Great Elm Capital Group Inc. (GEC), the financial services company created by Unwired Planet Inc.’s decision to exit the patent monetization business, said it is merging with Full Circle Capital Corp. (FULL) to create a business development company with a net asset value of more than $190 million.
Earlier this year, the former Unwired Planet agreed to sell its patent monetization business to Les Ware’s Optus UP Holding Co. for up to $40 million in cash. The company said it planned to use the money to expand into the financial services business.
Under the agreement with Full Capital, the combined company will assume the name Great Elm Capital Corp. and will apply for listing on NASDAQ under the symbol “GECC.”
Shareholders of Full Circle will own 38% of the combined company and shareholders of Great Elm Capital, including Boston-based MAST Capital, will own the rest. Full Circle’s net asset value was about $81 million as of March 31. The combined companies had a pro-forma net asset value of more than $190 million as of March 31.
Full Circle's outstanding senior notes will be assumed by Great Elm Capital Corp.
“Great Elm Capital Corp. will be a differentiated BDC that seeks to generate attractive risk-adjusted returns through our team's knowledge and experience in deep value credit investing and focus on the preservation of capital,” said Peter Reed, a partner at MAST Capital who will become CEO of the combined company.
“In MAST Capital's 14-year history, we have used this highly rigorous approach to identify attractive, risk-adjusted opportunities with identifiable catalysts for capital appreciation. We believe this is a particularly opportune time to identify value investments in the credit markets and are excited to have the opportunity to employ our strategy for Great Elm Capital Corp.'s stockholders.”
The combined company will concentrate its portfolio in fixed income instruments of middle market companies by focusing on the high yield market to take advantage of market dislocation, special situations and event-driven opportunities.
Great Elm Capital Corp. will be externally managed by Great Elm Capital Management Inc., a joint venture led by MAST Capital's investment team. The joint venture is expected to continue MAST Capital's research-driven approach to investing across the capital structures of middle market companies to generate sustainable recurring net investment income for distribution and capital appreciation.
The exact exchange ratio in the merger will be determined by the net asset value of the parties at the end of the month prior to the distribution of the proxy statement to Full Circle's stockholders to vote on the merger. In addition to approval by Full Circle's stockholders and payment of the special distribution, the closing of the merger is subject to customary conditions. The parties currently expect the transaction to be completed in the second half of calendar 2016.
Houlihan Lokey served as exclusive financial advisor to the special committee of Full Circle's board. Clifford Chance US LLP advised the special committee, and Sutherland Asbill & Brennan LLP is counsel to Full Circle.
Skadden, Arps, Slate, Meagher & Flom LLP, Schulte Roth & Zabel LLP and Akin Gump Strauss Hauer & Feld LLP are legal advisors for Great Elm Capital Group.
Immediately prior to the merger, Full Circle is declaring a special cash distribution to stockholders of 22 cents per share, or $5 million, representing 6% of Full Circle's March 31, 2016 net asset value.
The new company will have more than $55 million of investable cash (net of transaction costs) and more than $165 million of debt in its portfolio, after the contribution of $30 million in cash by Great Elm Capital Group Inc., and the contribution of an approximate $90 million portfolio (market value as of May 31, 2016) of debt from funds managed by MAST Capital.
The new company will initiate a $15 million stock repurchase program, subject to liquidity, credit facility and other considerations, triggered if shares trade below 90% of net asset value.
The company also is signing a new investment management agreement with Great Elm Capital Management Inc., which will have a management fee to 1.50%. The management fee is lower than the 1.75% management fee currently paid by Full Circle.
The new company also will pay a 20% incentive fee above a 7% annualized hurdle rate, subject to a deferral mechanism if the total return on beginning net assets on a rolling three-year basis does not exceed the hurdle rate.
The parent of Great Elm Capital Management will own 15% of the stock of the new company.
The merger will soon clear the way for Boris Teksler to depart as CEO of the former Unwired Planet after the close of the sale of the patent business to Optus UP.
Teksler, a former Technicolor SA and Apple Inc. executive, was brought in by the board to overhaul the company’s patent monetization business, which had struggled to achieve profitability because of the structure of a much criticized acquisition of a portfolio of 2,150 patents from Ericsson SA.
Under the agreement with Ericsson, Unwired Planet was required to pay Ericsson 20% of the first $100 million from licensing, 50% of the next $400 million and 70% of any amounts above $500 million. Because the amounts were based on gross rather than net figures, the deal left Unwired Planet to absorb all of the costs. As a result, Unwired Planet found it difficult during the ensuing years to make much profit from monetizing the portfolio.
"I'm proud of the work we did with the handset business," said Teksler in a phone interview. "We leave it in the hands of Panoptis with tremendous prospects going forward. They'll pick up where we left off."
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