Roumell Asset Management intends to vote against the proposed transaction among Sierra Income Corporation, Medley Capital and Medley Management

CHEVY CHASE, Md., Dec. 3, 2018 /PRNewswire/ -- Roumell Asset Management owns approximately 2% of the outstanding shares of Medley Capital Corporation, or MCC, and intends to vote against the proposed transaction among Sierra Income Corporation, MCC and Medley Management, or MDLY.  In our view, the proposed transaction effectively bails out MDLY owners. Roughly 80% of MDLY's economic interest rests with private unitholders, and we understand that these units are principally owned by the Taube brothers.

One needn't look further than the market's reaction to see the underlying intent of the merger.  To wit, upon the announcement, MDLY shares shot up over 50% and have retained their value at the elevated level.  In contrast, MCC shares trade in line with their pre-announcement price.  The market's response is effectively a fairness opinion on the proposed transaction, and in our view, makes clear that MCC shareholders are not being equitably treated in the deal. 

After reviewing the preliminary proxy statement, it seems that MCC's board of directors did not seek to maximize MCC's shareholder value by shopping it as a sole entity, where we believe a superior offer would have been likely.  It appears to us that all three entities (MCC, MDLY and Sierra) were shopped as a package deal and, not surprisingly, few were interested in paying a premium for MDLY shares as a condition to owning MCC's assets. 

Another reason we oppose the proposed combination is our belief that, given MDLY's performance in managing MCC, the MCC board should have fired MDLY by now.  MDLY's performance overseeing MCC's assets is exceptionally poor.  To wit, in its September 7, 2018 industry report, leading BDC sell-side firm Janney Montgomery Scott showed MCC's ROE to be the lowest in its coverage universe for the 1 year, 2 year, 3 year, 4 year, 5 year and 6 year (the latest shown) periods.  The average 6 year ROE in Janney's BDC coverage universe is 8.65% versus MCC's negative 1.6% ROE.  In fact, MCC is the only BDC to have a negative ROE over the past 6 years amongst Janney's coverage list.    

In our opinion, MCC's board effectively threw its shareholders under the bus, while saving MDLY's public shareholders and private unitholders, by proposing to combine a subpar asset manager with the currently separate and predominantly first-lien asset portfolio of MCC. In reality, MDLY's true value, wherein MCC accounts for over 25% of its fee-earning assets, is far less as a stand-alone entity, particularly if what we believe to be the appropriate action had been taken to fire them.  In our view, MCC's board did not fulfill its obligations to shareholders.  Did MCC's directors consider what Triangle Capital Corporation's (TCAP) board did for its shareholders last year in monetizing the TCAP portfolio at book value?  In this regard, TCAP's first-lien investments comprised less than 30% of its portfolio, compared to MCC's 76% first-lien investments as of June 30, 2018.  If a market exists to purchase TCAP's shares for cash at book value, it seems likely that MCC's value would be similarly recognized had it been marketed as a sole entity.       

To have experienced persistent NAV erosion as an MCC shareholder and then to not even be offered full NAV is insulting and, in our view, the proposed transaction is wrought with conflicts of interest.  Accordingly, we cannot, in good conscience, vote in favor of the proposed transaction.    

SOURCE Roumell Asset Management, LLC