Yesterday, American Capital Ltd. (ACAS) reported that late last month, the company sold the software producing unit Narus to Boeing Co. (BA) for $12 million. The company realized a gain of $3 million on this transaction during the third quarter.
 
Headquartered in Sunnyvale, California, Narus is a leading software provider for protection against cyber attacks and persistent threats targeted at large Internet Protocol networks.
 
According to American Capital, the compounded annual rate of return earned over the life of its investment was 7%. However, the proceeds from this deal fell short of the second quarter 2010 valuation of the investment by $2 million, or 13%. 
 
The total proceeds after including the investments in Narus by American Capital’s affiliated funds under management were $21 million during the third quarter, resulting in a $5 million gain, subject to post-closing adjustments.
 
In late 2006, American Capital and its affiliates had made an initial direct investment of $13 million in Narus and later provided financing for growth and working capital. The initial investment was made in the form of convertible preferred equity. 
 
American Capital’s access to the debt and equity capital markets became restricted following the global financial crisis. The company experienced a substantial depreciation of its investment portfolio, over-leveraging of balance sheet and payment default on a material financial obligation.
 
In June 2010, American Capital completed restructuring $2.4 billion of debt. This has afforded the company a sufficient operating flexibility and prevented it from filing for bankruptcy, as earlier cautioned by management.
 
American Capital has also initiated a number of steps to restructure the organization. This includes selling its portfolio assets to generate funds for new investments and de-risking of its balance sheet.
 
Nevertheless, we think that limited accessibility to capital and increased funding costs have weakened American Capital’s strategic position in its sector. The resumption of dividend payments is not expected in the near term, given the projections for capital losses.
 
American Capital currently carries a Zacks #3 Rank (Hold), implying no clear directional pressure on the stock over the next one to three months. The company also has a long term Neutral recommendation from us.
 
AMER CAP LTD (ACAS): Free Stock Analysis Report
 
BOEING CO (BA): Free Stock Analysis Report
 
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