Ares Capital Corp agrees to acquire smaller rival American Capital in $3.4-bn deal

Specialty finance company Ares Capital Corp has struck a deal to acquire smaller American Capital Ltd in $3.4 billion cash-and-stock deal, in a bid to capture a bigger share of loans to mid-sized firms as big banks turn cautious.

The deal, which excludes American Capital's mortgage management unit, comes about five months after the Bethesda, Maryland-based company said it would solicit offers.

Activist investor Elliott Management Corp had turned on the heat on American Capital over its performance and its plan to spin off some assets into a new business development company (BDC).

BDCs are closed-end investment funds that lend primarily to privately owned mid-sized businesses. Ares is the biggest BDC in the US by assets while American Capital, apart from its BDC operations had large asset management business.

BDCs had been hit by highly competitive underwriting conditions and sluggish deal flows, that had affected their share prices, portfolio yields and access to growth capital.

Elliott Management, owner of 14.4-per cent of American Capital, said it strongly supported the Ares deal. According to Elliott, the BDC plan would have put valuable assets at risk and entrenched management.

If the deal failed to go through, Elliott would be able to appoint one of four American Capital directors, while the other three would be mutually agreed upon by Elliott and American Capital.

Meanwhile according to Bloomberg columnist Gillian Tan, the acquisition of American Capital by Ares deserved to be cheered.

The cash-and-stock deal, announced yesterday had not enthused shareholders of either lender, with American Capital gaining only 0.6 per cent to $15.71 in early-afternoon trading, below the more than $17 a share that its investors were set to receive from the deal with Ares Capital, along with the sale of one of its units (American Capital Mortgage Management).

While Ares Capital was itself down 3 per cent, its parent company Ares Management, which would provide $275 million toward the deal and agreed to future fee waivers, added 0.9 per cent.