DEX - EXD: Merger Arbitrage Opportunity

Summary

• Eaton Vance Tax-Managed Buy-Write Strategy Fund is set to be merged into its larger sister fund Eaton Vance Tax-Managed Buy-Write Opportunities Fund.
• The merger is still subject to shareholder approval.
• The two CEFs now exhibit significantly diverging premiums to NAV.
• A retail investor can now monetize the difference and the view that the merger will occur.
• This article covers CEFs.

Thesis

We recently wrote about the merger proposal between Eaton Vance Tax-Managed Buy-Write Strategy Fund ( EXD ) and Eaton Vance Tax-Managed Buy-Write Opportunities Fund ( ETV ). ETV is the larger, better-known name with an impressive track record. While the merger was approved by the board of trustees for the two funds, it still awaits shareholder approval:

The proposed merger is subject to approval by Acquired Fund shareholders at a Special Meeting of Shareholders scheduled for Thursday, February 2, 2023. A proxy statement/prospectus containing information about the meeting and the proposed merger will be mailed to the Acquired Fund's shareholders of record as of November 21, 2022. No action is needed by shareholders of the Acquiring Fund. Each Fund is a diversified closed-end management investment company sponsored and managed by Eaton Vance Management. Each Fund is listed on the New York Stock Exchange.

We believe the merger will go through, irrespective of the initial vote. We have seen this with the Delaware/Macquarie funds, where the ( DEX ) shareholders did not originally approve the merger. After share repurchases and negotiations, the vote went through. It is most likely going to happen for EXD as well, given the large fund family set-up by Eaton and small AUM and lack of a brand for EXD.

An interesting situation has developed on the latest market moves, specifically on broad-based tech weakness. The section below goes into detail in outlining the current merger arbitrage opportunity when looking at EXD and ETV.

Premium to NAV Performance

On the back of significant Tech weakness, ETV has now started to trade at a discount to NAV:

We have not seen this type of behavior from this CEF since the Covid crash. We did warn investors here that the fund was historically overpriced, and we were expecting a narrowing of the premium:

ETV is a premier buy-write fund from the Eaton Vance family. The CEF has extraordinary long-term results which make it a core holding for us. However, the particularities of the CEF structure allow for premiums to net asset values. The premium to NAV for ETV has reached a decade-long high on the back of investors' desire to monetize a high VIX level. Just like in 2021 with high yield CEFs, premiums to NAV always revert to historic norms. We feel this is the case for ETV as well and we are trimming some of our exposure to monetize this historic high premium to NAV.

EXD, however, has not exhibited the same behavior:

This setup results in a merger arbitrage opportunity. If one believes the merger will go through (and we do), then you can pick up almost 6% by trading out of EXD and into ETV. Next year, they will become the same fund once the merger goes through, and an investor can pick up basically the same risk at a discount to NAV.

The two funds saw their premiums to NAV converge in the beginning of November when the announcement came out. They have now diverged significantly. The market is basically telling us it is doubting the merger is going through, and it is rewarding EXD for its portfolio set-up, which is less technology oriented when compared to ETV's.

What we strongly believe is that fund managers have a significant amount of tools at their disposal to appease shareholders if need be. If the large holders in EXD demand certain corporate actions in order to vote for the merger, they will probably get them. Once the merger has been put forward by the management teams, and it makes sense (a larger fund with a mint track record absorbing a much smaller one) it will ultimately happen in our opinion.

Conclusion

Eaton Vance Tax-Managed Buy-Write Strategy Fund and Eaton Vance Tax-Managed Buy-Write Opportunities Fund are two equity buy-write funds from the Eaton Vance family. ETV is the much larger and better-known fund and is set to absorb EXD next year, contingent on shareholder approval. We believe that the approval by the board of trustees foreshadows the management team's desire to get the corporate action through, and it will ultimately occur. If one views the merger as happening, then the two funds now run virtually the same pool of risk. ETV, however, has moved to a discount to net asset value, while EXD is still trading at a premium. ETV's move is explained by its technology focus, while EXD has less of a concentration to that sector. An investor looking for exposure to EXD can now obtain it at a 6% discount (the difference in premiums between the two CEFs) just by purchasing ETV.

For further details see: