Conclusion: GrowthIncome Research and Management, LLC, believes that Boulder Total Return Fund (BTF) and First Opportunity Fund (FOFI) are good candidates for taking a position in this merger because their current yields are low and their current discounts are high when compared to Boulder Growth & Income Fund (NYSE:BIF).
(The merger agreement of: Boulder Total Return, Denali Fund (DNY), First Opportunity Fund and Boulder Growth & Income Fund on November 4th, 2013.) (See GrowthIncome website for two articles on the funds.))
Merger: Upon the reorganization, the advisers will own close to 24% of the reorganized BIF shares. The Proxy materials are expected in the 1st quarter of 2014 and, upon an expected shareholder approval, the merger will take place in the 2nd quarter of 2014.
Below, you will find some key points that make this merger an attractive investment.
Discounts are Unusually Wide: Each of the four funds has a discount of close to 20%. Currently, the GenEqFnds CEF category has a discount of 8.4%.
Recent Distribution Activity: Each of the funds announced coordinated distributions in the end of 2013. Before this, BTF had not made a distribution payment for 3 years while FOFI has not made one for 2 years. The distribution for the pro forma merged funds was 4.0%. (Additionally, for 2007 and 2008, the average annual distributions for the funds were 11.0% and 9.5%, respectively.)
Merged Companies: The merged funds will have a net asset value (NAV) of $1.035 billion. This far exceeds its peer group average. In addition, the reorganized fund will see a large boost to its average daily volume, bringing it to 135,000 shares daily. Adviser fees will be slightly reduced, and administration and other expenses (audit, boards, registration, annual reports, etc.) will be consolidated. This will allow for a reduction in overall expenses that could add up to $.05 per share annually. (This would give it an initial yield of 4.0% with a distribution of $.05 per shares for a 4.5% yield return.)
Similarity of Assets: 75% of the reorganized fund's top 25 holdings currently exist in 2 or more of the original funds. This means there is a high degree of similarity among the 4 original portfolios. This allows the funds to reduce their expenses while retaining a similar portfolio upon reorganization. The consolidated portfolio's top 4 holdings will be Berkshire Hathaway, Inc., (Both "A" and "B" shares); Yum! Brands, Inc.; JPMorgan Chase & Co. Upon shareholder approval, a new investment policy will be adopted so that BIF may not invest more than 10% of its net assets in "private funds" (e.g. hedge funds). This would be good for First Opportunity Fund .
Boulder Advisers: Boulder advisers will have a 24% stake in the reorganized fund. The merging of the funds will give BIF a larger market cap, a larger daily trading volume (135,000) and a boost of its dividends (likely to be 4.5%).
Dividends: Currently, there have not been any representations by the Funds' Boards or the Advisers that the proposed reorganization would provide for the institution of a regular dividend. That being said, if a distribution policy of four quarters were established, it is likely that the stock (BIF) would stop trading at a 20% discount. Adams Express Co. (NYSE:ADX), with a similar amount of net assets, market cap and average trading volume, currently makes quarterly distribution payments equaling 6% annually. ADX is trading at a 14% discount. If BIF could bring its discount to 14%, the advisers would see a $13.5 million increase to their 24% equity stake.
Disclosure: I am long BTF, BIF, FOFI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.