Upon further though I wonder why the deal isn't structured as a sale by ACAS with all stock and cash flowing to ACAS and then distributed to the shareholders as a non taxable dividend distribution (return of capital due to no "earnings and profits"). The shareholders would reduce their stock basis (in most cases to zero) and pay taxes on the excess.
Clearly ACAS lawyers will work this out and disclose the anticipated tax consequences in the proxy statement.
Having trouble with your example. Have you treated the $3.65 non ARRC cash dividend as a return of capital (basis reduction) because ACAS has no "earnings and profits"? Then you receive $13.75 stock and cash in the merger in exchange for your share of ACAS which has had its basis reduced for the $3.65 return of capital..
Assuming this could be a tax free exchange it may result in limited tax deferral. If tax basis of ACAS is $5 and all proceeds are in exchange for the stock the gain is $12.40 of which only the $10.06 cash portion is recognized The $7.34 of ARRC stock retains the $5 basis with $2.34 gain deferred.
Perhaps there is some way the $3.65 non ARRC cash could be distributed as a dividend, non taxable due to no earnings and profits, then the $5.00 tax basis would be reduced to $1.35.Then the receipt of $13.75 cash and stock from ARCC would be a gain of $12.40 of which only the $6.41 cash portion would be recognized. The $7.34 of stock would have a $1.35 tax basis with $5.99 of gain deferred. Clearly this is the more favorable scenario.
Thanks for your reply. If you are correct then this should have been mentioned in the presentation. I know that an exchange can be tax free with the cash portion "known as boot" being taxable. What I am rusty on is how much boot can be received and still be tax free.
Interesting that the $2.45 from AGNC is not specified as being cash. This implies it may be stock.
If this transaction precedes the final closing will these proceeds be delayed as well or distributed as a dividend? Who know? Will it be subject to shareholder approval? Could it be subject to further negotiation?
ARCC stock valued at $15.19 last traded price but will be hit by at least 5% for a value of about $7.
This brings the total to about $17 with a closing, subject to approvals, by year end. Market appears to be pricing it at about $16.20 or about an 80 cent discount to the $17 apparent value..because of up to 6 months until closing and concerns about approval.
If NAV before option dilution and deferred taxes approaches about $$21 at Q2 then fully diluted NAV minus deferred taxes would be about$19. Assets at 75% would be $14.25, discounted at say 20% would equal $11.40. Add the $4.75 in cash for a total of $16.15, which is about what is was trading for recently.
I hope you are right. I have difficulty getting to that level without an uplift from ACAM.
Also, I would be concerned about receiving paper on the deal which paper might be worth less at the closing.
I have been fairly aggressive in establishing short straddles (short puts and short calls at $16 strike prices with May, June and August expiration dates). The net effect is that I make money if the price says within a band of about 14.50 to 17.50. My ACAS long position is over 5 times the straddle positions so I hope the 17.50 is exceeded.
As I have posted, I doubt that ACAM would have been written down if there were indications pf interest north of the written down value. $18.50 is about the NAV for Q1 fully diluted. I see this as top value in a buyout. BDC's at 10% and more discount to NAV are a dime a dozen, Perhaps $17 is a realistic top for a buyout
Does he know something that we don't?
Is it possible that there have been indications of interest from prospective buyers of ACAM at a premium to fair value on the books and yet ACAM was written down in value in Q1'16?
The effect of the forgoing put and call strategy, assuming equal positions of each, is as follows.
If the options expire with the stock below $16 the stock will be purchased for $14.40 ($16 less 85 cents premium on the puts
and less $75 cents premium on thew calls) If the options expire with the stock above $16 the shares currently held will be sold for $17.60 ($16 plus 75 cents premium on the calls and plus 85 cents premium on the puts).
The large purchases of May $17 calls for about 35 cents appeared to be an aggressive bet on favorable news with the earnings release. It looked like someone with some "knowledge". This doesn't appear to be the case.
I remain skeptical that a sale will result is much more than $17 given that fully diluted NAV is about $18.50 and the write down in ACAM is probably reflective of lack of interest by buyers at a higher price. Further, I fear that management may be paying lip service to Elliott but playing a waiting game.
I am hope that I am wrong and have resisted selling. While waiting I will try to sell one month $16 calls for at least 75 cents and to sell one month $16 puts for at least 85 cents. In effect, to get paid for volatility while waiting.
I agree. I had hoped that ACAM might be sold for more than its value in NAV..Yet I doubt the write down in ACAM would have occurred if there were indications of interest from buyers at a higher value. So I am now looking at a little over $19 NAV net of deferred taxes. We have a bunch of BDC's selling at double digit discount to NAV. Why should ACAS be worth more than 90% of $19 or about $17?
What I ponder is the reason for the delay in the earnings report. It should have been earlier this week I do not believe that it was because the numbers were not ready. Is it possible that there will be some news in addition to the earnings? I am hoping for Monday AM.
The longer time they take is more opportunity for management to collect salaries and allow for options to vest.