There have been many proposed mergers of Closed End Funds approved by boards over the past year. It is only after shareholder approval, a process that takes many months that I take an interest in these deals.
On February 11th, Nuveen shareholders finally approved a deal to merge 4 Muni CEFs: the Nuveen Premium Income Municipal Fund 4 (NPT), the Nuveen Dividend Advantage Municipal Fund 2 (NXZ), and the Nuveen Municipal Advantage Fund (NMA) will merge into the Nuveen Dividend Advantage Municipal Fund 3 (NZF), to be renamed the Nuveen Enhanced Municipal Credit Opportunities Fund: see following article for details. Typically, these deals close between 4-6 weeks after shareholder approval or 3-5 weeks from now. Nuveen allocates shares in their merger's according to the NAVs of the funds on the last day of trading before the deal closes. The prices and NAVs of these funds as of the close February 18th are as follows( data from CEF Connect):
Closing Price, NAV, Premium/(Discount)
NPT 13.61 14.66 (7.16)
NXZ 14.54 16.22 (10.36)
NMA 14.08 15.69 (10.26)
NZF 14.56 16.18 (10.01)
These numbers reveal something very interesting. All the funds involved seem to have roughly the same discount to NAV except for NPT. What happens when a fund trading at a 10.01% discount takes over a fund trading at a 7.16 discount?? Holders of the 7.16 discount fund (NPT) will instantly lose 2.85% of their money (10.01-7.16)!
The math is as follows. For each share of NPT held, a shareholder will receive .906 shares of NZF (14.66 NAV of NPT/16.18 NAV of NZF). That would have a market value of .906 x 14.56 (market price of NZF) or 13.19/share. But NPT is trading at 13.61! Why would anyone own NPT presently at 13.61, when they are looking at receiving only 13.19 for their shares upon closing of the deal? This is something I cannot understand.
Anyone holding NPT, can sell it and switch into NZF now instead of waiting. What is even harder to understand, is how can a prospective new Muni CEF buyer buy NPT today, when they could just as easily buy NZF, NMA or NXZ and avoid the 3% haircut.
Analyzing closed end funds can be complicated, because not only do you need to know which assets these funds hold, but you must look at how the market is pricing these assets.
To holders/prospective buyers of NPT- you are throwing away your money.
Disclosure: I am/we are long NXZ,NZF AND NMA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am also presently short NPT