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MVC Capital: A New Activist Pops Up

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NEWS

On April 27, 2018,West Family Investments disclosed taking “an active stance” with its holding of 1,200,397 common shares of MVC Capital (MVC).

The position represents 6.4% of the BDC’s outstanding stock. 

The “activist” wrote that it is “considering and evaluating strategic alternatives designed to lead to maximization of shareholder value.” 

Specific actions to help it reach these goals were not revealed.

However West Family was quoted as believing there are “many opportunities to improve [MVC Capital’s] strategic direction.” 

To that end, it is prepared to engage the board and other shareholders in discussions about the sale of certain assets; composition of the firm’s management and board; uses of its cash on hand; and the possible liquidation of the corporation.


ANALYSIS

West Family Investments is an Illinois based investment firm which frequently takes large positions in public companies.

Otherwise, a brief look at the public record shows little information.

Deja Vu

MVC itself only recently repulsed another “activist” investor in a key shareholder vote in 2017.

Metage Capital in September of 2017 sought shareholder agreement “that the BDC make no new investments until the stock price is at leas within 10% of book value”.

See the BDC Reporter’s article on the subject of September 26, 2017.

Long story short:

After much back and forth by press release, and after MVC upped its stock buy-backs, the Metage proposal was defeated.

However, the proposal was only rejected by a narrow margin.

Since then, a second Dutch Auction was successfully completed.

Drooping

However, MVC’s stock price has dropped off since the “excitement” caused by the activist episode as this 1 year chart shows:

Uninspiring

The stock price remains well below book value, which was $13.42 at January 2018.

The performance of the BDC has not improved as yet.

In the last quarter of reported results, Operating Income (aka Investment Income) dropped to $5.2mn from $5.5mn in the prior quarter

Net Operating Income (aka Net Investment Income) was negative at ($2.5mn), even after a partial fee waiver by the Investment Advisor.


VIEWS

We’re on the record for months about having grave doubts as to whether MVC would be able to reform itself.

In an article on November 22, 2017, we wrote the following:

 

“…we still question whether the BDC will be able to turn  from being a loss making operation even after engineering the sale of its largest investment (which still remains largely on the books as an equity and debt investment).

…If MVC is not able to make the conversion to BDC lender and generate a consistent profit, chances are investors will mark the stock down in the quarters ahead, once the drama around the stock buy-backs has abated.

Then the BDC will be right back where this started: with a stock price substantially below book.

What will be different is that the big cash balance will have melted down.

Almost certainly that will set the stage for another round of “activism” by Metage Capital.

Unsolicited Suggestion

From our point of view, if MVC cannot make the conversion to being a BDC lender and generate an appropriate ROE of 8%-10%,  Metage Capital and investors might be better off just asking the Investment Advisor to sell or liquidate the portfolio, rather than engage in the complicated scheme that the dissident shareholder suggested.”

Great Minds

Apparently – 7 months later – West Family Investments has come to a similar conclusion.

How this will play out, though, is hard to call in advance.

We don’t know if the new “activist” will seek to put a new proposal to shareholders.

The Original

We wonder what Metage Capital’s role might be.

The UK based activist – upon losing the 2017 shareholders vote –  promised to have another go in 2018.

Alarm Bells

With two “activists” potentially in the mix, and little to show shareholders in recent months, the insiders at MVC may be hard pressed to retain control.

This is a story that seems to be just getting going.

More to follow as the BDC Reporter learns more.


INVESTMENT DISCLOSURE

We took a Long position in MVC’s common stock at $9.97 on May 7, 2018. 

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