Business Context and Reporting Period
This Form 8-K, dated October 26, 2009, reports that Ares Capital Corporation (Ares Capital) entered into a definitive Agreement and Plan of Merger with Allied Capital Corporation (Allied Capital). The transaction involves a two-step merger where a wholly-owned subsidiary of Ares Capital will merge with Allied Capital, followed by Allied Capital merging into Ares Capital. The filing also discloses a separate cash acquisition of Allied Capital's interests in the Senior Secured Loan Fund LLC.
Key Financial Metrics and Transaction Terms
- Exchange Ratio: Each share of Allied Capital common stock will be converted into 0.325 shares of Ares Capital common stock.
- Share Impact: Approximately 58.3 million Ares Capital shares will be issued for approximately 179.4 million outstanding Allied Capital shares (excluding in-the-money options).
- Separate Asset Acquisition: Ares Capital acquired Allied Capital's interests in the Senior Secured Loan Fund LLC for $165 million in cash.
- Termination Fees: Allied Capital may be required to pay Ares Capital $30 million (or $15 million if stockholders do not approve the merger). Ares Capital may be required to pay Allied Capital $30 million under specified termination circumstances.
- Financial Performance: The filing text does not provide specific revenue, profit, cash flow, margin, debt, or liquidity metrics for either company.
Material Changes and Conditions
The primary material change is the proposed consolidation of Ares Capital and Allied Capital. The merger is anticipated to close by the end of the first quarter of 2010, subject to several conditions:
- Approval by stockholders of both Allied Capital and Ares Capital.
- Required regulatory approvals, including the expiration of the Hart-Scott-Rodino Act waiting period.
- Receipt of lender consents from both companies.
- Other customary closing conditions.
Upon consummation, Ares Capital's Board of Directors will continue, with an increase of at least one member, including the consideration of one current Allied Capital director.
Outlook, Risks, and Management Commentary
Management highlights that the transaction is expected to create a combined company with significant scale. However, the filing includes standard forward-looking statement disclaimers noting that actual results may differ due to various risks.
- Risks: Failure of stockholders to approve the transaction; unsuccessful integration of businesses; disruption to relationships with private equity sponsors.
- Contingencies: Allied Capital has agreed to cease discussions regarding other takeover proposals but retains a "fiduciary out" to negotiate a superior proposal if certain conditions are met, potentially triggering a termination fee.
- Unusual Items: The filing explicitly states that representations and warranties in the Merger Agreement are for risk allocation and should not be read as factual statements regarding the parties' businesses.
Investor Verification Checklist
- Verify the final exchange ratio and any adjustments based on the number of shares outstanding at the time of closing.
- Confirm the status of stockholder approvals for both Ares Capital and Allied Capital.
- Review the upcoming Joint Proxy Statement/Prospectus (Form N-14) for detailed financial data and integration plans.
- Monitor regulatory approval timelines, specifically the Hart-Scott-Rodino waiting period.
- Assess the impact of the $165 million cash outlay for the Senior Secured Loan Fund on Ares Capital's liquidity.