MidCap Financial Investment Corp. holders are to receive $1.21 in cash, paid by Ares Capital's investment adviser, plus about $9.67 of Ares Capital stock. Because Ares Capital trades below its book value, the package was worth less than its $10.88 headline at Tuesday's prices.
The deal gives shareholders of MidCap Financial Investment Corp. a large premium on their stock. It also sells the fund's loan portfolio for less than the fund says it is worth.
Ares Capital, the largest listed business development company by market value as of Sept. 30 by its own measure, agreed to acquire MFIC, a BDC managed by an Apollo affiliate, in a cash-and-stock deal the companies valued at about $2.6 billion including debt. The Wall Street Journal first reported the deal early on Tuesday, shortly before the companies announced it.
Each MFIC share is to receive $1.21 in cash, paid by Ares Capital's investment adviser, a subsidiary of Ares Management, plus about $9.67 in Ares Capital stock, for a headline value of $10.88. That is 30.1% above Monday's close of $8.36. It is also about 15% below MFIC's preliminary estimate of its Sept. 30 net asset value, about $12.86 a share.
Three prices for one deal
MFIC shares rose 24% to $10.365 at about 1:43 p.m. Eastern. Ares Capital rose 0.5% to $18.695.
The stock portion is where the headline and the market part ways. Ares Capital shares are delivered at the greater of their net asset value or their market price. Ares Capital's NAV was $19.31 a share at Sept. 30, and its stock was trading at about 97% of that. So the shares are counted at NAV, and at Tuesday's market price the $9.67 of stock was worth about $9.36. Add the cash, and MFIC holders were looking at about $10.57, not $10.88.
Measured that way, MFIC traded about 2% below the value of the package, a narrow gap that suggests the market expects the deal to close. If Ares Capital trades above its NAV, a collar lets MFIC holders share half of any premium up to 104.5% of NAV, with the stock valued at no more than 102.25% of NAV.
Who pays for what
The cash does not come from either fund. It is paid by the Ares adviser, about $100 million in total on the current share count, which buys Ares Management a larger pool of fee-earning assets. The stock comes from Ares Capital, which may issue up to about 41 million shares. MFIC holders would own about 5% of the combined company.
The terms tilt toward the buyer in other ways. Ares Capital shareholders do not vote, MFIC holders have no appraisal rights, and Apollo affiliates that own 5.2% of MFIC have agreed to vote in favor. MFIC would pay a $31.36 million fee if it walked away for a better offer. Ares Capital pays nothing if the deal fails.
Apollo is not selling its MidCap Financial lending platform, only the listed fund. Apollo said in the announcement that it "will continue to invest in and grow our middle-market direct lending franchise." MFIC Chief Executive Tanner Powell said the deal "represents the best path forward for MFIC's stockholders."
The companies said the deal will be modestly accretive to Ares Capital's core earnings per share and expect it to close in the first half of 2027, subject to a vote of MFIC holders and regulatory approvals. Wells Fargo is providing $750 million of additional secured financing.
Other BDCs rose too. An exchange-traded fund that tracks BDCs gained 1.9%, with several listed peers up 1% to 4%.
Two readings
One reading is that this is the best available exit for a fund the market had given up on. MFIC closed Monday at about 65% of its preliminary NAV and traded above $12 as recently as May. A 30% premium, liquidity in a much larger company and cash funded by the buyer's manager is a better result than holders were getting from the market.
The other is that the public holders are selling below stated value to a rival manager on terms that favor the buyer. The price is about 15% under NAV, the stock is valued at book rather than market, Apollo affiliates that own 5.2% are committed in advance, and there is no appraisal right. The NAV itself is preliminary and unaudited.
What to watch
MFIC's third-quarter results and final Sept. 30 NAV on Nov. 5, the size of a special dividend MFIC plans to pay before closing, the merger filing that will describe the sale process and any other bidders, and Ares Capital's price relative to its NAV at closing.