Ares and Apollo embrace new private-credit alchemy
ARCC•Ares Capital agreed to acquire Apollo-operated MidCap Financial Investment in a $2.6 billion deal including debt, using cash and Ares shares. The transaction could create $330 million of value by moving loans to a vehicle with a higher valuation multiple.
1. Deal exploits valuation gap
Ares Capital agreed to buy peer MidCap Financial Investment, operated by Apollo Global Management, in a $2.6 billion deal including debt. MFIC investors will receive $1.21 per share in cash and $9.67 in Ares Capital stock, with the stock issuance tied to reported net asset value per share or trading price, whichever is higher, subject to a cap.
2. Different trading valuations
Before the deal was announced, MFIC traded at about 60% of its last-stated net asset value per share, compared with an industry average discount of 70%, while Ares Capital traded close to its net asset value. Ares Capital, the industry's largest publicly traded business development company, manages more than $30 billion.
3. Potential value creation
MFIC's equity was worth about $690 million, but at Ares Capital's valuation multiple it would exceed $1 billion. The article estimates the transaction could add $330 million of value by moving loans, provided investors do not penalize the buyer. MFIC's software developers account for 12% of its portfolio, a concentration that has concerned investors amid industry scrutiny.
