Ares Capital to acquire MidCap Financial in $2.6 billion deal

Ares Capital Corporation agreed on Oct. 26 to acquire MidCap Financial Investment Corporation in a stock-and-cash transaction with an enterprise value of about $2.6 billion, the companies said in a joint press release. The merger agreement is described in an SEC Form 8-K filed by Ares Capital on Oct. 27.

The filing describes a two-step transaction: Ares Capital's wholly owned subsidiary Union Acquisition Sub Inc. will merge into MFIC, with MFIC surviving as a subsidiary, and then MFIC will merge into Union Acquisition Sub LLC, a second Ares Capital subsidiary. The result would place MFIC's assets under Ares Capital's ownership.

Under the merger agreement, each outstanding MFIC common share would convert into $1.21 in cash and newly issued Ares Capital shares. On the agreement date, the package was worth $10.88 per fully diluted share, with the cash portion paid by Ares Capital Management LLC, Ares Capital's investment adviser, and the stock portion valued at about $9.67, subject to reduction for certain tax dividends.

The exchange ratio will be set no earlier than 48 hours before closing, using Ares Capital's net asset value per share and its closing price. The filing gives three formulas: at or below NAV, the ratio is $9.67 less the post-signing tax dividend amount divided by NAV; above NAV up to 104.5% of NAV, the ratio includes half the premium; above 104.5% of NAV, the ratio is $9.67 less the tax amount times 102.25% divided by the price.

The MFIC board approved the transaction at the recommendation of a special committee, and the Ares Capital board also approved it, the filing says. Holders of MFIC common stock will not have appraisal or objecting stockholder rights, the filing adds. MFIC stockholders must approve the merger by a majority of outstanding shares; Ares Capital stockholders do not vote. Apollo Principal Holdings A, L.P. and MidCap Financial Trust, affiliates of Apollo Global Management, signed voting and support agreements covering 4,281,394 MFIC shares and agreed to vote in favor.

The filing lists closing conditions that include NASDAQ listing approval for the new Ares Capital shares, effectiveness of Ares Capital's Form N-14 registration statement, expiration of the HSR Act waiting period, and no law or order blocking the deal. Ares Capital's obligation is also subject to certain third-party consents.

The merger agreement restricts MFIC from soliciting competing acquisition proposals, though it may respond to unsolicited offers in certain situations. Before stockholders vote, MFIC can terminate the agreement to accept a superior proposal, but it would pay a $31,360,000 termination fee. The same fee applies after a change in the MFIC board's recommendation. Ares Capital owes no termination fee.

Before closing, MFIC will declare tax dividends to distribute previously undistributed investment company taxable income, prior-year shortfall and net capital gain, preserving its regulated investment company status. Those post-signing distributions, excluding regular quarterly dividends, reduce the stock portion of the merger consideration. The filing says the mergers are intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code.

Ares Capital said the deal is expected to further strengthen its position as the largest publicly traded business development company.