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

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.

Largest closed end fund makes a tender offer for its shares


Acceleration of the fourth buy-back programme by means of a Public Tender Offer initiated by Fondul Proprietatea SA

Franklin Templeton Investment Management Ltd. United Kingdom Bucharest Branch (“the Fund Manager”), in its capacity as Sole Administrator and Fund Manager of Fondul Proprietatea SA (“the Fund”), informed shareholders that today it has submitted for approval to the Financial Supervisory Authority (the “FSA”) the application for a buy-back tender offer for the purposes of carrying out the fourth buy-back programme approved through the Shareholders’ Resolution no. 9/28 April 2014. The Fund Manager would also like to inform shareholders and investors that it has contracted Raiffeisen Bank S.A. to assist in the execution of this operation.

For this offer, the Fund intends to repurchase 750,000,000 shares from its shareholders.

Full details of the offer will be announced after receiving the approval from the FSA, which should take place within 10 business days according to the regulations in force.

In light of this development, the Fund would also like to report that the daily execution of the buy-back programme on the regulated market has been suspended from 16 October 2014; any restart after the closing of the offer will be announced in due course.


The rummor is that the tender will be at 1.05 RON per share – at 13% premium to current share price. It is another attempt by the manager to narrow the NAV discount that currently stands at 25%. The fund manager faces termination, if it fails to narrow the discount below 15%.



  • Two weeks ago short fund Kerrisdale started a campaign against GSAT. Their presentation was a good show but disappointing on facts.
  • GSAT shares are oversold – down more than 50% in last two weeks.
  • Good opportunity to buy before the forthcoming catalysts.

What happened?

On Wednesday 1/10 a rumor was circulated that Kerrisdale, a prominent short fund, would host a presentation on its Globalstar (NYSEMKT:GSAT) short position on Monday 6/10. Based on the rumor the shares went down by 20%. Kerrisdale delivered a good show, which pushed the share price down by an additional 20%. GSAT management than had their presentation on 9 October. The presentation came in the midst of global sell off and failed to lift the price.

Introduction to Globalstar

Globalstar is the fourth largest global satellite phone company. It has invested over 1 bln into global satellite network. Prior to Kerrisdale attack, it had market value of 5 bln and debt of 700 mln USD. Its annual EBIT is about 20 mln USD.

Since 2004 Globalstar is controlled byThermo Capital Partners, who has around 70% stake in GSAT. Thermo invested over 600 mln USD in Globalstar and Thermo chairman Jay Monroe, is Executive Chairman & Chief Executive Officer at Globalstar.

The current satellite phone business does not justify the GSAT valuation. The whole value of the company may be in its Terrestrial Low Power Service (TLPS) – it is as Kerrisdale puts it “nothing more than one exclusive, licensable Wi-Fi channel”. GSAT is expecting a green light from FCC to execute the project by the end of the year.

Who is right – longs or shorts?

The key question on which the longs and shorts disagree is: is TLPS an asset and if so, what is the value.

The GSAT management and the analysts argue the following:

  1. There is an increasing WIFI congestion in the USA
  2. TLPS is a cost efficient tool to address the issue
  3. TLPS could be very quickly put into operation
  4. TLPS should be attractive for certain big players, such as Google to operate a private WIFI network in the US
  5. TLPS is, therefore, clearly an asset. Odeon Capital in its April research listed six valuation methods to value TLPS, which generated a range of $3.38 to $10.19. Based on this they assigned buy rating with $5 price target.

Kerrisdale clearly argues that TLPS is not an asset, and even if it were, it would have a zero value. Their arguments can be simplified to four basic propositions:

  1. Nobody has ever made money in satellite communications and GSAT would not either.
  2. Nobody would pay for GSAT product.
  3. The TLPS 2.4 GHz is an obsolete technology due to arrival of 5 GHz technology.
  4. The network that GSAT is building has zero value mainly because it would be too costly to build.

After listening to all webcasts and reading all the research, my view on Kerrisdale arguments is:

  1. It might be true that others did not make money. On the other hand GSAT is coming up with a different business proposition – a new product (TLPS) that has never been available before. I would, therefore, be reluctant to put too much value on those past records.
  2. The idea, that nobody would pay for GSAT product is a key theme for Kerrisdale. They believe that WIFI is free in the US and therefore why would anybody pay for WIFI on TLPS. I counted at least 20 times they said this during the presentation. My experience is that there is nothing free in life. I do not know anybody, who would have a free WIFI. You always pay, directly or indirectly.
  3. They claim TLPS 2.4 GHz is an obsolete technology due to arrival of 5 GHz technology. The management argues that 5 GHz is a poor substitute for 2.4 GHz because it falls off faster and is more easily obstructed, making it more expensive than 2.4 GHz to cover a given area. The same view is shared by analysts covering the stock. SA discourages contributors to use strong judgments in the articles. I can, therefore, only state, that this is a good example of „inaccurate information” Kerrisdale is trying to present.
  4. They also claim TLPS network would have a zero value because it would be too costly to build. Kerrisdale put up a back of the envelope calculation, which comes to 3.5 trillion USD. A subsequent analyst report by Odeon Capital puts the construction costs at a small fraction of this. As an example Odean provides a calculation that it would costs only USD 50 mln to set up the system in the whole New York.

The Kerrisdale presentation was best summarized by Dan Wise from Credit Suisse, who wrote in his report: “We believe Kerrisdale’s short thesis to essentially be a collection of half-truths, apples-to-oranges examples and red herrings”.

