The proposed merger between Medley Capital Corporation (NYSE: MCC), a publicly traded business development company, and Sierra Income Corporation, a non-traded BDC, is experiencing headwinds as independent proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services, as well as a significant Medley Capital shareholder, are urging Medley Capital shareholders to vote against the proposed merger in light of a competing proposal made by NexPoint Advisors.
Proxy advisory firm Egan-Jones Ratings has recommended that shareholders vote for the proposed merger, while Institutional Shareholder Services reversed its initial recommendation following the submission of the competing proposal by NexPoint. The special meeting of stockholders is scheduled on February 8, 2019.
Yesterday, The DI Wire reported that NexPoint submitted a competing management proposal related to the merger of Medley Capital and Sierra, which are both controlled by Medley Management Inc. (NYSE: MDLY). In August 2018, Sierra announced plans to acquire Medley Capital and Medley Management, with Sierra being the surviving company that would be structured as a publicly-traded BDC.
The special committee of Medley Capital’s board of directors received an unsolicited letter from NexPoint on January 24, 2019. They claim that the letter did not include any proposal under which NexPoint would acquire MCC stock or assets or offer $225 million of net value to shareholders.
NexPoint calculated the approximately $226.9 million stockholder consideration as follows: Elimination of MDLY cash payout (30.5 million shares at $4.09/share or approximately $124.9 million), annual management fee savings (1.25 percent over at least three years or $27 million), NexPoint’s payment of $25 million, and $50 million in share purchases ($25 million plus $5 million per quarter for five quarters).
FrontFour Capital Group LLC, a significant shareholder of Medley Capital commented, “[T]he submission of the NexPoint proposal and the manner in which [MCC] sat on and then dismissed NexPoint’s initial indication of interest heightens our concern that the board refuses to take sufficient steps to review alternatives that are most favorable to [stockholders]. We reiterate our belief that the NexPoint proposal represents a credible, superior offer and we call upon the special committee to immediately review all strategic alternatives to maximize value for all shareholders.”
Medley Capital said that the special committee adhered to a “rigorous and thorough” review process, consistent with its fiduciary duty and in consultation with its independent legal and financial advisors. “Following this, the special committee unanimously recommended that the board determine, and the board unanimously determined, that it is desirable and in the best interests of [the company] and its shareholders to decline to pursue NexPoint’s so-called ‘proposal.’”
According to Medley Capital and Sierra, their respective special committees received a follow-up letter on January 31, 2019 which they plan to review and will respond to NexPoint as appropriate.
NexPoint noted that counsel to the Medley Capital special committee has not yet responded to or acknowledged receipt of its competing proposal, and as of press time, the firm said that it has only received an acknowledgment of receipt of its proposal from counsel to the Sierra special committee.
“The boards’ failure to meaningfully respond to the NexPoint proposal…raises serious concerns about their ability to uphold their fiduciary responsibility to stockholders,” said NexPoint. “This deliberate inaction calls into question the independence of the board members charged with protecting stockholders from affiliated transactions like the MDLY merger, which entrenches underperforming management and promotes management’s interests over those of stockholders.”
NexPoint added, “Additionally, we have reason to believe that the independent directors of MCC and Sierra are longtime friends of brothers Brook and Seth Taube, the co-founders and co-CEOs of MDLY, and that there is an understanding that management would seek the removal of any board member who speaks out against management proposals.”
The Medley Capital special committee is served by financial advisor Sandler O’Neill + Partners L.P. and legal counsel Kramer Levin Naftalis & Frankel LLP. The Sierra special committee is served by financial advisor Broadhaven Capital Partners LLC and legal counsel Sullivan & Worcester LLP.
Sierra invests primarily in first lien senior secured debt, second lien secured debt and, to a lesser extent, subordinated debt of middle market companies in a broad range of industries with annual revenue between $50 million and $1 billion.
Medley Capital Corporation lends to privately-held middle market companies, primarily through directly originated transactions, to help these companies expand their businesses, refinance and make acquisitions. Their portfolio generally consists of senior secured first lien loans and senior secured second lien loans.