Ares Capital to buy rival Allied Capital for $648 million

BANGALORE (Reuters) - Small-business lender Ares Capital Corp (ARCC.O) agreed to buy its struggling rival Allied Capital Corp (ALD.N) in an all-stock deal valued at $648 million, providing relief to the debt-laden company.

Shares of Allied rose as much as 29 percent, their biggest percentage gain since March 10. Ares's shares were up 9 percent to a new 12-month high. Volumes traded in both stocks surged four-fold, compared with their 10-day moving averages.

The $3.47 per-share offer represents a 27 percent premium to Allied's Friday close. Under the deal, Allied Capital shareholders will get 0.325 Ares Capital shares for each share held.

The deal comes at a time when Allied Capital has been shedding assets to pay down debt and fight liquidity concerns.

"I think the deal is more favorable than a stand alone outlook for Allied's shareholders," analyst Robert Dodd of Morgan Keegan said.

Dodd said that although the deal comes at a discount to Allied's book value, considering the long-term problems with the company, the transaction is a positive for the shareholders.

Allied was involved in a long public battle with hedge fund manager David Einhorn, who shorted the business lender's stock, questioning the values it assigned to assets and sustainability of its dividend.

Loss-making Allied suspended its quarterly dividend in March in a desperate effort to save cash.

In May 2002 Einhorn, head of the $5 billion hedge fund firm Greenlight Capital, had told an audience that Allied's stock was overvalued. He argued Allied was slow to mark down depressed assets -- often equity stakes in small private companies -- and stretched accounting rules.

Einhorn could not be immediately reached for comments.

Following the transaction, Ares Capital stockholders will own about 65 percent of the combined company.

The deal is expected to close by the end of the first quarter of 2010 and add to Ares Capital's core earnings.

Ares Capital will also buy Allied Capital's interests in Senior Secured Loan Fund LLC, formerly known as Unitranche Fund, for $165 million in cash.

One member from Allied Capital's board will join Ares Capital's board, the company said.

Allied and Ares did not return calls seeking comments.

Separately, Ares also said it expects to earn 35 cents to 36 cents a share in the third quarter. Analysts see earnings of 32 cents a share in the quarter, according to Thomson Reuters I/B/E/S.

Business Development Cos like Allied and bigger rival American Capital Ltd (ACAS.O) have struggled as the biggest economic downturn since the Great Depression reduced the value of their portfolio companies, to which they make loans in return for equity stakes.

(Editing by Vinu Pilakkott and Anil D'Silva)