenders in September. Ward said he believes American Capital is also a candidate for sale, but its situation is different from Allied because of its management team. Allied Capital’s management team, which includes CEO John M. Scheurer, was “clearly open” to a deal, Ward said. Scheurer took the helm in March when the company’s CEO of 12 years, William Walton, stepped down.
With American Capital, it’s a different story. “We have no indication that ACAS (American Capital) management is open to this type of deal,” he said. American Capital’s founder, Malon Wilkus, remains its CEO. Aside from Ares Capital, only one other BDC would be capable of acquiring American Capital, were it seeking a buyer. Apollo Investment Corp., the publicly traded mezzanine and co-investment arm of Apollo Management, is in the position to acquire a company the size of American Capital, but isn’t acquisitive, Ward said.
Ares Capital, on the other hand, made its intentions to participate in BDC consolidation in March. On a conference call, he said:
BDCs are scalable businesses, he added. Overhead and public company expenses could be consolidated. “There’s a desire … that over time the lenders to this space would like to consolidate their exposure to the space in the hands of fewer mangers, to make it more efficient and make sure they’re lending to scale borrowers.”