FT - TDF: Tender Offer Is Live

2023-12-18 04:45:22 ET

Summary

• Templeton Dragon Fund has commenced an issuer tender offer to purchase up to 25% of its common shares at 98% of NAV.
• The tender offer is a generous one and originates from City of London Investment Management Company instead of the usual activist players.
• CLIM holds a significant stake in TDF and has made a deal with management to secure the tender offer.

The tender offer for Templeton Dragon Fund ( TDF ) is now live. The offering will expire on December 20, 2023 . TDF is an equity closed-end fund focusing on Chinese stocks. Fellow Seeking Alpha author JP Research has done a good job covering the fundamentals of TDF in a recent article . This article focuses on the current tender offer and the potential benefit that investors can obtain from tendering their shares.

From the press release :

Templeton Dragon Fund ((NYSE: TDF)) (the “Fund”), today announced that it has commenced an issuer tender offer to purchase for cash up to 8,451,035 of its common shares, representing 25% of its issued and outstanding common shares. Unless extended, the tender offer will expire at 5:00 p.m., New York City time, on Wednesday, December 20, 2023 (the “Expiration Date”). Subject to various terms and conditions described in offering materials distributed to shareholders: (1) purchases will be made at a price per share equal to 98% of the Fund’s net asset value ((NAV)) per share as of the close of trading on the first business day after the expiration of the offer; and (2) if more shares are tendered than the amount the Board has authorized to purchase, the Fund will purchase the number of shares equal to the offer amount on a prorated basis. Shareholders who choose to participate in the offer can expect payments for shares tendered and accepted to be mailed within approximately five business days after the Expiration Date.

This tender offer is a generous one, at up to 25% of shares at 98% of NAV. Interestingly, this proposal originates from City of London Investment Management Company ("CLIM"), instead of the usual player Saba. Remember, CEF managers don't generally voluntarily offer to redeem their shares because this reduces AUM and consequently decreases fee income for the fund.

CLIM holds a significant stake of 36.20% of all outstanding TDF shares, making them the largest shareholder, followed by Lazard Asset Management with 13.45%. However, Lazard's filing is a 13G, which indicated passive intent.

In a previous interview that I conducted with the CLIM founder Barry Olliff, he explicitly stated that he does not consider the company to be activist investors. Instead, their primary focus, as stated on their company website , is develop CEF strategies for their clients under the strategies of "Emerging Markets", "Developed Markets", "Frontier Markets" and "Opportunistic Value". Their portfolio holdings align with this focus, emphasizing international equities exposure:

Despite CLIM's claim of not being an activist investor, they do have a track record of limited activism various international equity CEFs. We covered one such instance in 2017 during the early days of our service.

This time, it seems that CLIM has made a deal with management to secure the tender offer in TDF in return for abiding with certain standstill covenants with respect to TDF and other Franklin/Templeton funds, namely Templeton Emerging Markets Fund ( EMF ), Templeton Emerging Markets Income Fund ( TEI ), Franklin Universal Trust ( FT ) and Franklin Limited Duration Income Trust ( FTF ). However, the description of the Standstill Agreement filed with the SEC is extremely sparse on details:

CITY OF LONDON INVESTMENT MANAGEMENT COMPANY LIMITED ANNOUNCES STANDSTILL AGREEMENT WITH TEMPLETON DRAGON FUND:

• Templeton Dragon Fund, Inc. ((TDF)) has announced that it will conduct a Tender Offer for 25% of its outstanding shares at 98% of Net Asset Value prior to the end of the calendar year 2023.
• Pursuant to an agreement with TDF, upon commencement of the Tender Offer, City of London Investment Management has agreed to be bound by certain standstill covenants with respect to

Investor strategy

We recently acquired a starter position in TDF in our Tactical Income-100 portfolio, aiming to capitalize on the upcoming tender offer. Unfortunately, Chinese equities markets have struggled over the last couple of weeks and our position is currently down -4.25%. This situation highlights one of the risks associated with participating in tender offers in equity CEFs as opposed to fixed income CEFs. Equity CEFs tend to be more volatile, and as a result, the potential gains from participating in the tender offer could be overshadowed by significant movements in the underlying NAV, whether positive or negative.

Our Corporate Actions Tracker Tool still indicates that the tender strategy for TDF is expected to generate a modest overall alpha through participation. Remember that for all tender offers, the potential gain from the tendered shares should be balanced against the expected loss due to the post-tender drop of the untendered shares, as discussed for a recent tender offer for Templeton Global Income Fund ( GIM ) in a separate article here .

Therefore, we intend to hold onto our TDF position and submit all of our shares for tender. For investors following this trade idea, remember to submit your instruction to tender TDF shares to your broker a few days prior to the deadline to ensure that your shares will be successfully submitted for the tender.

For further details see: