First Eagle Investment Management and NewStar Financial Inc. announced that they have entered into a definitive agreement for First Eagle to acquire NewStar, an established lender and investment manager specializing in direct lending to middle-market companies and management of broadly syndicated loans. NewStar stockholders are expected to receive total consideration estimated at $12.32 to $12.44 per share, which represents a premium of 10.4% to 11.5% over NewStar's 3-month volume weighted average price of $11.16 as of October 16, 2017, the last trading day before the transaction announcement. The contingent value rights entitle the holders to certain tax refunds generated by the transaction, the amount of which will vary depending upon, among other things, whether the transaction closes in 2017 or 2018.
First Eagle is an independent, privately-owned investment firm with approximately $116 billion in assets under management, and NewStar manages approximately $7.3 billion of assets1 across multiple credit funds. Following completion of the transaction, First Eagle plans to offer its new credit strategies to institutional and retail investors. The transaction is being made through First Eagle’s holding company, First Eagle Holdings, Inc.
In a related transaction, NewStar has entered into a definitive agreement to sell a portfolio of investment assets, including approximately $2.4 billion of middle-market loans and other credit investments, to a newly formed investment fund sponsored by GSO Capital Partners LP, the global credit investment platform of Blackstone Group L.P. The closing of First Eagle’s acquisition of NewStar is conditioned upon, among other things, GSO’s completion of the acquisition of such assets. At closing, NewStar will enter into a servicing agreement with GSO, under which NewStar’s current investment team will continue to service the portfolio of assets sold to the investment fund.
“Credit strategies focused on middle market lending will continue to provide a compelling risk-adjusted solution for investors looking for meaningful and sustainable income, even if interest rates normalize in the future,” said Mehdi Mahmud, President and Chief Executive Officer of First Eagle. “NewStar has an excellent reputation, deep industry experience and one of the longest proven track records of lending prudently to middle market companies and managing broadly syndicated loan portfolios. Its investment-centric culture and conservative investment philosophy align well with First Eagle’s core investment tenets. We look forward to welcoming NewStar employees into the First Eagle family.”
Tim Conway, Chief Executive Officer of NewStar commented: “Together these transactions accelerate NewStar‘s strategy to transform from a balance sheet driven commercial finance company into an investment manager of third-party assets, while unlocking the value of our portfolio investments and asset management platform for stockholders. NewStar has been taking steps intended to increase stockholder value by returning capital through dividends and share repurchases, growing managed assets through acquisition and new fund formation, and streamlining operations to improve efficiency. The transactions announced today are a culmination of that strategy and deliver compelling value for NewStar stockholders. The transactions also allow us to transition seamlessly to a larger investment platform, while maintaining continuity for our customers.”
Bennett Goodman, Senior Managing Director and Co-Founder of GSO added: “We are pleased to move forward with the acquisition of NewStar’s high quality $2.4 billion loan portfolio. We believe this investment represents a very attractive and unique opportunity for GSO and our investment partners that leverages all the strengths of the GSO platform. Through an ongoing relationship with NewStar, we will collaborate closely on their complementary middle market direct lending strategies. Continued collaboration is a demonstration of our confidence that NewStar’s investment philosophy, process and team will continue to thrive under First Eagle ownership.”
Under the merger agreement with First Eagle, the NewStar stockholders will receive $11.44 in upfront cash and one non-transferable contingent value right (CVR) for each NewStar share held at the closing of the transaction. Each CVR will entitle its holder to receive pro-rata distributions of any tax refunds received by NewStar following the closing as a result of a carryback of NewStar’s losses generated primarily from the sale of assets to GSO. 30% of any such tax refund will be distributed to the CVR holders promptly upon receipt, with the remainder to be held in escrow pending approval from the Congressional Joint Committee on Taxation (JCT) or the completion of applicable tax audits. NewStar estimates these refunds to total $1.00 per share if the transaction closes in 2017 or $0.88 per share if the transaction closes in 2018. NewStar expects to be able to file for these refunds by the third quarter of 2018. Actual timing of receipt and disbursement of these tax refunds to CVR holders will depend on the timing of potential IRS audits and JCT approval and other factors not within NewStar’s control.
The agreements with First Eagle and GSO include a 30 day "go shop" period, during which NewStar, with the assistance of its financial advisors Credit Suisse Securities (USA) LLC and Houlihan Lokey Capital, Inc., will actively solicit, evaluate and potentially enter into negotiations with parties that offer alternative proposals to acquire NewStar. The go-shop period runs through November 15, 2017. There can be no assurance that this process will result in a superior proposal. NewStar does not intend to disclose developments with respect to the go shop process unless and until its board of directors has made a decision with respect to any potential superior proposal.
First Eagle plans to fund the merger with cash from its balance sheet, the assumption of a modest amount of existing debt related to assets being purchased, and NewStar cash, including the net proceeds (after repayment of certain indebtedness and other obligations) from GSO’s acquisition of NewStar’s assets. GSO has obtained a commitment letter for an asset-based revolving credit facility with borrowing capacity of up to $1.85 billion led by Wells Fargo Bank, N.A. In addition, GSO has obtained equity commitments of $950 million from investors in a newly formed investment fund sponsored by GSO that will be purchasing the NewStar assets.
The transactions have been approved by NewStar’s and First Eagle’s boards of directors and are subject to approval of NewStar’s stockholders as well as other customary closing conditions, including certain consents with respect to NewStar’s existing funds.
Credit Suisse Securities (USA) LLC and Houlihan Lokey Capital, Inc. served as NewStar’s financial advisors and Simpson Thacher & Bartlett LLP and Locke Lord LLP served as its legal counsel. Wells Fargo Securities.