Stock promotion vs. stock manipulation

Kerrisdale is asserting that GSAT valuation is a result of stock promotion – they call it a bubble that they want to burst and make money on this. That would be ok, but I am not sure if the way they went for it is legal. The way Kerrisdale marketed the „leaked story” looked like to me as a share manipulation. SEC is getting sensitive about such issues. The Securities and Exchange Commission’s thesis in the Herbalife insider-trading case was precisely that: That Bill Ackman’s plans to announce his short constituted material nonpublic information, even though he had no nonpublic information about Herbalife. The SEC calls it market-moving information. Market moving information must be handled with care. I am not sure, if the Kerrisdale actions met such standard. I am sure SEC will be looking at this. I did file a motion to SEC to do so, and I am sure many others did too.

Another interesting fact is the timing of Kerrisdale attack. Jay Monroe is the controlling shareholder and has been buying GSAT share during 2014. As mentioned before Kerrisdale timed the announcement to happen during the blackout period, when Monroe is prevented from buying the shares. It just shows how Kerrisdale is trying hard to achieve its mission. On the call Jay Monroe already indicated, that he would be buying more shares if they stay in the current level after the blackout expires.


There will be several catalysts that should help to lift up the GSAT share price:

  1. Insider purchases – Jay Monroe indicated on the call that he might buy more shares when the blackout period expires on 13 November. He has been buying GSAT shares during 2014 at higher prices. This should help the stock
  2. FCC ruling on TMPS – GSAT claims that the ruling is eminent, and they expect this ruling by the end of the year. Again this should be helpful for GSAT share price.
  3. Partner announcement – GSAT has stated that it is in discussions with several potential partners on the development of TMPS. After the FCC ruling on TMPS announcement of a partnership could be expected.


After listening to Kerrisdale and management webcasts and reading subsequent analyst’s reports, I believe that Kerrisdale short theses fail on common sense grounds. I am sure its actions will be subject of SEC review as Pershing´s actions on Herbalife were. GSAT shares are 50% down since the attack begun two weeks ago. I expect rerating plus further upside after the catalysts materialize. Pity we can not short Kerrisdale.

Fondul Proprietatea aims to buyback 50% of daily volumes to drive up the price

Romanian energy fund Fondul Proprietatea announced that it started its 4th buyback round on 1 October. This time the fund aims to buyback 990 million shares, which represents 8% of the capital. With current daily volumes of around 15 million shares, the buyback represents about three months of trading volumes.

In the previous buyback rounds Fondul was allowed to buyback 25% of daily trading volumes. I spoke to the brokers, and Fondul was actually buying these volumes. For the 4the round Fondul got permission to buyback up to 50% of daily volumes. This is very significant buyback by any measure that should drive up the Fondul price.

Franklin Templeton that manages the fund has a strong motivation to drive up the Fondul price. In September shareholders passed a resolution based on which the fund manager 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. Looks like the Templeton is working hard to achieve this mission.

Long Getinge – profit from panic

Best time to buy is when people run. Good example is Getinge, a Swedish medical devices company. The company has a good track record – strong medical devices brand, good organic and acquisition growth.

On March 7 the company reported a profit warning. The warning was affected by the FDA inspection findings that raised issues with company’s quality management systems in certain production facilities. The company announced that it has retained consultants to remedy the situation and that the associated costs would amount SEK 125 mil (USD 20 mil) per quarter for a period of six to seven quarters. These costs will cause approximately 10% reduction in EBITA. The company also announced the work will not affect organic sales growth, as the issues are related to quality control system not production problems.

The result: the company shares went down by 27% from 236 to 172 SEK, wiping out USD 2.1 bln of its valuation.

If one believes the company that there should not be material production and brand perception distortions, and the total costs to remedy the situation will amount to USD 120 – 140 mil spread over 6 -7 quarters, than the valuation drop of USD 2.1 bln is not justified.

The reason for the drop was investor concern whether the company is not underestimating the issues raised by FDA.

In this I found very helpful research by Michael Jungling of Morgan Stanley. Under the Freedom of Information Act They requested from US FDA details of the inspections. They obtained two forms from two inspections from US and German facilities. In both cases the FDA issues relate primarily to administrative matters and not production quality issues. Specifically he mentions the following examples:

1. Corrective and preventive action and/or results have not been adequately documented

2. Procedures have not been adequately established to control product that does not conform to specific requirements

3. Procedures that define the responsibility for review and the authority for the disposition of nonconforming product have not been adequately established

I believe this is comforting despite the fact that not all forms have been obtained and reviewed.

The next big event for Getinge was supposed to be the Investor Day on May 27. The company was planning to announce its 2014 financial targets (Getinge already announced on 16 April its 2014 full year organic revenue growth of 4.3% beating consensus of 3.8%, but did not announce details on estimated profitability). It also stated that it would provide more information on its costs efficiency program that was “deemed to be highly favourable”. One week before the investor day the company postponed the event till the FDA situtaion is clarified. The share price was recovering towards the investor day, but went down to low 170s after this announcement.

I believe there are two FDA outcomes: (i) fine, (ii) temporary production disruption. If the FDA situtaion would require production closures, it would have already happened. I therefore see production clousures risk as low. The question is how big the fine might be. It is hard to estimate the fine, however it is hard to imagine, that it could be anywehere the 2.1 bln loss in mkt value the company suffered. If the fine is deemed not high enough we can expect the surge in Getinge share price. Such move than might be reinforced be the cost savings announcement that the company already promissed to the investors. The share price is still 21% down from the pre FDA announcement levels. The next event is the 16/10/2014 when Getinge is scheduled to report the results. It is quite possible that the date might bring some good news for Getinge investors.

Disclosure: I am long GNGBF.

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