A Sell on a Long-Time Holding
Contributed Opinion


Adrian Day Investment advisor Adrian Day discusses his decision to sell shares of American Capital prior to its merger with Ares Capital.

American Capital Ltd. (ACAS:NASDAQ, 17.31-17.32) 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 is a favorite BDC
Ares Capital Corp. (ARCC:NASDAQ 16.01, 9.5%) 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 owners of American Capital 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 investors hold it a taxable account, consider selling Ares instead (given the lower gain we have) or wait until the New Year. These are decisions investors need to make based on their 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. Including the dividend that ACAS paid for many years, we have a gain of 227%.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: American Capital and Ares Capital. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: American Capital and Ares Capital. I determined which companies would be included in this article based on my research and understanding of the sector.
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