Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Has American Capital just broken the record for time taken to appease an activist investor?

The $3.9 billion asset manager said Wednesday that it will undertake a full strategic review of all alternatives. That includes a sale of whole or parts of the company -- one of the five steps to increase shareholder value that Elliott Management included on the wish list it sent to American Capital's board just last week. The announcement sparked an 8.1 percent jump in the stock as of midday Wednesday, to $15.03.

For Sale?
Asset manager is exploring strategic options following activist pressure.
Source: Bloomberg

American Capital, best known for its lending capabilities, even started a shot clock: It reckons it will be able to disclose initial results of the review by Jan. 31.

The company is confident it can move swiftly because its fate likely comes down to the decision of Ares Capital, which is the most logical buyer of the company in whole or parts.

On an earnings call earlier this month, Ares Capital CEO Kipp deVeer said the firm is cautious by nature: Its biggest acquisition to date of Allied Corp. came toward the end of the financial crisis and cost the firm a meager $632 million, less than a sixth the size of American Capital.

But then he said this:

“I think we'll continue to pursue organic growth, and if it makes sense, growth through acquisition, but we'll do it in a careful and value-oriented way. And obviously, one, as it relates to the existing stock price and the existing shareholders, one that is good for our existing shareholders, i.e., that's not dilutive and positions the company and the existing and potentially new shareholders for good returns.”

At first glance, a deal that offers a decent premium to American Capital shareholders would require substantial synergies in order for it to work for Ares and not be dilutive, according to data compiled by Bloomberg. That's not out of the question, given that Ares and American Capital are the two largest businesses of their kind. 

And even though Ares trades at a lower price-to-earnings multiple than American Capital, a deal could still make sense: Relative to book value, American Capital is cheaper.

By the Book
Some business development companies have struggled to trade at a premium to book value.
Bloomberg

Ares has a competitive advantage in being the biggest player in its space, with the ability to dictate pricing on the various loans it both holds and syndicates. It could cement that advantage by buying American Capital, a move that would also prevent rivals from gaining share.

But, as with everything, it'll come down to price. Elliott believes American Capital could be worth "in excess" of $23 a share. To hit that number would require a bidder to fork out more than a 60 percent premium to Wednesday's levels, and that doesn't look likely.

If American Capital's board is happy to settle for less, Elliott, whose average buy-in price was $13.30 a share, stands to make a tidy profit. Thanks to the shot clock, we'll know soon enough. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net