KMF - KYN And KMF Proposed Merger: Yes Or No?

2023-05-05 17:21:52 ET

Summary

• Kayne Anderson Energy Infrastructure Fund, KYN, and Kayne Anderson NextGen Energy & Infrastructure, KMF, have proposed a merger.
• The merger requires shareholder approvals.
• Investors will have the ability to redeem KYN shares for cash (subject to pro-ration) instead of KYN shares.
• Inviting KMF and KYN 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 2, 2023 and April 26, 2023. Please check the latest data before investing.

A NAV-for-NAV merger of Kayne Anderson NextGen Energy & Infrastructure ( KMF ) into Kayne Anderson Energy Infrastructure Fund ( KYN ) has been proposed. The boards of both funds have approved the merger but also require shareholder approval of both funds. The shareholder meetings to vote on the merger are scheduled to take place on June 20, 2023 , with a record date of March 27, 2023.

From the press release (excerpts):

KA Fund Advisors, LLC ("Kayne Anderson"), which serves as the investment adviser to Kayne Anderson Energy Infrastructure Fund, Inc. (KYN) and Kayne Anderson NextGen Energy & Infrastructure, Inc. (KMF), today announced that KYN and KMF have entered into a definitive merger agreement to combine the two funds (the "Merger"). Pursuant to this agreement, KMF will be acquired by KYN. The Merger has been unanimously approved by each fund's Board of Directors and is subject to KYN and KMF stockholder approval. Key highlights of the Merger and related transactions include:

• Combined entity positioned to capitalize on favorable industry outlook and navigate current market conditions;
• KMF common stockholders to be issued KYN common stock in NAV-for-NAV exchange;
• Merger expected to qualify as a tax-free reorganization and is not expected to be a taxable event for KYN or KMF stockholders;
• KMF to conduct a tender offer for 15% of its outstanding shares prior to closing of the Merger ¹ ;
• Kayne Anderson agrees to implement new management fee waivers for KYN;
• In a separate announcement earlier today, KYN announced a one cent per share increase to its quarterly distribution rate (raising it to 21 cents per share, representing a 5% increase); and
• KYN management intends to recommend an additional one cent per share increase to KYN's quarterly distribution rate (raising it to 22 cents per share, representing a cumulative 10% increase) once the Merger is completed.

Because KMF was trading at around at a mild discount to KYN before the announcement, its share price popped by +7% on the day of the announcement. KMF's discount has now moved to be very close to KYN's, so there's currently no arbitrage potential.

While the activist Saba Capital Management does have a sizable stake in KMF, it is unclear whether they exerted any direct pressure to institute this merger because the press release makes no mention of any agreement made with Saba as part of the proposals.

Possibly, the Kayne Anderson managers have proactively instituted this merger to help protect the smaller KMF ($424 million assets under management, or AUM) by rolling it into the much larger KYN ($1,380 million AUM). Saba's stake in the combined fund would be much lower, making it harder for it to sway shareholder decisions compared to its current influence on KMF alone. However, any private discussion between Kayne Anderson and Saba cannot be ruled out.

KYN tender replaced with cash exchange

To help sweeten the deal, KMF originally planned to conduct a tender offer for 15% of its shares at 95% of NAV, but only if the merger is approved by both KMF and KYN shareholders. This would have been a good deal for KMF holders but is neutral for KYN shareholders.

However, we have recently learned that the proposed tender offer to repurchase 15% of KMF shares at 95% of NAV has been replaced by the ability for KMF shareholders to elect to redeem their shares for cash at 95% of NAV, in lieu of receiving shares of KYN. However, the maximum number of KMF shares to be redeemed will be 15% of total outstanding shares.

This change in my view is neutral as the ability to redeem KMF shares as part of the merger event is the same as if it were to be conducted in a separate tender offer. Both the discount to NAV (5%) and the total proportion of KMF shares to be redeemed (15%) remains the same. Moreover, both the original and the revised mergers require approval from both KMF and KYN shareholders.

One possible benefit is that it simplifies the overall merger by reducing one standalone event, possibly resulting in the lowering of such expenses along the way.

Distribution boost and fee reduction

To also entice KYN shareholders to vote for the merger, KYN is immediately raising its distribution by 1 cent to $0.21 (ex-date April 6, 2023), representing a +5.0% increase, and proposes to further increase its distribution by another 1 cent to $0.22 (+4.8%) if the merger is approved.

Moreover, if the merger is completed, "Kayne Anderson has agreed to revise its management fee waiver agreement with KYN to significantly reduce the asset value thresholds for such fee waivers to be applicable," as shown in the table below.

⁴ Initial asset tier for fee waiver of $2.4 billion in this table is illustrative and based on KYN and KMF assets as of February 28, 2023. The actual amount of the first asset tier will be equal to the combined fund's assets at the closing of the Merger.

While it appears initially that the combined AUM for KYN and KMF (currently under $1.8 billion) would put it in the smallest NAV bracket where no fee waiver applies, the cap of the first tier will actually be reset to whatever the combined funds' assets will be at the time of the merger. In order words, if the portfolio starts appreciating the day after the merger, we will immediately enter the second NAV bracket with a 0.125% reduction in management fees.

It will be interesting to see how this merger plays out. Will the sweeteners be enough to convince both KMF and KYN shareholders to vote for the merger? Will Saba play along or will they holdout for further concessions?

I invite KMF and KYN shareholders to share their opinions on this deal in the comments below. Only shareholders of record on March 27, 2023 will be able to vote in the shareholder meeting slated to take place on June 20, 2023, so anyone buying the fund(s) now won't have a say. Yes or no?

For further details see: