American Capital Ltd. Is Cleaning Out its Closet

Photo: Darwin Bell

Ahead of an expected spin-off of its asset management arm, American Capital Ltd. (NASDAQ: ACAS  ) is making deals left and right for its collection of portfolio companies.

Monetizing a monster
First, American Capital announced a big deal to sell SPL Acquisition, its fourth-largest portfolio company after American Capital Asset Management, European Capital, and recent acquisition CML Pharmaceuticals.

SPL Acquisition was valued at $223 million against a cost basis of $176 million at the end of the fourth quarter. The buyout terms include $210 million for American Capital, giving the company a 15% annual return on its total debt and equity investment.

What's important here is the total size of the transaction. At $210 million direct to American Capital's pockets, the company has turned nearly 4% of its balance sheet at the end of the fourth quarter into cash.

Divesting a legacy investment
The second sale is of a long-lived asset. American Capital will sell Specialty Brands of America in a deal worth $155 million. Specialty Brands of America became an American Capital portfolio holding in 2003, when the company invested $68 million in a one-stop buyout transaction, grabbing 77.5% of the company.

Later, American Capital financed an add-on investment of $55 million for a Specialty Brands buyout of Bear Creek in 2005.

Unfortunately, American Capital has likely reduced its 77.5% ownership of Specialty Brands of America in recent years. Going back to old SEC filings, we find that American Capital's cost basis on its warrants declined over time, suggesting that the company monetized its equity position leading up to the buyout.

As of December 2003, American Capital had warrants and common stock with a combined cost basis of $13 million. As of its latest filing, the cost of its warrants and common stock was listed at $3.7 million.

Assuming the equity stake was sold off over the last 10 years, American Capital would still own about 22% of the company, netting it about $34 million in cash from the exit of its combined equity and warrant sales.

A big winner
Finally, American Capital sold its position in Anchor Drilling Fluids USA, bringing in $33 million from its debt and equity investments. This was a particularly good deal for American Capital, which had marked the company at $22.7 million in fair value last quarter.

I estimate that American Capital freed up as much as $300 million from these recent sales, or about 5% of its total assets in April alone, clearing its third-largest portfolio company and taking profits in long-lived assets.

American Capital rarely discloses all transactions with a press release in any given quarter, so if these sales are any indicator, its next quarterly reports should reveal more cash on the balance sheet and a cleaner investment portfolio as it plans its next move.

It's worth pointing out that sold investments were primarily equity positions, which have plagued American Capital's operating income for several quarters as it struggles to explain to investors that its equity investments do have value, despite their low dividend yield.

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