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The Singapore Fund Tender Offer
Posted by: AlphaVulture (IP Logged)
Date: March 6, 2012 11:20PM


The Singapore Fund is a closed-end fund that is focused on equities listed in Singapore (surprise!). The fund is currently trading at a discount of ~5% of NAV and has announced an in-kind tender offer for up to 25% of all shares outstanding at a price of 99% of NAV. As is common in these kind of transactions holders of small positions are given a preferential treatment compared to holders of bigger positions, creating opportunities for those with a (very) small portfolio. The SGF tender offer has two of these mechanisms in place.

The small idea

If you own 100 shares or less you will not get prorated if more than 25% of outstanding shares are tendered, and you will not get paid in-kind, but in cash. Since the shares of SGF are priced at 12.93 that would mean that you would be able to create a $1293 position that has a positive expected return of ~4% in a week time (the offer expires March 14). That’s a pretty good return, but obviously the position size is severely limited. I would not be too lazy to pick up 50 dollars in EV, and even better: you can reduce most of the variance in this bet by hedging your market exposure using an ETF such as EWS that tracks the MSCI Singapore Index. The not-so-scientific proof:



The bigger idea

There is however also a preferential treatment for people who tender less than 2500 shares. Instead of receiving odd lots of securities listed in Singapore, those holders also receive cash, but just like the bigger positions they are prorated if more than 25% of shares are tendered. That makes it harder to evaluate the expected value of going long more than 100 shares SGF, since it’s unknown how much shares will be tendered. You are certain to make a profit on 25% of the tendered shares, but if the discount to NAV returns to the 6% SGF traded at before the tender offer was made you lose a bit on EV on the remaining 75% of your position. Add in some transactions costs and going long SGF could have zero expected value.

This is however an unrealistic pessimistic scenario because for all kinds of reasons not all share holders tender their shares. This can be because it’s simply impossible. In this case you can only tender more than 2499 shares if you have an account capable of receiving Singaporean securities (my broker – Interactive Brokers – can’t). But it could also be that people are perfectly happy with their position in SGF, and don’t want to sell.

Past year I participated in a tender of a Russian company that was willing to buy 7,71% of stock back at a huge 50% premium. A deal that you would think no-one would be willing to pass up, but in the end the proration factor was 10.95%. Part of the reason: Russian shareholders had to tender their shares in person – standing in line for days! – while the USA listed ADR’s could be tendered with a few clicks of a mouse.

But to get back on topic: there is actually some scientific evidence that proration factors, and specifically those for close end funds trading at a discount, are significantly higher than you would expect based on a 100% participation rate. This paper, that looks at a sample of 71 CEF tender offer repurchases in the period from 1994 till 2006, finds that the average realized proration factor is 79.98% versus a 25.87% expected value. And that’s in a sample where the average discount to NAV is bigger than that of SGF.

Conclusion

While it’s hard to know what the expected value of the bet exactly is, it is a case of heads I win, tails I don’t lose (much). I have created the table below, based on a 2000 share position in SGF and a 2100 share short position in EWS, that shows the expected profit based on various possible proration factors.



It’s important to note that the expected profit can be materially different than the realized profit because the hedge is not perfect, and there is no guarantee what exactly the discount of SGF is going to be post tender offer. But having some potential variance in your portfolio is not a problem, as long as the dollar amount at risk is not too big relative to the total portfolio value, and the variance is not correlated with your portfolio.

Disclosure

Author is long SGF, short EWS




Stocks Discussed: EWS, SGF,
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Re The Singapore Fund Tender Offer
Posted by: chihin (IP Logged)
Date: March 7, 2012 07:10AM


I think Interactive Brokers recently started offering trading in Singapore securities, so you may be able to take delivery in specie.


Stocks Discussed: EWS, SGF,
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Re The Singapore Fund Tender Offer
Posted by: Adib Motiwala (IP Logged)
Date: March 7, 2012 12:38PM

yes you can trade in Singapore via IB. However, this idea is about tendering shares in a CEF and not taking in-kind securities. For that you need to purchase fewer than 2500 shares.

I am not sure the odd lot of 100 shares is in the Tender documents though. You may want to re-confirm.


Stocks Discussed: EWS, SGF,
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Re The Singapore Fund Tender Offer
Posted by: Adib Motiwala (IP Logged)
Date: March 7, 2012 01:02PM


What does it mean that the Fund will pay cash with respect to Odd Lots?

To avoid the potential burden on you resulting from receiving an amount of Portfolio Securities below
conventional minimum trading thresholds in S ingapore, the Fund will pay you in cash with respect to each Portfolio Security as to which you would receive an Odd Lot, or a distribution of fewer than 1,000 shares of that Portfolio Security. Due to the large size of the conventional minimum trading threshold in Singapore, the Fund expects that all participating stockholders will receive at least some cash with respect to each Portfolio Security allocated in the Offer. The Fund expects that any Small Tenderer who tenders fewer than 2,500 Shares would be allocated fewer than 1,000 shares with respect to each of the Portfolio Securities. Accordingly, if you are a Small Tenderer, you will not receive Portfolio Securities and will receive solely cash in exchange for your Shares in the Offer. If you are a Small Tenderer you will therefore not be required to establish a Singapore Account.

Alpha,

The way I intrepret the meaning of odd lot in this tender ( compared to most other tenders ) is that they refer to less than 1000 shares of the underlying Portfolio security of the fund...as an Odd lot. So, if you own fewer than 2500 shares of the Singapore Fund (SGF) that would likely equate to owning less than 1000 shares of all the underlying stocks in the fund.... And they call that 1000 a odd lot. To avoid this, they will pay Cash instead of In-kind securities for the Small Tenderer ( ie less than 2500 shares).

The odd lot here DOES NOT refer to owning less than 100 shares of SGF (which is the case in most other tenders such as WTM that you posted about).

Let me know if you think that assessment is correct.



Stocks Discussed: EWS, SGF,
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Re The Singapore Fund Tender Offer
Posted by: AlphaVulture (IP Logged)
Date: March 7, 2012 07:04PM


Adib: read the tender offer document. There is also a provision for odd lots
(meaning 100 shares or less of SGF) although they don't guarantee that odd lot
share holders won't get prorated:

If the number of Shares properly tendered and not withdrawn prior to the Expiration Date exceeds 25% of the Fund’s issued and outstanding Shares, the Fund will, upon the terms and subject to the conditions of the Offer, purchase tendered Shares on.pro-rata basis. The Fund may, in its discretion, accept all Shares tendered by stockholders who own fewer than 100 Shares and tender all their Shares for purchase in this Offer, before pro-rating the Shares tendered by other stockholders. There can be no assurance that the Fund will be able to purchase all the Shares that you tender even if you tender all the Shares that you own.



Stocks Discussed: EWS, SGF,
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Re The Singapore Fund Tender Offer
Posted by: Adib Motiwala (IP Logged)
Date: March 7, 2012 07:33PM

Yes, exactly. I remember reading that earlier.. but forgot about it. They may buy odd lots of the fund shareholders but its not a guarantee.


Stocks Discussed: EWS, SGF,
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