If you like activism, you should love what's going on at TICC Capital (NASDAQ: TICC). As the current management team plans its exit, there's an ongoing 3-way race for the job of managing its $934 million of assets.
On Monday, another party threw its hat in the ring. This time, it's activist investor Raging Capital, a 5% owner of TICC Capital that doesn't seem very pleased with the way TICC is handling its job of picking a new manager. In a sternly worded press release, Raging Capital identified the three options it believes TICC should consider before picking a new manager.
Option No. 1: Sell out
Sell the company to a suitable acquirer that could improve shareholder returns via scale efficiencies, lower management fees, improved portfolio management, and better deal sourcing.
This sounds like a campaign for TICC Capital to seriously consider the all-stock buyout offer that TPG Specialty Lending (TSLX) has now offered twice to the TICC Capital team. On both occasions, publicly and privately, TICC Capital's existing management team shot it down.
The TPG proposal checks most of the boxes here. It brings advantages in scale, portfolio management, and deal sourcing. On the fee front, TPG falls short -- a greater percentage of its total investment income was lost to management and incentive fees in the last three and six months, but the difference is negligible. A beefier buyout offer at a price closer to TICC's net asset value of $8.60 per share may seal the deal here.
Option No. 2: Lower fees topped with repurchases
Entering into a fresh management agreement with a firm that can offer permanently lower management fees, superior deal sourcing and portfolio management skills, and who is committed to buying back material amounts of stock if TICC shares trade meaningfully below net asset value.
This sure sounds like the NexPoint proposal, doesn't it?
As a reminder, NexPoint offered to manage TICC Capital with a permanently reduced management fee of 1.25% of assets (down from the current 2%), waive as much as $20 million in fees, and purchase up to $20 million of stock to better align the interests of management and shareholders. A summary of all offers can be found here.
There's only one missing check box: share repurchases.
I view share repurchases as a difficult concession to get from any BDC manager. Buying back stock reduces assets under management, and thus management fees for the manager. Shareholders, of course, benefit tremendously.
Notably, TPG Specialty Lending has an automatic share repurchase program in place, but it's never been used because the stock has consistently traded at a premium.
Option No. 3: Liquidate
An outright liquidation and complete return of capital to stockholders.
This is timely. Leveraged loan volume is light. There are certainly a handful of BDCs that would like to shop TICC Capital's assets. But all in all, I think this is the least likely of all the suggestions.
Can Raging Capital get its way?
Given Raging Capital owns just over 5% of TICC Capital's common stock, it certainly has some sway. Add it to TPG Specialty Lending's 3% ownership and the two combined already control roughly 1 out of 12 votes in any voting contest.
I want to point out that Raging Capital wouldn't have issued this press release if it were happy with TICC Capital's decision to favor Benefit Street Partner's proposal to manage the company. Unless BSP offers more fee concessions and proposes a plan for share repurchases, I tend to think the other managers and TICC shareholders will choose to duke it out in a proxy contest.
Raging Capital is probably fishing for another offer. TPG Specialty Lending could easily afford to pay full price (TICC's net asset value of $8.60) in a stock-for-stock deal, given its shares trade at a premium. The deal would result in TPG swapping stock at a premium to book value for shares valued at book value, a positive result for shareholders in both companies. Without another acquisition offer on the table, and with TICC management stopping any discussion in its tracks, however, TPG may not feel compelled to increase its bid.
Likewise, if NexPoint agrees to repurchase shares in a given quantity on a routine basis, it would be an extremely compelling offer. The management fee cut alone might not take TICC Capital shares back to NAV, but a continuous repurchase program would turn TICC into a compounding machine if its share price languishes below net asset value.
If nothing else, Raging Capital just might force the front-runner, Benefit Street Partners, to sweeten its offer once again. This story just gets better and better for TICC shareholders.