Paul Singer Hidden Gem – How To Make A Quick Buck by Jan Martínek

Fondul Proprietatea, the largest closed end fund in the world, has been under pressure from activist investors. The largest shareholder in this Romanian energy 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 in 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.

Paul Singer

 

Franklin Templeton’s strategy to increase Fondul Proprietatea’s share price

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 a 6th buyback round 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 purchase600,000,000 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

 

Paul Singer’s hidden gem: Fondul Proprietatea’s share price gains with tender offer announcement

The current tender offer was announced on October 20th, 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 the magnitude of the share price growth may differ. If the situation would repeat again, there is still 15% on the table. Not bad for two months return. Taking into account the other planned activities (buyback and London listing), it seems very likely that Templeton will achieve its mission and will be able to retain the management contract.

In his Q3 letter – Paul Singer provided an update to investors about Fondul, stating:

The price of Fondul Proprietatea, a closed-end fund listed on the Romanian stock  exchange, rose during the quarter, accompanied by a narrowing of its discount to net  asset value from 32% to 25%. In early July, the fund completed a significant asset disposal, generating additional cash for deployment toward share buybacks and other  distributions to shareholders. The partial return of the shares’ nominal value to each  shareholder was paid, as expected, in late July. The fund completed its third share  buyback program during the quarter and launched a larger fourth program in late  September. The fund manager also announced that a tender buyback would be considered  in order to accelerate this fourth buyback program. In addition, a resolution proposing a  fifth program was included on the agenda of a shareholders’ meeting to be held in  November.
In other developments, the fund manager recently held discussions with its  local regulator concerning modifications to current regulations necessary to permit the  secondary listing of the fund on the London Stock Exchange, which has already received  shareholder approval. Finally, a new two-year management contract for the fund manager became effective September 30, which formally incorporated a target discount to net  asset value of 15% as proposed by Elliott.