Sell: American Capital (ACAS)
From Adrian Day’s Global Analyst
Updated from Investment Digest 757, May 21, 2014
Sell American Capital (ACAS) with a limit of $17.31. American Capital was recommended in our very first Global Analyst, in August 1999. The company, and the stock, has had its ups and downs since then. After it suspended its dividend amid fears it would go bankrupt in the midst of the credit crisis, the stock has been on a tear, moving from a low under 50 cents. Those fears were misguided (and we doubled our position at that time). Now the story is coming to a close, as ACAS is being acquired by Ares Capital. Shareholders will vote December 15th, and the close is expected in early January.
Ares (ARCC) is one of our favorite BDCs, and the acquisition of ACAS will be immediately accretive; ACAS, despite the run up, is still selling at barely 80% of book value. This provides a cushion for Ares to dispose of some assets quickly should it wish, but over time, we suspect it will be able to realize better-than book from many of ACAS’s assets, just as it did when it acquired Allied Capital (at one time, the largest BDC).
Ares is already on our list of recommended holdings, so we want to reduce what will become a double holding.
If you do not own Ares (or are underweight the BDC sector), by all means, hold on to ACAS and the shares of ARCC you will receive. If you hold in a taxable account, you might sell Ares instead (given the lower gain we have) or wait until the New Year.
These are decisions you need to make based on your personal circumstances. The bottom line is that we like Ares and will also like the combined company. For our record keeping, we will assume a sale of American Capital.
Adrian Day, Adrian Day’s Global Analyst, www.adriandayglobalanalyst.com, 410-224-8885, November 28 and December 8, 2016