8-K: Blue Owl Capital Corp and Blue Owl Capital Corp III Announce Merger Agreement

Blue Owl Capital Corporation and Blue Owl Capital Corporation III have agreed to merge, creating the second-largest publicly traded BDC by total assets.

Summary

• Blue Owl Capital Corporation (OBDC) and Blue Owl Capital Corporation III (OBDE) have entered into a merger agreement where OBDE will merge into OBDC.
• The merger aims to enhance scale and streamline their direct lending platform.
• The combined entity will have approximately $18.4 billion in total assets on a pro forma basis at fair value.
• Approximately 90% of OBDE's investments overlap with those of OBDC, reducing integration risk.
• The merger is expected to increase OBDC's total investments by about 30%, reaching approximately $17.7 billion across 256 portfolio companies.
• The transaction is expected to be accretive to Net Investment Income (NII) due to operational savings and improved capital structure.
• The merger is structured to potentially provide Net Asset Value (NAV) per share accretion to OBDC if its shares trade above NAV at closing.
• OBDE shareholders may receive consideration valued at a premium to OBDE's NAV per share if OBDC shares trade above NAV at closing.
• The exchange ratio will be determined based on the NAV per share of both companies and the market price of OBDC common stock prior to closing.
• Blue Owl Credit Advisors LLC will reimburse merger-related fees and expenses up to $4.25 million.
• The merger is expected to close in the first quarter of 2025, pending shareholder and regulatory approvals.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook on the merger, highlighting potential benefits such as increased scale, cost savings, and improved returns. The language is optimistic and forward-looking, suggesting a strong belief in the transaction's success.

Positives

• The merger will significantly increase the scale of the combined company.
• The high overlap in investments reduces integration risk.
• The merger is expected to improve secondary market liquidity.
• The combined company may have increased access to long-term, low-cost, flexible debt capital.
• The transaction is expected to be accretive to NII and potentially NAV per share.
• The structure allows for OBDE shareholder consideration to be valued at a potential premium to OBDEs NAV per share.

Negatives

• The merger is subject to shareholder and regulatory approvals, which could introduce uncertainty.
• There are risks associated with diverting management's attention from ongoing business operations.
• Shareholder litigation related to the merger could result in significant costs.
• The transaction is dependent on the market price of OBDC common stock before merger close.

Risks

• The timing or likelihood of the merger closing is uncertain.
• Expected synergies and savings may not be fully realized.
• The ability to realize the anticipated benefits of the merger is not guaranteed.
• Shareholder votes may not be in favor of the proposals.
• Competing offers or acquisition proposals may arise.
• Various conditions to the merger may not be satisfied or waived.
• There are risks related to diverting management's attention from ongoing business operations.
• Shareholder litigation could result in significant costs.
• Changes in the economy, financial markets, and political environment could impact the merger.
• Geopolitical conditions and conflicts could affect the merger.
• Future changes in laws or regulations could impact the merger.
• Economic downturns, elevated interest rates, and supply chain disruptions could impact the combined company.
• The ability of Blue Owl Credit Advisors LLC to locate suitable investments and retain talent is a risk.

Future Outlook

The merger is expected to enhance scale, improve diversification, and be accretive to NII over time. The combined company is positioned to deliver attractive risk-adjusted returns for shareholders.

Management Comments

• We believe now is the right time to deliver long-term value for both OBDC and OBDE shareholders and streamline our direct lending platform.
• The merger is set to enhance scale while preserving our strong credit quality.
• This increased scale positions the combined company to deliver attractive risk-adjusted returns for shareholders in the years to come.

Industry Context

This merger reflects a trend of consolidation within the BDC sector, aiming to create larger, more efficient entities with enhanced market presence and access to capital. The combination of two similar portfolios under the same management team is a strategic move to reduce integration risks and leverage existing expertise.

Comparison to Industry Standards

• The merger will create the second-largest publicly traded BDC by total assets, placing it among the industry leaders.
• The combined entity's scale will be comparable to other large BDCs such as Ares Capital Corporation (ARCC) and Main Street Capital Corporation (MAIN).
• The focus on direct lending and middle-market companies aligns with the strategies of many other BDCs.
• The expected NII accretion and cost savings are consistent with the goals of other BDC mergers and acquisitions.
• The potential for NAV per share accretion is a common objective in BDC transactions, aiming to enhance shareholder value.

Related Party Transactions

• Blue Owl Credit Advisors LLC, the investment advisor for OBDC, has agreed to reimburse fees and expenses associated with the merger up to a cap of $4.25 million.

Stakeholder Impact

• Shareholders of both OBDC and OBDE are expected to benefit from the increased scale and potential for improved returns.
• Employees of Blue Owl may experience changes due to the consolidation of operations.
• Customers (portfolio companies) may benefit from the increased financial strength of the combined entity.
• Creditors may see improved creditworthiness of the combined company.

Next Steps

• OBDC and OBDE will file a joint proxy statement/prospectus with the SEC.
• OBDC will file a registration statement on Form N-14 with the SEC.
• Shareholder meetings will be held to vote on the merger.
• Regulatory approvals will be sought.
• The merger is expected to close in the first quarter of 2025.

Key Dates

Keywords

merger, business development company, BDC, direct lending, net investment income, NAV, Blue Owl Capital Corporation, Blue Owl Capital Corporation III, OBDC, OBDE, investment portfolio, shareholder approval