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Retail Supplier To Be Acquired By Publicly Traded Firm

Implied Total Enterprise Value Under Transaction Is $167 Million

Purchaser Cites Potential For More Strategic Acquisitions

April 25, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

MVC Capital, Inc. announced that Equus Total Return, Inc., a publicly-traded business development company that previously announced its intention to become an operating company, has entered into a definitive agreement to acquire MVC’s largest portfolio holding, U.S. Gas & Electric, Inc.

In announcing the plan of reorganization, Equus stated its intention to pursue a merger or consolidation with MVC Capital, Inc. (MVC) or one of MVC’s portfolio companies, the effect of which would transform Equus into an operating company instead of a closed-end fund.

The acquisition of USG&E by Equus (hereafter referred to as the "Consolidation") represents the final step of Equus’s plan of reorganization within the meaning of Section 2(a)(33) of the Investment Company Act of 1940, as adopted by Equus on May 13, 2014.

The Consolidation will be effected in two stages. The first stage (the Initial Closing) consists of Equus’s acquisition of more than 90% of USG&E’s common and convertible preferred stock from MVC and certain other USG&E stockholders in exchange for shares of Equus. In the second stage, a wholly-owned subsidiary of Equus (formed to hold all such common and convertible preferred shares of USG&E) will be merged with and into USG&E (the Second Closing), with USG&E as the surviving corporation and wholly-owned by Equus, which will change its name to USG&E, Inc.

Pursuant to the Purchase Agreement, based on the deemed transaction price of $3.28 per share of Equus common stock, USG&E stockholders will receive on a pro rata basis an aggregate of: (i) 32,606,539 shares of Equus common stock; and, (ii) $40 million in par value of 5-year mandatory convertible Equus preferred stock (Preferred Stock) that is entitled to dividends at the rate of 7.5% per annum. The Preferred Stock may be converted at any time into Equus common stock at conversion prices ranging from $3.28 to $4.10 per share, and automatically converts into common stock in December 2022. At the deemed transaction stock price of $3.28 per share of Equus common stock, the shares of Equus common stock and Preferred Stock to be issued in the first stage of the Consolidation would be valued together at $150.5 million (the Equity Value), which would imply a total enterprise value for USG&E of approximately $167.5 million (including other indebtedness of $22.4 million and excluding estimated cash at closing of $5.5 million). Based on MVC’s current 76.4% ownership stake in USG&E, MVC’s share of the Equity Value would be valued at $115.1 million (excluding any illiquidity discount that would be applied), as compared to MVC’s fair value estimate for its equity investment in USG&E of $89.4 million as of January 31, 2017.

As a result of the Consolidation, and assuming conversion of the Preferred Stock at $3.28 per share, MVC will own 66.3% of the combined company (inclusive of MVC’s existing 33% ownership in Equus on a fully-diluted basis), with other Equus stockholders owning 15.6% on a fully-diluted basis and other USG&E stockholders owning 18.1% on a fully-diluted basis. The number of shares of the common stock and Preferred Stock of Equus to be issued to USG&E stockholders in the Consolidation is based in part on the deemed transaction stock price of $3.28 per share of Equus common stock. The actual value of the shares of Equus common stock and Preferred Stock to be issued upon the closing of the Initial Stage and the Second Closing will be dependent upon the market value of Equus’s common stock at such time. As of 4:00 pm ET on Friday, April 21, 2017, the market value of Equus’s common stock was $2.46 per share.

The Consolidation is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes, and USG&E stockholders are not expected to recognize a gain or loss to the extent of the stock consideration received.

The transaction has been approved by the Boards of Directors of USG&E, MVC and Equus, and will not be subject to further shareholder approvals. In connection with the transaction, Equus has obtained the necessary consent of a majority of its stockholders, including MVC, which currently holds 33% of Equus’s common stock.

Following the Consolidation, Equus intends to monetize and liquidate certain of its assets that are inconsistent with its planned change in strategy to focus on commercial and retail energy marketing.

Upon completing the Consolidation, the combined company will serve over 375,000 residential customer equivalents (RCEs) in 64 utility markets, including the District of Columbia and across the following 11 states: Connecticut, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, and Pennsylvania.

As of January 31, 2017, 53% of USG&E’s RCEs were residential and 47% were commercial.

"As a publicly-listed company with access to the capital markets, the combined company will be better positioned to pursue organic and other growth opportunities to drive future value creation for all stakeholders," the companies said

John Hardy, CEO of Equus, will continue to serve as CEO of the public parent company; David Weinberg and Kevin McMinn, USG&E’s CFO and COO, respectively, who have led USG&E to date, will continue in their positions at the USG&E subsidiary; and Michael Tokarz, Chairman and Portfolio Manager of MVC, will be appointed Executive Chairman of Equus’s Board of Directors.

"The transaction is a significant milestone in our investment in USG&E and allows the opportunity for it to grow in value and for MVC to potentially benefit from receiving consistent dividend payments," said Michael Tokarz, Chairman and Portfolio Manager of MVC. "It also will provide greater visibility and transparency into the operations and performance of MVC’s largest asset. Lastly, it demonstrates our commitment to the reorganization of Equus and provides Equus stockholders with an attractive opportunity to participate in the potential upside and growth of USG&E."

"We are pleased with the transaction and the prospects for USG&E to operate as a publicly-traded company with access to the capital markets, providing opportunities for growth and strategic acquisitions," said John Hardy, CEO of Equus. "We believe the transaction structure will deliver value to all key stakeholders, who will benefit from a stronger and more financially flexible partner. We look forward to continuing to work closely with the USG&E management team to realize long-term growth and strong financial results."

The Initial Closing is subject to certain conditions, including regulatory approvals, and is expected to occur approximately 60 days from the signing date. The Second Closing is subject to the effectiveness of a registration statement on Form S-4, which is to be filed with the Securities and Exchange Commission (SEC) following the Initial Closing, covering the Equus common stock and Preferred Stock to be issued to the remaining USG&E stockholders at the Second Closing. Prior to the Initial Closing, Equus will finalize its termination of its election to be classified as a business development company under the 1940 Act.

In connection with the first stage of the Consolidation, Equus intends to file with the SEC an information statement on Schedule 14C (the Information Statement) in preliminary and definitive form, as well as other relevant documents concerning the Consolidation. In connection with the second stage of the Consolidation, Equus intends to file with the SEC a registration statement on Form S-4 registering the shares of Equus common stock and Preferred Stock to be issued to USG&E stockholders at the Second Closing, as well as other relevant documents concerning the Consolidation.

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