Business Context and Reporting Period
This Form 8-K, dated May 23, 2016, reports that Ares Capital Corporation (Ares Capital) entered into a definitive Agreement and Plan of Merger with American Capital, Ltd. (American Capital). The transaction involves a two-step merger where American Capital will become a wholly-owned subsidiary of Ares Capital and convert into a limited liability company, withdrawing its election as a business development company. The filing also discloses a Transaction Support Agreement with Ares Capital's investment adviser.
Key Financial Metrics and Transaction Terms
The filing details the consideration to be paid to American Capital shareholders per share of common stock:
- Cash from Ares Capital: $6.41 per share.
- Cash from Ares Capital Management: $1.20 per share (totaling approximately $275 million in aggregate cash support).
- Stock Consideration: 0.483 shares of Ares Capital common stock (Exchange Ratio).
- Dividend Rights: Pro-rated rights to Ares Capital dividends depending on the closing date relative to record dates for Q4 2016, Q1 2017, and subsequent quarters.
- Additional Cash from Mortgage Manager Sale: $2.45 per share, contingent on the sale of American Capital Mortgage Management, LLC to American Capital Agency Corp.
Based on outstanding shares at the time of the agreement, the transaction involves the exchange of approximately 110.8 million Ares Capital shares for approximately 229.3 million American Capital shares. Ares Capital has suspended its stock repurchase program pending the transaction's consummation.
Material Changes and Agreements
The primary material change is the entry into the Merger Agreement and the Transaction Support Agreement. Key provisions include:
- Fee Waiver: Ares Capital Management agreed to waive the lesser of $10 million or the total income-based fees payable for each of the first ten calendar quarters following the closing.
- Termination Fee: A $140 million termination fee is payable by either party under specified circumstances, including the acceptance of a Superior Proposal.
- Non-Solicitation: Both parties agreed to cease discussions regarding competing proposals, subject to fiduciary out provisions allowing negotiation of a Superior Proposal.
Outlook, Risks, and Contingencies
The consummation of the transaction is expected within the next 12 months but is subject to several material conditions:
- Approval by stockholders of both Ares Capital and American Capital.
- Required regulatory approvals, including the expiration of the Hart-Scott-Rodino waiting period and consents from authorities in the United Kingdom and Guernsey.
- Consents from investment funds representing 75% of assets under management as of March 31, 2016.
- Successful completion of the Mortgage Manager Sale.
Risks include the failure to satisfy closing conditions, delays in integration, inability to realize anticipated synergies, and potential stockholder litigation. The filing includes standard forward-looking statement disclaimers regarding the uncertainty of these outcomes.
Investor Verification Checklist
- Verify the final approval status of the transaction by both companies' stockholders.
- Confirm the successful closing of the Mortgage Manager Sale, which is a condition precedent and a source of additional cash consideration.
- Monitor regulatory approval timelines, specifically regarding the Hart-Scott-Rodino Act and international consents (UK/Guernsey).
- Review the upcoming Joint Proxy Statement and Registration Statement (Form N-14) for detailed financial projections and risk factors.
- Track the status of the $140 million termination fee provisions in case of a Superior Proposal or agreement termination.