Ares Capital, American Capital in $3.4B Union

American Capital headquarters in Bethesda, MD; the merger follows a strategic review.

BETHESDA, MD—Ares Capital Corp. and American Capital Ltd., said Monday they had signed a merger agreement valued at $3.43 billion in cash and stock. Not included in the merger is American Capital Mortgage Management, which American Capital (NAsdaq: ACAS) is selling to American Capital Agency Corp. in a deal that will combine the two mortgage REITs for $562 million. As part of the aggregate consideration, Ares Management L.P. will provide financial support to the transaction. Through its subsidiary, Ares Capital Management LLC, which serves as Ares Capital’s investment adviser, Ares Management will provide $275 million of cash, or $1.20 per fully diluted share, to American Capital shareholders at closing. The deal was prompted in part by pressure last fall from activist investor Elliott Management, which holds a 14.4% stake in American Capital. Elliott had called for a strategic review along with new directors and a review of the company’s portfolio, and said Monday it would vote its shares in favor of the merger. “Similar to the strategy we successfully utilized in our acquisition of Allied Capital in 2010, we plan to leverage our robust origination platform to redeploy American Capital’s portfolio into directly-originated investments generating a higher level of current income and ultimately improved risk-adjusted returns,” says Kipp deVeer, Ares Capital’s CEO. Adds Mike Arougheti, Ares Management’s president, “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.” The deal for American Capital Mortgage Investment Corp., which trades as MTGE on Nasdaq, calls for American Capital Agency Corp., which trades as AGNC, to acquire MTGE’s external manager, American Capital MTGE Management LLC. “The acquisition of our manager by AGNC eliminates any uncertainty associated with the current ACAS strategic review process and provides continuity of personnel and investment philosophy,” says Gary Kain, CEO and president of MTGE. Kain calls the sale “a great outcome for our shareholders, as MTGE will maintain its access to our experienced management and investment teams and well-established infrastructure, providing scale benefits not typically associated with a REIT of MTGE’s size.” Under AGNC’s management, Kain adds, “we are confident that MTGE can further enhance the value proposition for shareholders and continue to generate attractive risk-adjusted returns through prudent investments, disciplined risk management and accretive capital management actions, including the continuance of our practice of share repurchases.”