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American Capital's Spinoff Plans Face Elliott Opposition

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The proposed spin-off plans of American Capital, Ltd.ACAS , which management believes to be a strategic move to boost shareholders value, has drawn concerns of billionaire investor Paul Singer's hedge fund Elliott Management Corporation. In a letter to the board of directors of American Capital, disclosing that it holds around 8.4% interest in American Capital, Elliott Management brokered for withdrawal of the spinoff plan.

The activist hedge fund stated that the proposed spin-off plan "will put valuable assets at risk, serve to entrench management and significantly limit options for future stockholder value creation."

The Spin-off Plan

In November 2014, American Capital's board of directors approved a plan to split the businesses and spin off two business development companies (BDCs). The company aimed to transfer most of the investment assets to these BDCs and would itself continue mainly in the asset management business. However, later in May 2015, the company revised the plan stating that it intends to spin-off one new BDC, to be known as American Capital Income, Ltd.

American Capital Income will largely own American Capital's existing investment assets and will have around $4 billion of equity capital during the spin-off. The equity capital will be utilized for expansion of the Sponsor Finance business, focusing on large middle market transactions that will include unitranche, second lien and mezzanine lending.

Elliott's Concerns

Elliott Management has filed a presentation with the U.S. Securities and Exchange Commission (SEC), urging shareholders of American Capital to vote "against" the spin-off proposal, which it considers to be a "Poison Pill" ensuring hefty fee structures for management while minimizing shareholder rights.The company has also launched a new website in an effort to block the proposed spin-off plan.

In the letter, Elliott Management stated that the proposal of the board of American Capital came "after years of value destruction". The company highlighted that shares of American Capital have traded at a median price to net asset value of 71% since the beginning of 2011, compared to 115% for comparable BDCs.

Elliott Management noted several reasons for the underperformance of the stock including ineffective management, weak capital deployment and payment of excessive compensation to executives. Elliott Management believes that the shares of American Capital could scale over $23 per share.

Apart from proposing for withdrawal of the spin-off plan, Elliott Management recommended strengthening the board of American Capital with suitable members, reviewing the company's portfolio and capital allocation policies, undertaking cost cutting initiatives and setting up a Strategic Review Committee to look for all available options in order to maximize stockholder value.

Bottom line

Notably, in connection to the spin-off transaction, American Capital has filed proxy and registration statements with the Securities and Exchange Commission in September 2015. However, now it is all the more difficult to predict how things might turn around following the latest announcement of Elliott Management. We look forward to the response of the Maryland-based company as well as its shareholders.

American Capital currently carries a Zacks Rank #2 (Buy). Some other top-ranked stocks in the finance space include E*TRADE Financial Corporation ETFC , BlackRock Capital Investment Corporation BKCC and Flagstar Bancorp Inc. FBC . All three stocks sport a Zacks Rank #1 (Strong Buy).

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AMER CAP LTD (ACAS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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