Fondul Proprietatea: 4th Buyback on The Way

Another positive news from Fondul Proprietatea, the Romanian energy fund that is under pressure from activist investor Paul SingerThe Elliot Associates managed by Singer is the largest investor in Fondul with 15.22% stake.

The local FSA has approved the changes to the Fund’s share capital after the cancellation of the 1.1bn shares bought in the second buyback programme. The cancellation opens the way for the fourth buyback programme in which the fund aims to buyback 990 million shares (8% of the shares). The fund manager said the buyback would start over the coming days. Accelerated buyback is also under consideration. At the current market price, the buyback would require RON 0.93bn. The Fund held RON 1.26bn on its balance sheet as of the end of August.

As I wrote before, 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.


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PAUL SINGER text book activism

Paul Singer gained fame by pushing Argentina into a default. His activist transactions are worth looking at too. His Romanian venture is a text book case of activist investing that generates return for all shareholders.

Elliot Associates is the largest investor in a Romanian USD 4.4 bln. energy fund Fondul Proprietatea. The fund was created to compensate Romanians whose assets were seized under communism. The fund holds minority stakes in Romanian energy companies, some of which are unlisted. The fund is managed by Franklin Templeton. Elliot Associates is the largest shareholder with 15.2% stake valued over 600 mil. USD. It is Elliot´s third largest equity position.

Since its listing on Bucharest stock exchange in January 2011 the fund has been trading at a discount to its Net Assets Value (NAV). The discount has been narrowing, just in the last 12 months by 37%. In addition the fund pays annual dividends of around 7-8%.

Paul Singer has a team of lawyers in Romanian that pushes Templeton into concrete steps to reduce the NAV discount. The fund has just completed 3rd round of buyback in which it purchased 10% of its outstanding shares. The unlisted portfolio decreased by half during the last two years.

This week the shareholders led by Elliot agreed to extend the management contract for Templeton by additional two years. The new contract includes criteria that has to be met for Templeton to continue managing the fund. The most important one is to decrease the NAV discount to 15% (from current 27%) in two thirds of trading sessions between October 1, 2014 and June 30, 2015.

Templeton is waiting for Romanian financial regulator to approve the concrete steps to achieve the mission, namely the secondary London listing (scheduled for October) to broaden the investor universe and 4th round of buyback in which the fund will buy 7.3% of its shares.

Templeton expects further gains could come from IPO of power producers Hydroelectrica, Oltenia, port of Constanca and Bucharest airport all scheduled for 2015. Fondul is also negotiating to sell stakes in two electricity distribution companies to local power producer and distributor Electrica.

Local media speculate that Fondul has retained Goldman Sachs and Erste bank to find buyers for the OMV Petrom stake, which represents 35% of the fund´s NAV.

If the above transactions materialize, the fund cash balance should increase from 8% by 20%-40%. This would allow Templeton to finance further buyback or possibly convert the closed end fund into open ended, which would immediately allow the investors to realize the NAV discount.

All the above steps should contribute to narrowing the discount. If this happens investors will make additional 40%. Not bad, given the fact that Paul Singer is doing all the work.

FONDUL PROPRIETATEA BUYBACK ACCELARATION?

Swiss capital just reported:

* Local media mentions FP RO may sell its entire 19% stake in OMV Petrom (SNP RO) in the next few days according to uncited sources, local news website economica.net wrote today.

* FP’s stake in SNP RO is currently valued at EUR 1.1bln (USD 1.4bln), that would be largest deal to date on the Bucharest SE.

* SNP stake represents 35% of FP’s NAV.

Fit Investment Ideas comment:

I do not doubt that if this is correct than it is a result of Paul Singer´s Elliot Associates activst preassure on Templeton.

At the moment Fondul has 8% of NAV in cash. If this rumor is right the cash would go to 43% of NAV. This would mean significant buyback acceleration. Personally I believe such large transaction is unlikely. Selling “only” half of the OMV Petrom stake would leave Fondul with 25% of its NAV in cash. At current NAV discount it would allow Fondul to buy back close to 35% of outstanding shares at current prices. If correct I would expect significant rerating in the FP.

Yesterday Elliot Associates announced, that it has increased their stake by 26 mn shares in FP. It is a first purchase in many months. It might be an indication that something may be happening.

Hidden Gem in Paul Singer Portfolio

Summary:

  • Investment sites that follow Paul Singer´s portfolio include only US listed securities. One of his largest positions therefore remains unnoticed.
  • Elliot Associates owns 15.2% stake in Romanian restitution fund Fondul Proprietatea. Market value of the position is 550 mil USD.
  • Fondul is the third largest (after HES and put on IWX) position in Elliot Associates´ portfolio.

 

Introduction to Fondul

The fund was created by the Romanian state to reimburse Romanian citizens for the assets that were taken from them by the communist regime. Since 2010 the fund is managed by Franklin Templeton and since 2011 the fund is listed on Bucharest Stock Exchange.

The fund is 85% invested in Romanian energy companies. The latest NAV of the fund is 1.25 Ron while the shares of the fund trade 0.85 Ron, which represents 32% discount to NAV. Since the listing the discount has been narrowing. In the last 12 months Paul Singer recorded USD gain of 47% on this investment and collected 7% dividend.

There are two main reasons for the NAV discount:

  • Romanian citizens are gradually exiting from the fund and foreigners are buying. The oversupply of shares has been eliminated and this is reflected in the recent share price performance
  • Substantial 42% of the portfolio is not listed

Why the fund will make you money

Portfolio restructuring – As stated above the unlisted equities represent 42% of the portfolio. The largest unlised postion is a stake in Hydroelectrica, which accounts for 14% of the NAV of the fund. The government plans to IPO Hydroelectrica in early 2015. The remainder of the unlisted securities represents stakes in local electricity distribution companies. Most of them already have foreign majority owners. Fondul has retained investment banks to advice on sale of those stakes. The goal of the fund is to exit from those investments by the end of 2015. This means that by the end of 2015 most of Fundul assets will be listed equities and cash.

Active buybacks – Elliot Associates is very active in Fondul. Elliot has a team of lawyers in Romania that pushes Templeton into active steps to narrow the NAV discount. Fondul is very actively buying back its own shares. On the top of the buyback the fund is paying out 7-8% dividends pa.

London listing in September – to broaden the investor universe Templeton is making steps to list the fund on LSE. The listing is scheduled for September.

Romainan economy strong – the fund owns only energy companies. Energy companies are proxy to Romanian economy. Romania has been one of the best performin EU countries, growing at 3.5% in 2013. In 2013 the good macro situation was reflected on the performance of the companies in Fondul portfolio causing Fondul to report the best dividend income ever.

Investors follow Paul Singer activities. It would be a mistake to neglect this one.

 

http://fondulproprietatea.ro/sites/default/files/fp_june_2014_factsheet.pdf

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