CEN - CEN Proposes Merger Into An Open-Ended Fund: Yes Or No?

2023-05-07 09:35:41 ET

Summary

• CEN proposes merger into an open-ended fund.
• Discount has widened back out after the initial pop, will the merger be approved?
• Inviting CEN shareholders to share their opinions on the deal.

Author's note: This article was released to members of CEF/ETF Income Laboratory as part of the CEF Weekly Roundups on April 4, 2023, with certain numbers updated. Please check the latest data before investing.

CEN proposes merger into an open-ended fund

Center Coast Brookfield MLP & Energy Infrastructure Fund ( CEN ) has proposed a merger with the open-ended fund, Center Coast Brookfield Midstream Focus Fund ( CCCAX ) ( CCCNX ) (the “Focus Fund”).

From the press release:

March 30, 2023 | Center Coast Brookfield MLP & Energy Infrastructure Fund Announces Planned Reorganization . Center Coast Brookfield MLP & Energy Infrastructure Fund announced today that its Board of Trustees approved a proposal by Brookfield Public Securities Group LLC (“PSG”), the investment adviser of CEN, to reorganize CEN into Center Coast Brookfield Midstream Focus Fund (the “Focus Fund”) (the reorganization of CEN into the Focus Fund is the “Reorganization”). The Board of Trustees that oversees the Focus Fund also approved the Reorganization. The Focus Fund is an open-end fund that is a series of Brookfield Investment Funds, which is also managed by PSG using a similar investment strategy. After careful consideration of a variety of factors and alternatives, the Board of Trustees of CEN (the “Board”) determined that it would be in the best interest of shareholders to merge CEN into the Focus Fund. As stated in a press release issued on August 1, 2022, PSG, in collaboration with the Board, has evaluated various strategic options for CEN seeking to advance and maximize shareholder value, including, without limitation, reorganization opportunities with third parties, and strategic portfolio repositioning, including a potential sale of all or part of CEN’s holding in KKR Eagle Co-Invest LP (“KKR Eagle”). Following an extensive process with a strategic advisor regarding potential sale opportunities for KKR Eagle, PSG has signed a purchase and sale agreement to sell CEN’s interests in KKR Eagle. The sale of CEN’s interests in KKR Eagle is expected to close tomorrow, March 31, 2023. The proposal to reorganize CEN into the Focus Fund will require the approval of CEN shareholders. A special meeting of shareholders of CEN (the “Special Meeting”) is expected to be held in the third quarter of 2023 to consider the proposed Reorganization. Following a constructive dialogue, PSG, CEN and Saba Capital Management, L.P. (“Saba”), CEN’s largest shareholder, have entered into an agreement whereby Saba, on behalf of itself and other entities or accounts that it manages, has agreed to vote its shares in favor of the Reorganization. Subject to CEN shareholder approval at the Special Meeting, shareholders of CEN will be issued shares of the Focus Fund the aggregate net asset value of which will equal the aggregate net asset value (not the market value) of the common shares of CEN held immediately prior to the Reorganization. The Board has recommended that the shareholders of CEN approve the Reorganization and related proposals at the Special Meeting. The Board believes the proposed Reorganization is in the best interest of shareholders of CEN.

This will be a NAV-for-NAV exchange, thus the merger will cause CEN's discount to be eliminated. As expected, CEN popped on news of the announcement, with the discount narrowing from -12.27% to -3.51% in a single day. Note that the merger requires the approval of CEN shareholders.

Therefore, it makes sense for the managers to close the chapter on this relatively small CEF (with only $98 million in assets) by merging into the larger mutual fund Center Coast Brookfield Midstream Focus Fund (with a combined $891 million in assets across all share classes). This will also lead to a reduction in expenses for CEN shareholders, as the mutual fund charges 1.46% in net expense ratio, compared to 1.95% for CEN.

One issue that could have been a potential roadblock to the merger is CEN's interest in KKR Eagle Co-Invest LP, which represented a massive 35.2% of its total assets.

It turns out that CEN may have found a solution to dispose of this position, as noted in the press release announcing the merger approval.

Following an extensive process with a strategic advisor regarding potential sale opportunities for KKR Eagle, PSG has signed a purchase and sale agreement to sell CEN’s interests in KKR Eagle. The sale of CEN’s interests in KKR Eagle is expected to close tomorrow, March 31, 2023.

Looking at the NAV between March 31, 2023 ($19.95) and April 3, 2023 ($20.12) shows a +0.85% daily NAV gain, compared to +2.04% for the benchmark AMLP, suggesting that the KKR Eagle Co-Invest LP asset was sold at or near the NAV that was marked on CEN's balance sheet. This is a good thing for CEN shareholders.

The merger requires the approval of CEN shareholders, and a special meeting will be held in the third quarter of 2023 to vote on the merger. It is also interesting to consider how big of a role Saba Capital Management played in pushing for the reorganization this time around. Saba only owns a relatively small 3.43% stake in CEN (worth $20.8M), and the last time that they added to their position was reported last August. If the merger was due to Saba's instigations, then this was truly a long time coming, with the first 13D filing (indicating active intent) filed by Saba all the way back on October 29, 2021 .

Nevertheless, Saba has entered into an agreement with the fund managers to vote for the reorganization, as noted in the press release.

But will the merger go through? This one is a difficult one to call because institutions only own around 6% of total outstanding shares. Getting sufficient retail investors to vote may be a real challenge here. Moreover, Saba has been continuously selling their CEN shares since the merge approval, with their stake dropping from 1,202,730 shares before the announcement down from 1,028,885 shares in less than a month.

CEN's discount narrowed to -3.51% on the day of the announcement, but has since drifted lower to -7.69%, possibly due to skepticism about the prospects of merger approval. For those who are confident that the merger will be approved, can continue holding CEN to reap the current discount gap when the merger goes through.

For those who consider the merger unlikely, they might wish to take the gains off the table and instead redeploy their funds into a more discounted MLP/midstream CEF, such as Tortoise Energy Infrastructure ( TYG ) at a -18.88% discount and 10.12% yield, or the aforementioned FIF (-15.44% discount, 8.63% yield) or FPL (-15.79% discount, 7.81% yield), which are all positions in our Tactical Income-100 portfolio.

I would like to invite CEN shareholders to share their opinions on this deal in the comments section below. Yes or no?

For further details see: