Act Fast If You Want To Take Advantage Of SPE Tender Offer (NYSE:SPE)

[This article was shared with our Inside the Income Factory® members and trial subscribers on March 22. Readers who act fast can still take advantage of the tender offer before the expiration date of April 1st.]

SPE Tender Offer Looks Attractive, But Act Fast

I’ve written before about how tender offers are often done in the hopes that most shareholders will ignore them and those who take advantage of them will get to sell their shares to the fund at an above-market price, essentially subsidized by the shareholders who choose to sit out the offer.

The current tender offer by Special Opportunities fund (NYSE:SPE) sets a purchase price of 97% of net asset value (“NAV”), in other words, a discount of 3%; while the fund currently sells at a discount of about 7.5%. So someone who tenders their shares will receive (if current prices stay the same) about 4.5% (about 70 cents) more than the current market price.

So I am tendering all my shares. I obviously don’t expect to have the fund accept all my shares, but since the tender offer is for a limited number of shares (1.25 million out of 12.7 million, or about 10%), if more shares than that are tendered the fund allocates among the tendered shares on a pro rata basis. So the more of your own shares you tender, the greater percentage you will ultimately have accepted at the tender price.

I explained this in more detail in the above-linked article. Short explanation: The sponsors of a tender offer hope that most investors will NOT take advantage of it. This leaves the pro rata share of the non-participants in the tender offer to be split among those who DO tender their shares.

Unusual Twist, Where the “Activist” Is Also The Manager

SPE was taken over about 13 years ago by Philip Goldstein’s Bulldog Investors, a well-known activist group. They have often bought into funds for the purpose of forcing a tender offer that they and other investors tagging along with them could take advantage of. This time is a bit unusual in that the activist group already controls and manages the fund, and presumably plans to continue doing so in the future. But just because they already manage SPE doesn’t prevent them from doing the same sort of tender offer on it, and benefitting shareholders (including themselves) who are “in the know” about how most tender offers work and how to benefit from them.

Shareholders who like the fund as a long-term investment still have the opportunity to sell at an above-market price, even if they plan to buy back in later. Obviously there is always the risk that what is an “above market price” today may not seem so attractive post-tender, if for some reason the fund’s price takes off. But that is true about any decision to sell.

I don’t know if I plan to buy back in or not, and probably won’t make a decision about what to do after the tender offer is completed until I know (1) how many of my tendered shares are actually accepted, (2) how many I have left afterwards, and (3) whether I want to increase my stake in SPE, considering how many other bargain-priced funds there are to choose from right now.

Look forward to your comments and questions.

Steve