BRW - I'm Buying Some GIM To Jump On The Saba Bandwagon

2023-10-09 09:16:06 ET

Summary

• Activist group Saba recently took over Templeton Global Income Fund (GIM), so I'm buying some too to jump on the bandwagon.
• Saba will likely force the fund to conduct a tender offer, allowing shareholders to sell some of their shares at an above-market price.
• Other institutional investors must want to get into the action, as 74% of the fund is now institutionally owned.
• Shareholders who take advantage of tender offers generally benefit at the expense of shareholders who don't.

Readers may have seen that the activist group, Saba, has taken over Templeton Global Income Fund (GIM), which has been a bit of a laggard in recent years in terms of both performance and pricing (currently a 9% discount).

What activists often do when they take over a poorly performing and/or highly discounted fund is to do a tender offer, where the fund offers to buy back some of its shares at an above market price. Every shareholder has an equal chance to sell a pro rata portion of its shares at the tender offer price, but many or most don't bother to do so. This allows those shareholders savvy enough to take advantage of the tender offer to get more than their own "pro rata" share of its benefits, since there is usually a provision that says if the maximum amount of the tender offer is not fully utilized by shareholders tendering their pro rata amounts, the excess (i.e., unexercised portion) can be taken up by shareholders willing to tender more than their pro rata portion. Here's an article that explains tender offers in general.

Shareholders can tender (i.e., offer to sell pursuant to the tender offer) as many of their shares as they want to (up to 100%), but the fund is only obligated to buy back the stated maximum. So if every shareholder tendered 100% of their shares, the tender percentage limit (the 10 or 20%) would be allocated pro rata among the tenders received, and each shareholder would get to sell whatever the tender maximum was - i.e. the 10% or 20% - and no particular shareholder would have an advantage.

In theory, such an offer is fair to all, since every shareholder is offered the chance to do it. And if every shareholder took up the offer and tendered the same percentage of their shares, there would be no diminution of value and every shareholder would get a little more money for giving up some of their shares than they would have gotten if they sold them in the market. No shareholder would have gotten a special deal at the expense of any other shareholder.

But activists are hoping and expecting to do better than that. They know that most closed-end fund investors are not professional traders, and that they buy funds for long-term income. They know many of those investors don't really pay a lot of attention to SEC reports and notices, as tender offers with a lot of fine print. So they hope that many or even most shareholders won't pay attention to or participate in these tender offers.

That means the unused portion of the tender offer (whatever it is, 10%, 20%, etc.) that doesn't get taken up by shareholders is thrown back in the pot and available for other shareholders to use. So if some of the shareholders tender most or all of their shares and others tender none, those tendering their shares will get to sell more than their proportionate number of shares at the advantaged price.

Of course, the "advantage" the tendering shareholders get (i.e., the loss the fund itself takes by buying in its own shares for more than they'd have to pay on the open market) comes at the expense of the fund itself. In other words, at the expense of the other shareholders who did not tender their shares.

It can get pretty one-sided if a relatively few more sophisticated holders tender all their shares and a lot of other shareholders tender few or none of their shares. The shareholders who tender all their shares will get a much higher percentage of the total shares allocated for tender than shareholders who only put up a smaller percentage or none of their shares. The shareholders who participate less or not at all in the tender, of course, are left holding the bag so to speak, in that the shares they own are worth less because the fund has paid out a premium price to pay certain shareholders more for their tendered shares than the shares are worth on the open market.

So if you want to get your "fair share" of a tender offer and protect yourself from having other, more aggressive shareholders get more than their proportionate share of the advantages of the tender offer, you should tender 100% of your shares. Obviously, you won't end up selling all your shares, but you'll get the maximum you are entitled to and avoid being among the shareholders who tendered none and end up being stuck with a disproportionate share of the fund's losses from buying in its own shares at a price above market.

If we managed to educate the entire CEF community about this, so every shareholder tendered the shares they owned, activist funds would have less incentive to be as aggressive as they are. That probably won't happen, but in the meantime, we should be vigilant and protect and exercise our own rights.

In the meantime, I plan to buy some shares of GIM, as a speculation, in order to ride the coattails of Saba as they follow through on their takeover program (and collect a 9% yield while waiting around). We should find out in future weeks whether the fund actually will do a tender, since nothing is ever assured. I'm not alone, as the institutional ownership in GIM is now about 74%, with Saba apparently having sold some of its original 37% pieces but still owning about 30%. Whatever you think of activists, I've read a good bit about Boaz Weinstein, Saba's owner/principal, and seen him in some recent interviews; besides his hugely successful investment record, he sounds very much like he knows what he's doing. We already own one of his other funds, Saba Capital Income & Opportunities (BRW).

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