It's been a long time coming for American Capital Ltd. (ACAS) shareholders.
This morning the company announced it repurchased 8.9 million shares, or 3.3% of its shares outstanding, during the first quarter. This is nothing new. American Capital has been slashing its shares outstanding since June 30, 2011.
The real story is that American Capital will suspend its buyback program, after spending more than $1 billion buying back stock over the last 11 quarters.
From the press release:
"[T]he Company is undertaking a process to evaluate its corporate structure to determine whether that structure and the various legal, regulatory and accounting regimes under which it operates are the optimum means for the operation and capitalization of its business."
What's all this mean?
American Capital is a business development company that invests in middle-market businesses. Each quarter, the company reports its net asset value, or the book value underlying each share.
Previously, American Capital had a policy of buying back stock when it sold at a discount to net asset value. Buying back stock allowed it to essentially buy $1 worth of investments on its balance sheet for as little as $0.70. Due to losses sustained during the financial crisis, none of the income it reported was taxable. Share repurchases were a tax-free way to boost the wealth of its shareholders.
Share repurchases never really worked out as planned, however. American Capital continued to trade under net asset value, and thus it continued to repurchase stock. The plan was that American Capital could repurchase shares until it traded at book value, a point at which it could turn off aggressive buybacks and start paying out big dividends. Most BDCs pay big dividends. American Capital is the outlier.
Is a spin-off coming?
American Capital's management has frequently pointed to a spin-off as a way to create shareholder value.
You see, American Capital's nonexistent dividend may leave it to be permanently undervalued by Wall Street. All of its peers currently pay a big dividend.
American Capital can spin off its debt investments into a debt BDC, which would pay a big dividend and attract traditional BDC investors. The other investments, primarily non-dividend-paying equity investments, would be put in a "diversified growth company" similar to Roper Industries (ROP).
After a spin-off, the debt and equity investments would be valued separately. And, when combined, it's possible that the sum of the parts will be worth more than they are as they sit today.
A spin-off is necessary
After years of trading under net asset value, American Capital needs to do something. I've made the case for spinning off its debt investments before. I've also suggested that American Capital needs to be more transparent, and give investors insight into its equity investments.
A spin-off would accomplish both goals -- attracting high-yield investors to its debt portfolio, and providing more transparency into the value of its equity portfolio.
It's time for something new. Anything short of a complete spin-off of its debt and equity portfolios would be tremendously disappointing. American Capital shares haven't traded at their net asset value for more than 5 years. A spin-off could help it turn the corner.