Blue Owl Capital Corporation (OBDC), has officially entered into a definitive merger agreement with Blue Owl Capital Corporation III (OBDE), with OBDE being the surviving company. Talk about some highlights attached to such a transaction, they begin from the promise of a known, high-quality asset portfolio. This translates to how OBDC and OBDE employ the same investment strategy. In fact, Blue Owl Capital Inc. has been allocating the same investments to both funds since OBDE’s inception. Owing to that, approximately 90% of the investments in OBDE overlap with those of OBDC. Hence, the combination of two known, complementary portfolios, constructed and managed by the same centralized team, should be able to tread a long distance in the context of facilitating portfolio consolidation and meaningfully mitigate potential integration risk. Then, there is the potential to increase sales and diversification. In essence, the proposed merger will increase OBDC’s total investments by approximately 30%. More on the same will reveal that OBDC’s investment portfolio on a pro forma basis, at fair value, is expected to increase to somewhere around $17.7 billion across 256 portfolio companies with an average position size of 0.4% as of June 30, 2024. All in all, the combined company is poised to become second largest externally managed, publicly traded BDC in regards to total assets. Apart from improving sales and diversification, the merger is also tipped to scale up secondary market liquidity. We get to say so because increased market capitalization following the proposed merger may result in enhanced trading liquidity, as well as potential for greater institutional ownership. Another reason why that might be the case is rooted in the fact that elimination of a second diversified publicly traded BDC reduces arbitrage opportunities, while simultaneously streamlining Blue Owl BDCs’ organizational structure.
Joining the same is a more well-balanced capital structure and an increased access to long-term, low-cost, and flexible debt capital. To put it simply, the combined company’s scale can create potential for more diverse funding sources, and at the same time, consolidate existing facilities. With better scale and structural simplification, the resulting entity here can improve the cost of debt and allow for more favorable financing terms over time. In case that wasn’t enough, then we must mention how the combined company may also benefit from OBDC’s higher investment grade credit ratings when it comes down to generating bonus funding cost savings.
Hold on, there is more, considering the proposed merger is also understood to be accretive to net investment income. This, in turn, is driven by operational savings. You see, the transaction will make duplicative expenses pretty much redundant so to generate savings which both OBDC and OBDE estimate could be in excess of $5 million during the first year alone. On top of that, NII should benefit further from incremental yield through portfolio mix optimization and cost savings from capital structure improvements over the long-term. There is also an opportunity in play for net asset value per share accretion. Expanding upon that, the terms of transaction allow for potential NAV per share accretion to OBDC, if shares of OBDC are trading above OBDC’s NAV per share at the time of closing. The deal’s structure further allows for OBDE shareholder consideration to be valued at a potential premium to OBDE’s NAV per share, if shares of OBDC are trading above OBDC’s NAV per share at the time of closing.
“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,” said Craig W. Packer, Chief Executive Officer of OBDC and OBDE.
