Prospect Capital, Part One

Allied Capital Corp. plans to merge with Ares Capital Corp., and an interloper, Prospect Capital, has shown up at the wedding trying to disrupt the proceedings, like Benjamin at the end of The Graduate.

Said Prospect in a preliminary proxy statement filed January 26, 2010: "We believe that our increased merger proposal should not only provide superior value to Allied shareholders, when compared to the Ares proposal, but also should provide significant value to Prospect shareholders. In our view, the credit markets have improved significantly since October when Allied agreed to merge with Ares. We believe the significant improvement in the credit markets likely increases the value of the Allied portfolio since October and makes Allied asset sales and debt repayments more feasible. The strong GDP numbers released on January 29 further support our belief that there may be smoother sailing ahead for Allied's portfolio companies."

So what's this all about? Ares is a closed-end, non-diversified specialty finance company that is regulated as a Business Development Company, or a BDC, under the Investment Company Act of 1940. The company is publicly traded on the NASDAQ Global Select Market under ticker symbol “ARCC.” Ares Capital became a public company in October 2004 through an initial public offering, which raised approximately $160 million in net proceeds.

Allied Capital (Elaine, in my movie-driven analogy) is also a BDC -- one that manages private funds with total assets under management of $3.3 billion.

Allied had had a special meeting of stockholders scheduled for November 18, 2009, but it was cancelled in light of their deal with Ares. Allied will scheduled a new meeting "in connection with the proposed business combination" sometime within the first quarter of this year, we're told.

Prospect Capital, our Benjamin, is yet another BDC. It says that its "investment objective is to generate both current income and long-term capital appreciation through debt and equity investments." So it obviously distinguishes itself from all those companies with a business objective of losing money.

Now that I've gotten the participants straight, let me see if I can figure out for the next entry, on Sunday, what the dispute is.