Current Price – $12.54
Expected Price – $12.9+
Upside – 3%+
Expiration Date – Expected Q3 2018
This idea was shared by Adam.
The idea is for SWZ. This is a closed-end fund for Swiss equities. Bulldog has been an activist and won 2 board seats last year. They just won 2 more during this proxy season, which officially flips the board to their control. Goldstein and Hellerman were Bulldog nominees this year and both won board seats, with Dakos and Sell already Bulldog directors from last year, bringing Bulldog nominees to 4/5 seats. During this proxy season, shareholders also voted to approve a non-binding recommendation to the board to conduct a tender for >50% of the shares of SWZ.
The fund is currently trading at a 6% discount to NAV. Given Bulldog’s board control, it is extremely likely that a significant tender for >50% will be coming in the next 1-2 months. Assuming a 50% tender at 99% and 100% participation (which is highly unlikely, as a non-binding proposal for 100% tender last year failed), the pro forma discount is 11% (50% at 99% implies the remaining 50% is trading at 89%). This is simply too wide/attractive for a board that is fully controlled by Bulldog and has the potential to fully open-end/liquidate. Ultimately, I believe Bulldog will achieve the full NAV discount, but the timing is less clear.
A more reasonable PF discount is <6% given the board control is now entirely in the hands of Bulldog (one could argue even tighter with other CEFs under activist control in the low-single digits for NAV discount). This implies the current discount to NAV should be <3.5%, which implies 2.5% uncorrelated upside over the next 2 months, assuming 100% participation. I believe the participation rate will be materially lower, which could add another 1%-2% of return from the idea over that time period. Said differently, there should be a total uncorrelated return opportunity of 2.5%-4.5% over the next 2 months from the tender, depending on ultimate participation. The downside is very limited, as the shareholder vote is over and the final proxy votes certified.
For those so inclined, the correlation to EWL is rather significant, which can be used as a hedge to SWZ to isolate the NAV discount.