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MVC Capital: Sells Portfolio Company

BDCs:
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NEWS

On July 9, 2018 MVC Capital (MVC) reported the sale of portfolio company Centile Holdings, B.V.

Centile is “a leading European developer of unified communications and fixed-mobile convergence platforms for operators and integrators”.

The buyer is another European firm.

The purchase price is approximately $7.5mn.

According to MVC the price represents “a 2X multiple on its initial investment and a gross IRR of 11% over the life of the investment.

The MVC CEO added:

“Selling Centile is consistent with the Fund’s strategy to monetize its equity investments in order to redeploy capital into yielding investments. Generating enhanced yield for our shareholders remains a key strategic priority for MVC. The sale of Centile, a European-based investment reflects continued progress in this regard,” said Michael Tokarz, Chairman and Portfolio Manager of MVC Capital, Inc. “The sale of Centile at a price approximating its carrying value, despite significant currency headwinds during our investment hold period,  also demonstrates MVC’s and its Valuation Committee’s adherence to a solid valuation process.”

See the press release attached.


ANALYSIS

Given that MVC does not hold regular Conference Calls, the BDC Reporter had no prior indication that Centile might be sold.

We note that the gross proceeds above are before any payments held back during the upcoming 18 month escrow “and excludes: 1) transaction fees and expenses associated with the sale and 2) currency exchange changes that can result prior to the close anticipated for July 31, 2018”.

At April 30, 2018, MVC’s 10-Q showed Centile in its affiliate investment section with a cost of$3,254,376. The FMV was $7,281,000.

Net proceeds will probably be very close to the April 2018 valuation, which may have been based on the value of the acquisition at the time of the preparation of the filing.

MVC held only common stock in Centile.

Exceptional

We had previously reviewed MVC’s 10-Q and noted that Centile and MVC’s interest in its private equity fund are the only common equity and Preferred investments valued materially over cost.

Re-invested at a yield of 12.00% (which is what MVC targets), the proceeds (when received in full) should add $900,000 annually to Operating Income (aka Investment Income) which was annualizing at $22mn as of April 2018.

On paper that’s a potential 4% annual boost to revenues, based on those assumptions.


VIEWS

Just In Time Or Not Enough ?

This transaction comes at a critical time for MVC which posted lackluster results in the quarter ended April 2018.

If not for a reversal in the period for Net Incentive Compensation and waivers of fees by the Investment Advisor, the BDC would have lost money at the Net Investment Income level.

Not Alone

Moreover, there are two potential “activist” shareholders stalking the BDC.

The latest dissatisfied shareholder to show their hand and mention their ire came onto the scene in May 2018.

For the BDC Reporter’s key articles on MVC’s two activist challengers, click here and here.

New Low

If that was not enough, the BDC’s stock price has dropped to a new 1 Year Low, as this chart shows:

Discounted

MVC – as its critics frequently complains – continues to trade at a discount to book.

The discount is currently (29%).

The Investment Advisor – as they did with the sale of  U.S. Gas & Electric last year – will use this example to argue that its strategy of shifting to ever more income producing assets is working.

See the CEO’s comments in the press release mentioned above.

Long Journey

However, MVC still has a great way to go.

Non income producing Affiliate and Control investments account for roughly a third of the BDC’s assets at fair value, and nearly half when the all categories are considered and excluding cash.

Many of those investments are carried at a discount to cost and have  been on the books for years.

Several investments seem to require regular additional loan or equity infusions for reasons not given but suggest more propping up than for expansion.

Investors – reasonably enough – seem to doubt (the Centile transaction notwithstanding) the valuation placed on the portfolio, viz. the huge discount.

Still, the journey of a thousand miles sometimes begin with a small portfolio company sale.

Unconvinced

Nonetheless, we doubt that any “activist” – and most other shareholders – will not be dissuaded from complaining about MVC’s strategy and execution by the Centile transaction.

We still expect some sort of struggle for control of MVC and its direction in the months ahead.


INVESTMENT DISCLOSURE

We are Long MVC’s stock. See our article: “Why We Bought MVC Capital” dated May 29, 2018

Since we bought MVC as part of our Special Situation strategy, the stock price – as noted earlier – has dropped to new lows.

However, we will continue to hold onto the position for the foreseeable future.

Our fundamental premise for investing remains the same.

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