425: Blue Owl Capital (OBDC) to Merge with Blue Owl Capital Corporation III (OBDE) in $4.3 Billion Deal

Blue Owl Capital Corporation (OBDC) announces a merger agreement with Blue Owl Capital Corporation III (OBDE) to streamline their direct lending platform and enhance scale.

Summary

• Blue Owl Capital Corporation (OBDC) and Blue Owl Capital Corporation III (OBDE) have entered into a merger agreement.
• The merger aims to streamline the direct lending platform, enhance scale, improve trading liquidity, increase access to lower-cost debt, and drive operational efficiencies.
• The combined entity is expected to have approximately $17.7 billion in investments, making it the second-largest publicly traded BDC by total assets.
• The transaction is structured as a stock-for-stock merger, with the exchange ratio determined based on NAV per share.
• The merger is expected to close in the first quarter of 2025, subject to shareholder approval and customary closing conditions.
• The combined company will continue to operate as Blue Owl Capital Corporation and trade under the ticker OBDC.
• OBDC expects the merger to be accretive to net investment income (NII) over time, driven by operational savings of over $5 million in year one.
• The combined company intends to continue delivering a regular dividend yield of approximately 9.5% and a variable supplemental dividend equal to 50% of spillover income.
• OBDC and OBDE will be reimbursed for merger-related fees and expenses up to $4.25 million by OBDC's advisor if the merger is completed.
• OBDC's existing $150 million share repurchase program will remain in place.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook on the merger, highlighting potential benefits such as increased scale, diversification, and cost savings. Management expresses confidence in the transaction and its ability to enhance shareholder value.

Positives

• The merger is expected to streamline the direct lending platform and enhance scale.
• The combined company will have a larger, more diversified portfolio, reducing reliance on any single investment.
• Improved trading liquidity is anticipated due to the larger market capitalization of the combined company.
• The combined company is expected to have more diverse and efficient access to capital, potentially at lower borrowing costs.
• Operational efficiencies and cost savings are expected, with over $5 million in savings projected for the first year.
• The merger is expected to be accretive to net investment income (NII) over time.
• OBDC has delivered 10% GAAP ROE since inception and is currently at 12.6%.
• OBDE's portfolio is considered to have excellent credit quality.

Negatives

• The merger is subject to shareholder approval and customary closing conditions, which could delay or prevent the transaction.
• There may be short-term market volatility affecting the portfolios.
• There may be a slight dilution in NII for one quarter before accretion begins.

Risks

• Uncertainties associated with the timing or likelihood of the merger closing.
• The ability to realize the anticipated benefits of the merger, including expected accretion to net investment income.
• The percentage of OBDC and OBDE shareholders voting in favor of the proposals submitted for their approval.
• The possibility that competing offers or acquisition proposals will be made.
• The possibility that any or all of the various conditions to the consummation of the merger may not be satisfied or waived.
• Risks related to diverting management's attention from ongoing business operations.
• The risk that shareholder litigation in connection with the merger may result in significant costs of defense and liability.
• Changes in the economy, financial markets, and political environment.
• The impact of geo-political conditions, including the ongoing war between Russia and Ukraine and the escalated conflict in the Middle-East.
• Future changes in law or regulations.
• Conditions to OBDC's and OBDE's operating areas, particularly with respect to business development companies or regulated investment companies.
• An economic downturn, elevated interest and inflation rates, ongoing supply chain and labor market disruptions, instability in the U.S. and international banking systems, and the risk of recession or a shutdown of government services could impact business prospects of OBDC and OBDE and their portfolio companies or following the closing of the merger, the combined company.
• The ability of Blue Owl Credit Advisors LLC (the Adviser) to locate suitable investments for the combined company and to monitor and administer its investments.
• The ability of the Adviser to attract and retain highly talented professionals.

Future Outlook

The combined company aims to grow its scale and enhance returns through the merger, with expectations of NII accretion and improved access to capital. They anticipate optimizing the portfolio mix and generating cost savings from capital structure improvements.

Management Comments

• We have long believed that it would make sense to streamline our BDC platform under the right conditions, and now is the right moment to do that.
• We believe now is the right time to merge these two BDCs and create meaningful benefits for both sets of shareholders.
• We expect the increased scale of the combined company to enable better access to a wider array of debt funding solutions at potentially lower borrowing costs.
• We think that there istheres low-hanging fruit in the context of these companies coming together to tighten our spreads relative to our peers in the IG space.

Industry Context

The merger reflects a trend towards consolidation in the BDC sector to achieve greater scale, diversification, and access to capital. Larger BDCs tend to have higher trading volumes and better access to debt financing.

Comparison to Industry Standards

• The combined company will be the second-largest publicly traded BDC by total assets, positioning it among industry leaders like Ares Capital Corporation (ARCC) and Prospect Capital Corporation (PSEC).
• The expected operational savings of over $5 million in year one are in line with typical synergy targets in similar BDC mergers.
• The target dividend yield of approximately 9.5% is competitive within the BDC sector, where yields often range from 8% to 12%.

Stakeholder Impact

• Shareholders of both OBDC and OBDE are expected to benefit from the increased scale, diversification, and potential for enhanced returns.
• Lenders are expected to benefit from the increased diversification and improved credit profile of the combined company.
• Employees may experience some changes due to the elimination of duplicative expenses, but the overall impact is expected to be manageable.
• Portfolio companies are not expected to experience significant changes, as the investment strategy will remain consistent.

Next Steps

• Obtain shareholder approval from both OBDC and OBDE.
• Satisfy customary closing conditions.
• Close the transaction, expected in the first quarter of 2025.
• Integrate the two portfolios and operations.
• Optimize the portfolio mix and capital structure.
• Continue to execute the existing investment strategy.

Key Dates