DDF - DEX: Pleasant Tender Offering Results

Summary

• Quick run-down of DEX's tender offer results.
• Fewer shareholders than expected tendered their shares, resulting in a generous pro-ration factor.
• Why it pays to keep track of CEF corporate actions like this.

Author's note: This article was released as part of the CEF Weekly Roundup on February 15, 2023.

DEX tender offer results

Delaware Enhanced Global Dividend & Income Fund ( DEX ), a global stock/fixed income closed-end fund, recently announced the results of their tender offer. We discussed this when it was first announced in a previous CEF Weekly Roundup .

From the press release:

PHILADELPHIA--( BUSINESS WIRE )--Today, Delaware Enhanced Global Dividend and Income Fund (the “Fund”), a New York Stock Exchange–listed closed-end fund trading under the symbol “DEX,” announced the final results of its tender offer for up to 3,186,291 of its common shares (“Common Shares”), representing up to thirty percent of its issued and outstanding Common Shares, without par value. The offer expired at 5:00 p.m., New York City time, on Friday, February 10, 2023. Based on a count by Computershare Trust Company, N.A., the depositary for the tender offer, approximately 4,212,892 Common Shares, or approximately 39.67% of the Fund’s Common Shares outstanding, were tendered. The Fund has accepted 3,186,291 shares (subject to adjustment for fractional shares) for cash payment at a price equal to $8.89 per share. This purchase price is 98% of the Fund’s net asset value per share of $9.07 as of the close of regular trading on the New York Stock Exchange on February 13, 2023, the pricing date stated in the Offer to Purchase. Under final pro-ration, 75.64% of the Common Shares tendered will be accepted for payment, subject to adjustment for fractional shares. Following the purchase of the tendered shares, the Fund will have approximately 7,434,680 Common Shares outstanding.

This was a tender offer for 30% of shares at 98% of NAV. As we discussed previously, such generous tender offers are rarely willingly volunteered by CEF managers, as it leads to an immediate decrease of AUM and fee income. Instead, the tender offer was a deal that DEX's managers made with activist investors, Bulldog Investors (headed by Philip Goldstein), in order to push through the merger of DEX into abrdn Global Dynamic Dividend Fund ( AGD ).

As we discussed previously:

Some of proposed mergers between Delaware's CEFs into the abrdn CEFs had been stymied by the lack of participation of shareholders in those funds. Although the mergers had been approved by the boards of both the acquiring and acquired funds, shareholders from both sides need to approve the merger for them to take place. In order to get the activists on their side and push the vote through, the managers of DEX and Bulldog have struck a deal to conduct a tender offer for 30% of their shares at 98% NAV, that is contingent on shareholder approval of the merger. As part of the deal, Bulldog has agreed to certain standstill conditions , such as voting for the merger and also refrain from engaging in further activist activity against the fund.

It pays to pay attention to CEF corporate actions!

To take advantage of the upcoming tender offer and piggyback on Bulldog's efforts, we purchased a position of DEX in our Tactical Income-100 portfolio last month at $8.43 when the fund's discount was -7.44%.

The repurchase price will be 98% of the fund's closing NAV per share on February 13, 2023 i.e. 98% of $9.07, or $8.89. This will therefore give us an instant profit of +5.46% on the tendered shares.

However, while participating in tender offers might seem like "free money", there is a significant risk. That is, if more shareholders tender their shares than the fund will accept for repurchase, each shareholder will have their subscription pro-rated. The excess shares that are not accepted for repurchase by the fund will therefore be returned to the shareholders. At this point, the shares will likely sell off because the shares are less valuable without the tender condition attached. Thus, a higher pro-ration factor is beneficial when taking part in tender offers.

What this effectively means is that the fewer the people who know about the tender offer, the better the results are for everyone else! In the case of the DEX tender offer, only 39.67% of shareholders tendered their shares, which was an even better result than I expected (my base case is to assume that 50% of shareholders tender). This is expected to lead to a generous pro-ration factor of 75.64%.

Thus, while the majority (75.64%) of our DEX shares were tendered for a gain of $0.46 per share (+5.46%), or $0.50 (+5.93%) if January's distribution is included, this should be balanced by the fact that the remaining minority (24.36%) of unaccepted shares will likely see a small loss. As of writing (on February 15, 2023), DEX is trading at $8.30 so we are currently down -$0.13 per share (-1.5%) on the unaccepted shares, or -$0.08 (-0.95%) if January's distribution is included. Overall, an excellent result for this trade. On the other hand, the 60% or so DEX shareholders who did not tender their shares simply left money on the table. Which, as I mentioned earlier, is great for those who did tender. This is why it literally pays to pay attention to CEF corporate actions such as tender offers.

As an aside, the fact that the shares are repurchased by the fund at 98% of NAV (rather than 100%) means that there is a small accretion to the NAV/share of the fund as well as a result of the tender offer, which is a nice bonus to remaining shareholders. I estimate this NAV accretion to be around +0.86%.

Going forward

As we expected, after the tender offer expired DEX's discount quickly converged to the discounts of the acquiring fund AGD as well as Delaware Investments Dividend & Income Fund ( DDF ), which is also being acquired by AGD. This is because the impending merger (slated to take place on March 10, 2023) will be on a NAV-for-NAV basis. Thus, any significant deviations in the premium/discount valuation of the three funds could be potentially exploited by purchasing the cheapest fund of the three (and optionally hedged by shorting the more expensive funds).

The below table is from our Corporate Actions Tracker tool from our members section of the Income Lab which updates in real-time. As can be seen, DEX and DDF's discounts are within 0.21% of AGD's, so currently the arbitrage opportunity is slim.

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