Herald (HRI), the £1.2bn global technology trust engaged in a high-stake battle with hostile shareholder Saba Capital, is working on a tax-efficient vehicle to enable shareholders to avoid crystallising massive capital gains tax bills if they sell in the upcoming “backstop” tender offer.
Saba, a US hedge fund that has built a 31% stake and campaigned to remove its board and take control of the Katie Potts managed fund, last month blocked a tender offer that would have enabled it and other shareholders to sell their shares.
In response the company has started plans to launch the “backstop” tender offer to let shareholders exit before Saba wins control, a tactic that Edinburgh Worldwide (EWI) and Impax Environmental (IEM) have also resorted to in their battles with the activist. If pursued it likely means the end of these listed funds.
Herald’s second tender offer requires 50% of shareholder votes rather than the 75% hurdle of the previous proposal. In preparation, Potts, who has successfully run the portfolio since launch in 1994, has sold illiquid holdings and amassed 26% in cash and bonds in readiness for buying back shareholders’ shares.
However, long-standing shareholders have expressed concern over the CGT bills they could face given HRI’s impressive 2,904% investment return since launch.
In reply, HRI’s board said “it may be possible to enable shareholders to remain invested in a non-Saba controlled vehicle in a tax-efficient manner, whilst also offering shareholders a significant cash exit opportunity, and the board is working on that possibility.” It said it will keep shareholders updated.
It also said it was still “seeking to achieve a mutually agreeable solution with Saba” to avoid implementing the second tender offer.
Our view
Matthew Read, senior analyst at QuotedData, said: “Given the strong backing for the existing manager from non-Saba Herald shareholders – and the potential CGT implications for long-term holders in particular – it is encouraging that the board continues to explore a negotiated solution with Saba. However, experience at funds such as Edinburgh Worldwide and Impax Environmental Markets suggests this may prove difficult, and the board and manager must be prepared to pursue alternatives.
“In that context, it is sensible that the manager has begun reducing some of Herald’s less liquid positions to limit the impact of any forced disposals, whether through a backstop tender or a larger-than-expected cash exit. Ultimately, if negotiations fail, the backstop tender provides shareholders with a route to avoid being locked into a Saba-controlled vehicle – albeit at the cost of potentially crystallising significant tax liabilities.”
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