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PM Capital & Wilsons


PGF and PAF Proposed Merger

On 15 September, PM Capital Global Opportunities Fund Limited (ASX: PGF) and PM Capital Asian Opportunities Fund Limited (ASX: PAF) announced it had entered into a Scheme Implementation Deed to merge the two LICs. In effect, PAF is to be acquired by PGF, with PAF share holders receiving PGF shares.
Under the proposed terms, PAF share holders will receive an amount of PGF shares based on the NTA of PGF. The implied value offer based on the respective NTAs as at 10 September 2021 was: a 23.8% premium to PAF’s closing share price as at that date, or; a 24.3% premium to PAF’s 3-month VWAP.

Given the size disparity between the two LICs, the rationale should be relatively clear – for PAF share holders to benefit from materially greater size. In this respect, PAF share holders will benefit from:

A portfolio pre-tax NTA of $712m relative to PAF’s $67m;
Approximately 8,400 share holders versus 1,200 share holders in PAF; and Market liquidity 10x that of PAF.

And with scale comes additional benefits, namely the tendency to trade at a lesser discount to NTA. On the topic, PAF has gravitated around a -16% discount to NTA whereas PGF’s discount to NTA has compressed substantially more recently to single digit levels on the back of a very strong 12-months of performance.

And with that strong performance, PGF is now in a strong position regarding future dividends, with bolstered reserves. PGF has provided FY22 dividend guidance of 10 cps. Based on PAF’s closing price on 14 September 2021 and a consequent exchange ratio of 0.7553x, this would imply an annualised yield of 7.8%, or 11.1% p.a. grossed up. This is far in excess of PAF’s 12 month trailing yield of 1.3% during which it skipped an interim dividend.
The PAF Board Committee established to the merger has recommended the merger subject to the independent expert concluding that the merger is in the best interests of share holders. The scheme meeting date is slated for 9 December 2021.

In terms of best interests, RRM sees the benefit to PAF share holders as relatively clear based on the various points noted above. Of course, the merger will entail a material change in investment strategy, but for those investors that object to that there is the ability to sell on-market. We would note that the time line of the proposed deal does permit a degree of market timing flexibility, and which may be needed given the recent sell off in Asian equities.

From the perspective of PGF share holders, the scale difference between the two vehicles does not place an overly material impact on investment strategy. But this is more about PAF share holders than it is PGF share holders.

But wait, WAM Counter Bids for PAF yesterday.
Talk about stirring the pot. On 28 September, WAM Capital Limited (ASX: WAM) announced its intention to make a conditional off-market takeover bid for PM Capital Asian Opportunities Fund (ASX: PAF).

The WAM Capital Offer exceeds the proposed scheme of arrangement between PAF and PM Capital Global Opportunities Fund Limited (ASX: PGF) (Scheme) and represents a premium to the implied value to PAF shareholders under the Scheme. Based on the 24 September 2021 Scheme exchange ratio of 0.73471 and the PGF closing share price of $1.49 per share on 27 September 2021, the scheme provides PAF shareholders with an opportunity to exit their investment at a 0.5% discount to PAF’s 24 September 2021 pre-tax NTA.

Under the Offer, accepting PAF shareholders will receive 1 WAM Capital share for every 1.99 PAF shares they own. The Offer of 1 WAM Capital share for every 1.975 PAF shares represents a 10.6% premium to the 27 September 2021 closing share price for PAF and a 5.1% premium to the 24 September 2021 pre-tax NTA for PAF.

The reader may wonder why WAM Strategic Value (ASX: WAR) has not undertaken this. Presumably 1) because the offer does not constitute a discount to NTA; 2) it would be too large an acquisition for WAR; and 3) it would not necessarily have the roll-up premium to NTA benefits relative to being acquired by WAM.

The irony is PM Capital set a proposal in place (for good reasons) but with the counter bid, the hand has been forced.