Ares Capital acquires American Capital

The merger of the business development companies creates a $13 billion industry leader.

Ares Capital Corporation (ARCC) announced Monday (23 May) that it had entered into an agreement to acquire American Capital for $3.43 billion, or $14.95 per share. In a separate transaction, American Capital Mortgage Management will be acquired by American Capital Agency Corp. for $2.45 per share, or $562 million, according to the statement.

The merged company will be externally managed by Ares Capital Management and have combined assets of more than $13 billion. According to the statement, all current Ares Capital officers and directors will remain in their current roles.

ARCC 's acquisition of American is conditioned on the successful completion of the mortgage unit sale. The Ares transaction, expected to be finalized within the next 12 months, is also subject to approval by regulators and shareholders of both American Capital and Ares Capital. Following completion of the deal, ARCC shareholders will own 73.9 percent of the company and American Capital shareholders will own 26.1 percent.

“The growing demand for capital from middle market borrowers has created the need for flexible capital providers like us to fill the financing gap as banks continue to retrench from the market,” Ares Capital board of directors co-chair Michael Arougheti said in the statement. “We believe this transaction materially enhances our presence as a market leading direct lender with size and scale to capitalize on the attractive competitive dynamics in the market today and for the foreseeable future,” he said.

ARCC parent company Ares Management provided $275 million of cash in support of the transaction in addition to an agreement to waive up to $100 million in Part I income-based fees for 10 quarters beginning in the first full quarter after the transaction is completed. The remainder of the deal was financed using $1.4 billion in cash from ARCC and $1.6 in ARCC stock.

Wells Fargo Securities and Bank of America Merrill Lynch advised Ares Capital on the deal, with Goldman Sachs and Credit Suisse Securities advising American Capital.

The move comes amid heightened expectations of consolidation in the business development company (BDC) sector, which has been faced with challenges related to capital constraints, asset quality deterioration and low market volumes. In April, while commenting on a report issued regarding the challenges facing the BDC sector, Fitch senior director Meghan Neenan said that the sector was ripe for consolidation and it was reported last month that Apollo, Fortress and Blackstone were among the other companies interested in acquiring American Capital.

“There has only been less than a hand full of acquisitions in the BDC space, ever, and Ares has done the largest one,” said Neenan in an interview, referring to Ares' 2010 purchase of Allied Capital. “I think they are the best position to execute on this one as well,” she added.