American Capital Ltd. (ACAS +0.00%) announced a much-needed buyout last week, selling portfolio company DelStar to Schweitzer-Mauduit International (SWM 1.92%) for $231.5 million in cash.
Since business development companies are inherently opaque, I went back through the filings to get an idea of how this buyout will affect American Capital's bottom line.
In 2005, American Capital acquired 83% of Delstar in a deal worth $114 million. At the time, it held convertible preferred stock, redeemable preferred stock, and common stock warrants, along with a small debt position.
|
Investment |
Size |
Fair Value |
|---|---|---|
|
Convertible preferred stock |
50,722 shares |
$5.089 million |
|
Redeemable preferred stock |
45,650 shares |
$16.918 million |
|
Common stock warrants |
152,701 shares |
$29.019 million |
Source: American Capital's 2005 annual report.
In the latest filing, American Capital held a much smaller stake as measured by share count:
|
Investment |
Size |
Fair Value |
|---|---|---|
|
Convertible preferred stock |
29,569 shares |
$11.7 million |
|
Redeemable preferred stock |
26,613 shares |
$48.2 million |
|
Common stock warrants |
89,020 shares |
$35.2 million |
Source: American Capital's 3rd quarter 2013 SEC filing.
Where'd the missing shares go?
I went back through every filing from the acquisition in 2005 and the last quarterly report and found that American Capital Ltd. pared down its stake first in its December 2006 filing, and then again in the December 2007 filing.
Both sales, if conducted at fair value at the time, were profitable for American Capital. However, now that the company has found a new home for Delstar, it's important that investors temper their expectations for how much cash will flow back to the BDC.
Without being an American Capital insider, we can't get perfect numbers on what this transaction means for American Capital. A conservative estimate would probably be in the range of half of the reported transaction value of $231.5 million, or $115.75 million back to American Capital.
That works out to a write-up of about $20 million on the Delstar stake, or about $0.06 per share in NAV. A best-case scenario is probably in the realm of $60 million, or $0.18 per share in NAV. Either way, an exit valued at $115.75-$155.75 million would put $0.38-$0.52 of cash per share on the balance sheet, allowing it to make new investments.
Mission impossible
Keep in mind that these are mere estimates. There is no perfect way to look into the blackbox accounting of a BDC and ascribe a perfect valuation to all of the moving parts at Delstar, and how much American Capital earned on the transaction. Delstar marks were all over the map, with the warrants priced as low as $15.7 million as recently as year-end 2012, and just $1.2 million at the year-end 2011.
Warrants are inherently volatile, so admittedly, my estimations for how this affects American Capital's balance sheet could be way off. For all we know, Delstar could have bought out shareholders in between American Capital's initial purchase and its exit, adding to American Capital's proportional ownership. Likewise, the transaction value could include debt American Capital shareholders aren't privy to, reducing the write-up to the convertible stock and warrants.
The market does appear to like the exit. American Capital shares are back over $15 per share for the first time since the financial crisis. This was, after all, the biggest exit of the year for the company, right after it announced new capital allocation plans to help drive its shares higher.
We'll know more when American Capital reports earnings next quarter, and the details of the Delstar acquisition come to light. But it is good to see American Capital making an exit, given the bulk of its holdings are equity stakes, and selling companies is the most important driver to pushing its share price back to reported net asset value.
I've been critical of American Capital's slow-going exits this year. But with a big deal in place, and a new plan to improve net operating income by holding debt on the balance sheet, this could be the start of a series of improvements at American Capital.
