Global smaller companies trust Herald (HRI) has stepped up efforts to resolve its dispute with Saba Capital. Meanwhile, manager Katie Potts has been tasked with ‘raising the liquidity profile’ of the portfolio.
In an update, the board said it continues to seek a ‘mutually agreeable solution’ with hostile major shareholder Saba.
The US activist has a 31% stake in Herald and has been trying to take effective control by a process of attrition. But the majority of non-Saba shareholders have previously voted against moving into a Saba-controlled vehicle. Many would like to remain invested in the Katie Potts-managed trust’s successful mandate.
Herald’s Plan B
Saba recently blocked a tender offer that would have enabled it and other shareholders to sell their shares in Herald. But the technology-focused trust has a contingency plan in place should talks with Saba break down.
Herald’s fallback option is a proposed ‘backstop’ tender offer. This would allow eligible shareholders to sell up to 100% of their holdings at a price close to net asset value (NAV).
However, proceeding with the backstop tender would create a problem, albeit a high-quality one, for shareholders.
Herald has delivered a stellar 2,904% NAV total return since inception in 1994, leaving many shareholders with significant capital gains on their holdings. Proceeding with the tender would mean they’d have to choose between crystallising an unwanted tax event, or staying invested in a Saba-controlled company.
The encouraging news is the board believes 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’. Led by chairman Andrew Joy, the board is working on that possibility.
Going liquid
Potts has been boosting the liquidity of a portfolio whose holdings include Be Semiconductor (BESI), Celestica (CLS) and Fabrinet (FN). According to Herald, Potts has agreed to an ‘accelerated programme of selling portfolio holdings, including a number of less liquid stocks’.
This looks a sensible move. The aim is to limit the impact of any forced disposals, whether through a backstop tender or a larger-than-expected cash exit.
Board must ‘be prepared’
Matthew Read, senior analyst at QuotedData, commented:
‘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, Read said experience at Edinburgh Worldwide (EWI) and Impax Environmental Markets (IEM) suggests this may prove difficult.
As such, ‘the board and manager must be prepared to pursue alternatives.’
Herald’s backstop tender provides shareholders with a route to avoid being locked into a Saba-controlled vehicle should talks fail.
Edinburgh Worldwide and Impax Environmental have also resorted to this tactic in their battles with the intransigent US activist.
If pursued, all three of these differentiated portfolios are likely to disappear. That would be a crying shame for the shrinking investment trust sector.
Learn more about Herald Investment Trust here: https://heralduk.com/
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