Gabelli Merger Plus+ 10 November 2020
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Gabelli Merger Plus+. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Gabelli Merger Plus Trust (GMP/GMPP) aims to provide uncorrelated absolute returns by investing in announced mergers in order to earn the spread between the deal price and the market price of the acquired company. Whilst investment is predominantly through equities or instruments tied to equities, GMP is seeking to benefit from the share price upside offered by the risk premium attached to announced deals. As such, returns will not typically be driven by wider equity market moves. The trust aims to pay a 5% dividend yield on NAV.
Although this trust was launched in July 2017, Gabelli Funds has managed dedicated funds with this approach since 1985. However, as we note under Performance, the lower interest rate environment (which would typically see a lower spread attached to proposed deals) has negatively impacted M&A strategies.
A widening discount has negatively impacted shareholder market price returns despite relative NAV resilience. As we discuss under Discount, the board had initiated a share buyback programme earlier in 2020, but the discount remains stubbornly wide at c. 22.4% (as at 28/10/2020).
Dividends have been in line with the proposed payout of 5% since launch on the starting NAV. However, with the trust moving to a sizeable discount, the historic yield on GMP is now c. 6.5% (as at 26/10/2020). A sterling quote for the shares was launched in summer 2019, and trades under the symbol ‘GMPP’; this is aimed at improving trading volumes and liquidity with the ultimate aim of broadening the shareholder register in the UK.
Uncorrelated, or at the very least lowly correlated, NAV returns look an attractive proposition in the current environment. The low interest rate environment of recent years has been challenging to absolute returns, but any economic recovery could well see deal activity pick up, as has often been historically observed following sharp recessions. At this time the low cost of capital is also a potential driver for deal-making.
Against this must be weighed the potential headwinds to M&A activity in general; since c. 1978, received wisdom in the US in particular has held that consolidation activity cannot be held to be deleterious to the public interests if it lowers consumer costs. Yet this is an interpretation, not a fact, of competition law, and there are some indications that US politicians may be starting to re-evaluate antitrust jurisprudence. If this comes to fruition, it could inhibit overall deal activity and likely reduce the risk premiums available to M&A strategies.
Yet ‘if’ is the key word in this. The signs of political shift are tentative, and certainly not mainstream in either main party yet. Favourable jurisprudential attitudes to mergers have, if anything, accelerated since 2008–09.
GMP’s discount is optically attractive, but thin trading volumes mean the discount narrowing should not be taken for granted. More pertinently, dividends have been consistently maintained, and should remain a largely uncorrelated source of income.
| bull | bear |
| Low to no correlation to wider equity markets | Governments and central banks may try to suppress interest rates |
| Should benefit from a rising rate environment, unlike most conventional asset classes | Thin trading volume and concentrated ownership structure a barrier to discount narrowing |
| High dividend yield, at c. 6.5% | Potential shift away from favourable regulatory regime for M&A could pose strategy headwinds |
Fund History
