425: Blue Owl Capital Corporation and Blue Owl Capital Corporation III Announce Merger Agreement

Blue Owl Capital Corporation (OBDC) and Blue Owl Capital Corporation III (OBDE) have entered into a definitive merger agreement to create the second largest publicly traded BDC by total assets.

Summary

• Blue Owl Capital Corporation (OBDC) and Blue Owl Capital Corporation III (OBDE) have announced a definitive merger agreement.
• OBDC will be the surviving company, subject to shareholder approvals and customary closing conditions.
• The boards of directors of both OBDC and OBDE have unanimously approved the transaction following recommendations from their special committees.
• The merger aims to enhance scale while preserving strong credit quality, positioning the combined company to deliver attractive risk-adjusted returns.
• Approximately 90% of the investments in OBDE overlap with those of OBDC, mitigating potential integration risk.
• The proposed merger will increase OBDC's total investments by approximately 30%, increasing the combined company's scale.
• The combined company's investment portfolio is expected to increase to approximately $17.7 billion across 256 portfolio companies as of June 30, 2024.
• The combined company is expected to be the second largest externally managed, publicly traded BDC by total assets.
• The increased market capitalization may result in enhanced trading liquidity and potential for greater institutional ownership.
• The increased scale of the combined company may create potential for more diverse funding sources and more favorable financing terms.
• The proposed merger is expected to be accretive to Net Investment Income (NII) over time, with operational savings estimated to be in excess of $5 million in the first year.
• The terms of the transaction allow for potential Net Asset Value (NAV) per share accretion to OBDC if shares of OBDC are trading above OBDC's NAV per share at the time of closing.
• OBDE shareholders will receive newly issued shares of OBDC based on an Exchange Ratio determined prior to closing, calculated based on NAV per share of each company and the market price of OBDC common stock.
• Blue Owl Credit Advisors LLC has agreed to reimburse fees and expenses associated with the merger up to a cap of $4.25 million, only if the merger is consummated.
• The transaction is expected to close in the first quarter of 2025, subject to shareholder and regulatory approvals and other customary closing conditions.

Sentiment

Score: 8

Explanation: The document presents a positive outlook on the merger, highlighting potential benefits such as increased scale, diversification, and accretion to NII. While acknowledging risks, the overall tone is optimistic and suggests a well-considered strategic move.

Positives

• The merger creates a larger, more diversified BDC with increased scale and improved secondary market liquidity.
• The combined company is expected to benefit from a well-balanced capital structure and increased access to long-term, low-cost debt capital.
• The merger is expected to be accretive to NII and may result in NAV per share accretion for OBDC shareholders.
• The high degree of investment overlap between OBDC and OBDE mitigates potential integration risk.
• OBDC's higher investment grade credit ratings could drive additional funding cost savings for the combined company.

Negatives

• The merger is subject to shareholder and regulatory approvals, and there is a risk that these approvals may not be obtained.
• There are risks related to diverting management's attention from ongoing business operations during the merger process.
• Shareholder litigation in connection with the merger could result in significant costs of defense and liability.

Risks

• The timing or likelihood of the merger closing is uncertain.
• The expected synergies and savings associated with the merger may not be fully realized.
• Competing offers or acquisition proposals could be made.
• Various conditions to the consummation of the merger may not be satisfied or waived.
• Changes in the economy, financial markets, and political environment could impact the combined company.
• Geo-political conditions, including the war between Russia and Ukraine and the conflict in the Middle-East, could affect financial market volatility and global economic markets.
• An economic downturn, elevated interest and inflation rates, and ongoing supply chain and labor market disruptions could impact the business prospects of the combined company.
• Blue Owl Credit Advisors LLC's ability to locate suitable investments and attract and retain talented professionals is crucial for the combined company's success.

Future Outlook

The merger is expected to enhance scale, preserve strong credit quality, and deliver attractive risk-adjusted returns for shareholders. The combined company may benefit from more diverse funding sources, improved cost of debt, and potential NAV per share accretion.

Management Comments

• Craig W. Packer, Chief Executive Officer of OBDC and OBDE, stated, 'We believe now is the right time to deliver long-term value for both OBDC and OBDE shareholders and streamline our direct lending platform.'

Industry Context

This merger reflects a trend towards consolidation in the BDC sector to achieve greater scale, diversification, and operational efficiencies. The combined entity will be a significant player in the direct lending space, potentially influencing market dynamics and competitive landscape.

Comparison to Industry Standards

• The combined company is expected to be the second largest externally managed, publicly traded BDC by total assets, suggesting a leading position in the industry.
• The merger aims to achieve operational efficiencies and cost savings, aligning with industry best practices for BDCs.
• The focus on maintaining strong credit quality and delivering attractive risk-adjusted returns is consistent with the objectives of well-managed BDCs.

Related Party Transactions

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

Stakeholder Impact

• Shareholders of OBDE will receive newly issued shares of OBDC based on an Exchange Ratio determined prior to closing.
• The merger is expected to deliver long-term value for both OBDC and OBDE shareholders.
• The increased scale and diversification of the combined company may benefit employees and other stakeholders through enhanced stability and growth opportunities.

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.
• OBDC and OBDE will mail the joint proxy statement/prospectus to their respective shareholders.
• OBDC and OBDE will hold shareholder meetings to vote on the merger.
• The parties will seek customary regulatory approvals.
• The transaction is expected to close in the first quarter of 2025.

Key Dates