CEF Activism and Takeover Artists

I had a discussion this morning about the future direction of the stock market+ with an old friend. He is quite bullish based on the hope for a $1.9 trillion stimulus package and an infrastructure bill's eventual passing. I get that and talked about it yesterday in the Banking on Profit Weekly Update. This has to happen, and it has to happen fast to support the economy.

Will it be enough to justify the current valuation levels in the stock market?

I don't know.

Many bulls like to make the interest rate argument. While it's true that low-interest rates can justify higher valuations, it is also true that, as Meb Faber pointed out this week, we have never had this combination of low rates and high valuations.

I don't think anyone has a clue what the market will do in the rest of 2020. This is uncharted water for stock prices.

Rather than torture myself trying to guess the unknowable, I will focus on what I do know.

Bulldog Investors filed a 13D concerning The New Ireland Fund last month. He attached a letter to the fund's management that said, "Based upon the wide discount at which the Fund's shares trade, we can infer that there is just insufficient investor interest in a small closed-end fund with a relatively high expense ratio (of around 2%) that specializes in Irish equities. Since other measures to narrow the discount have been tried and failed to narrow the discount, we think the time has come to afford shareholders an opportunity to realize a price for their shares that is at or close to NAV by converting the Fund to an ETF or dissolving it."

The fund trades at a discount of almost 20% to NAV today. A conversion or liquidation could produce a quick gain of about 25% for those who ride Bulldog's coattails with the New Ireland Fund.

If Bulldog fails in their quest, you end up owning a portfolio of companies at a considerable discount. The portfolio managers have been tilting the portfolio towards green energy companies. They wrote in their latest commentary that "A theme we have been gradually adding to over recent years has been that of providing the portfolio with some exposure to the alpha potential of 'Green impact/climate change. Interestingly, the fiscal spend by governments from the USA to Europe to China has been a strong one focused on green infrastructure. This theme, we believe, is here to stay and exciting from a portfolio perspective."

You also have a back door bet on sports gambling with the fund. About 16% of the New Ireland Fund portfolio is invested in Flutter (PDYPY). Flutter is a Dublin based sports betting and gaming company in the United Kingdom, Ireland, Australia, and the United States.

Here in the United States, Flutter is the parent company of Fan Duel, which is poised to be a huge player in the rapidly expanding sports betting market.

Best case scenario, you get a quick arbitrage profit.

Worst case, you own a portfolio of solid companies that will benefit from two of the hottest trends in the world right now at a 29% discount to what they currently fetch in the market.

I also want to point out that KKR has teamed up with the Chairman of Lululemon, Glenn Murphy to for a SPAC. Mr. Muprhy has a ton of experience operating and investing in consumer companies. He was Chairman and CEO of Gap (GPS) from 2007 to 2014. Before that, he held other senior leadership roles, including the Chairman of the Board of Directors and the CEO of Shoppers Drug Mart.

Mr. Murphy is also the founder of FIS Holdings, a consumer-focused investment firm that has made significant investments, including Lululemon (LULU), Aimbridge Hospitality, Whole Foods Market Bloomin' Brands.

The members of KKR that will be part of the board have a ton of experience doing LBO's of consumer companies. The combination should be dynamite when it comes to making a purchase that elevates the SPAC shares' value.

If I am wrong and the deal sucks, we can just get our money back.

KKR Acquisition Holdings I Corp. will trade with the ticker KAHC.U. The notes will trade with one share of stock and a third of a warrant. The idea is to separate the warrants and sell them to create a discount to the trust value at some point.

WE have no idea who the selling group is, so talk to your broker about possible IPO shares availability.

If you cannot get IPO shares, you can buy units for $10.10 or less when the SPAC starts trading.

Posted to The Community Bank Investor… on Feb 12, 2021 — 11:02 AM
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