Harvest Capital Credit (HCAP) and Portman Ridge Finance (PTMN) entered into a definitive agreement under which HCAP will merge with and into PTMN, a business development company managed by Sierra Crest Investment Management, an affiliate of BC Partners Advisors.
The transaction was approved by a unanimous vote of a special committee of the board of directors of HCAP, the board of directors of HCAP (other than directors affiliated with HCAP’s external investment adviser, who abstained from voting) and the board of directors of PTMN. In addition, the board of directors of HCAP will recommend that HCAP stockholders vote in favor of adoption and approval of the definitive merger agreement, subject to certain closing conditions.
The combined company will be externally managed by Sierra Crest and is expected to have total assets of approximately $757 million and a net asset value of approximately $248 million. These numbers are based on Sept. 30, 2020, balance sheets, adjusted for estimated transaction expenses and PTMN’s recent merger with Garrison Capital.
Certain significant stockholders of HCAP entered into voting support agreements with PTMN and agreed to vote their HCAP shares in favor of the transaction, which shares represent in aggregate approximately 31.6% of HCAP’s shares outstanding as of Dec. 22.
Following the transaction, current HCAP stockholders are expected to own approximately 16.6% of the combined company.
In connection with the transaction, HCAP stockholders will receive aggregate consideration equal to HCAP’s net asset value at closing. This consideration will be funded using PTMN shares (valued at 100% of PTMN’s net asset value per share at the time of closing of the transaction) and, to the extent the required number of PTMN shares exceeds 19.9% of the issued and outstanding shares of PTMN common stock immediately prior to the transaction closing, cash consideration in the amount of such excess.
HCAP stockholders will have an opportunity, subject to certain limitations, to elect to receive either cash or PTMN shares in consideration for their HCAP shares. Additionally, all HCAP stockholders will receive an additional cash payment from Sierra Crest of $2.15 million in the aggregate, or approximately $0.36 per share.
In addition to approval by HCAP stockholders, the closing of the merger is subject to customary conditions. The parties currently expect the transaction to be completed in Q2/21.
“We continue to execute on our strategy of targeting consolidation opportunities that become earnings accretive for shareholders of both PTMN and the acquired company,” Ted Goldthorpe, president and CEO of PTMN and head of BC Partners Credit, said. “We have been proactive in identifying specific opportunities where our company can benefit from greater scale and immediate cost synergies. In past transactions, we have successfully benefitted from achieving greater scale, which allows PTMN to both increase position sizes while simultaneously reducing the impact of public company reporting and other expenses. We believe the combined company will benefit from having lower financing costs, a lower blended fee structure, a reduction in public company costs per share and an increased trading liquidity in the equity.”
“We believe the combination with PTMN represents a favorable outcome for HCAP investors,” Joseph Jolson, chairman and CEO of HCAP, said. “As HCAP’s largest non-institutional shareholder, I have agreed to take stock in the merger and to lockup my PTMN position for 90 days post-closing to facilitate greater liquidity for HCAP shareholders who receive shares in the merger. The transaction is expected to be accretive to net investment income of the combined company due to material cost savings, lower investment management fees and reduced borrowing costs on HCAP’s contributed assets. Finally, HCAP shareholders who receive PTMN shares in the merger can expect to receive regular cash dividends from PTMN on a go-forward basis.”
Keefe, Bruyette & Woods acted as financial advisor to HCAP’s special committee. Dechert served as counsel to HCAP and HCAP’s special committee, while Simpson Thacher & Bartlett served as counsel to PTMN.
Harvest Capital Credit provides customized financing solutions to privately held small and mid-sized companies in the U.S., generally targeting companies with annual revenues of under $100 million and annual EBITDA of under $15 million. HCAP’s investment objective is to generate both current income and capital appreciation primarily by making direct investments in the form of senior debt, subordinated debt and, to a lesser extent, minority equity investments. HCAP is externally managed and has elected to be treated as a business development company under the Investment Company Act of 1940.
Portman Ridge Finance is a publicly traded, externally managed investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940. PTMN’s middle market investment business originates, structures, finances and manages a portfolio of term loans, mezzanine investments and selected equity securities in middle market companies.