Fondul Proprietatea – how to make money in tender offer

 

Fondul Proprietatea, the largest closed end fund in the world, has been under pressure from its activist investors. The largest shareholder in the fund is Paul Singer´s Elliot Associates, who has 15.2% stake in the fund valued at USD 550 mil. It is Paul Singer´s third largest position.

In September shareholders passed a resolution based on which the Franklin Templeton faces termination of the management contract if the NAV discount does not decrease to 15% (from current 25%) in two thirds of trading sessions between October 1, 2014 and June 30, 2015. To comply with this the Fondul share price needs to rice another 13% to 1.07 Ron per share.

Templeton is working hard to achieve this mission. At the moment they have announced three steps strategy to increase the Fondul share price: (i) the fund started the tender offer in which it will buy 6.4% of its shares at 18% premium to the market price, (ii) after completion the fund will start 6th round of buyback in which it will buy 2% of its shares, (iii) the fund announced it will list its shares in London to promote liquidity.

This is the second tender offer; the first tender offer was competed one year ago. It had a slightly smaller size (600 mln shares vs 750 mln shares), but was done at a higher premium to the market (38% vs 18%). The result of the tender was a significant gain for Fondul shareholders – they sold 5% of their stake at substantial premium to the market and saw their remaining shares appreciate by 19%. In total the tender offer delivered 21% return to shareholders over 2 months period. Below are the main data points:

Summary of the First Tender Offer

DATE Action Share price
24/9/2013 Pre announcement share price 0.72
25/9/2013 Announcement of the intention to purchase

600,000,000 through tender offer

0.75
10/10/2013 Announcement of the regulatory approval and buyback details 0.78
15/10/2013 Buyback starts 0.78
4/11/2013 Buyback completed 0.81
3/12/2013 One month after the buybakc 0.86

The current tender offer was announced on 20. 10. 2014. The pre announcement share price was 0.90. Since the announcement the share price moved to 0.94 – which represents 4.4% gain. During the previous tender offer the share price increased by 19%. Most of the increase came after the end of the tender – when the investors were buying back the shares they sold in the tender. Of course the terms of the tender offers are not identical and therefore magnitude of the share price growth may differ. If the situation would repeat again, there is still 15% on the table. Not bad two months return. Taking into account the other planned activities (buyback and London listing) I believe that it is very likely that Templeton will achieve its mission and will be able to retain the management contract.

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