- Ares Capital Corp (ARCC), the largest BDC and externally managed by ARES, will pay ACAS shareholders $6.41 in cash plus 0.483 shares of ARCC.
- American Capital Agency Corp (AGNC), the larger of the two ACAS managed mortgage REITs will internalize management and pay $2.45 in cash to ACAS shareholders.
- Ares Management (ARES) will pay $1.20 in cash - presumably for the non-mortgage REIT related asset manager businesses (CLOs, PE Funds, and the orphaned ACSF).
There is some conflicting information on when the deal will close, the presentation and corresponding call mentioned end of 2016 (or six months was referenced a couple times on the call), while the press release stated 12 months.
American Capital's non-diluted NAV was $20.14 on 3/31, so despite the recent ~$600MM in announced asset sales at or above book value, plus the huge share repurchases below book value, most of that activity only semi-masked the management incentive compensation dilution, losing the deferred tax asset (change of control) and a cool $200MM in estimated deal related costs (unsure if this includes management's golden parachutes - see page 35). The dangers of investing in BDCs.
- The ACAS portfolio is a jumbled mess (middle market loans, private equity deals, and the asset manager), a small reason in comparison to overpaid management for the discount to NAV, but ARCC by contrast is much cleaner with a portfolio consisting mostly of leveraged loans that enable them to pay a high dividend, more of a BDC 2.0 that followed the original BDCs of the 1990s that ARCC has now swallowed up (ACAS, Allied). Ares Capital is going to recycle the acquired portfolio and reinvest in more straight forward assets, the market places a higher value on simplicity (similar to what Gramercy Property Trust is doing with the Chambers Street merger), so I can see this being a slight win to ARCC shareholders. Acquire a messy portfolio at a discount, hopefully sell most of the portfolio for the marked value, and then reinvest in something investors will pay up for like leveraged loans that enable dividends.
- After the externalizing management trend of 2012-2014, it seems to be reversing into an internalizing management trend, similar to how conglomerates go in and out of style. We saw Colony Financial acquire their manager Colony Capital and now the merged Colony Capital (CLNY) is buying Northstar Realty Finance (NRF) and its manager Northstar Asset Management (NSAM) only a short time after NSAM was spunoff from NRF. Ashford Inc (AINC) and Fifth Street Asset Management (FSAM) are facing similar activist pressure regarding the inherent conflicts of interest between fat asset management fees and a captive permanent capital entity. The ACAS news is positive for AGNC shareholders now that they will be internalizing their manager, and even better news for the smaller ACAS managed mortgage REIT, American Capital Mortgage Investment Corp (MTGE), as it seems likely MTGE (which will now be externally managed by AGNC) will be folded into AGNC. Maybe they could sell the cute ticker to an ETF company for additional consideration.
- The smallest of the ACAS captive entities is American Capital Senior Floating (ACSF), a BDC with just a $100MM market cap and trading at 85% of NAV, hard to imagine that Ares will keep this as a standalone entity, it could easily be folded into ARCC at something short of NAV and be a win for both sides.
- Ares Management (ARES), the asset manager, is also making out nicely in the deal, they'll add about $4B in assets to their externally managed ARCC. It's a backdoor way of justifying a capital raise for a BDC that's trading below NAV. At a 1.5% base management fee that's additional $61.5MM annually (they are waiving $10MM in fees for the first 10 quarters post close), plus they get a 20% incentive fee on income as long as they meet their 7% hurdle rate, it's good to be the manager of a BDC.