Current price: A$0.78
Liquidation Value: A$0.846
Expiration Date: Sep 2019
This case was shared by Paul.
8IP Emerging Companies Limited is Australian listed closed end fund. The fund has been under pressure after receiving an unsolicited bid by Aurora (15% shareholder). As a counter-offer, management proposed to liquidate the fund and distribute proceeds to shareholders causing Aurora to withdraw its bid and support management’s proposal. Spread to liquidation value estimate stands at 8.5%.
Fund’s portfolio is made of cash (A$0.49/share), listed securities (A$0.34/share) and unlisted securities (A$0.024). Listed securities are small cap names on Australian stock exchange and 8IP position is less than 1% of their market cap (at least for the indicated top holdings).
Shareholder meeting to vote on liquidation is set for the 1st of August and approval seems to be guaranteed. Initial distribution of A$0.47 will follow shortly after the approval and the remaining portfolio is expected to be liquidated by the 30th of Sep 2019 Brought forward from the initial timeline of Dec’19)
Management owns 8% of stock.
Company presented the following liquidation estimates:
The main risks here are:
- Price of listed securities in portfolio might change till liquidation – this can be partially hedged by shorting Australian small cap ETFs, albeit historical correlation is far from perfect as 8EC only holds limited number (20-30) of positions.
- Existing some of the positions in portfolio might prove difficult, especially some of the illiquid exploration stocks as well as unlisted securities. On a positive note, the fund does not own more than 1% of the companies it invested in (at least for the named largest positions).
- Liquidation and operating expenses might exceed management’s projections – their track record is not great having consistently under-performed Australian small cap indices. However, at least estimates of the operating costs seem to be in line with historical figures.
- Bid/ask spread on 8EC is wide.
Also worth noting that Aurora has reduced its position from 17.2% to 14.8% in Jun’19 after withdrawing the bid. Aurora is a small fund with net assets of only A$4.5m. There might have been issues with their mandate to keep a large position in liquidating security but that’s just a speculation on my part. Maybe it was a matter of opportunity cost to them.