Author’s note: This article was released to CEF/ETF Income Laboratory members on September 7, 2022. Please check the latest data before investing.
SMM Merger Closing This Week
The Salient Midstream & MLP Fund (New York stock market :NYSE: SMM) the saga is coming to an end end. Excerpt from the press release:
September 1, 2022 | SALIENT MIDSTREAM & MLP FUND ANNOUNCES SHAREHOLDER APPROVAL OF REORGANIZATION WITH SALIENT MLP & ENERGY INFRASTRUCTURE FUND. Salient Midstream & MLP Fund (the “Fund”) (SMM) today announced that at a special meeting of shareholders of the Fund, shareholders have approved the reorganization of the Fund with and into Salient MLP & Energy Infrastructure Fund (“SMAPX”) (the “reorganization”). As previously announced, it is currently expected that the reorganization will be completed after the close of trading of the New York Stock Exchange (“NYSE”) on September 13, 2022, subject to the satisfaction of customary closing conditions and the unwinding of the Fund’s leverage. To facilitate the planned reorganization, the Automated Client Account Transfer Service (“ACATS”) will be limited to the close of market on September 2, 2022, and all shares of the Fund will cease trading on the NYSE at the close of market on Thursday, September 8, 2022. On Wednesday, September 14, 2022, shareholders of the Fund who will become shareholders of SMAPX as part of the Reorganization will hold shares of SMAPX and not of the Fund. Fund shareholders who become shareholders of SMAPX will receive newly issued Class A shares of SMAPX as part of the reorganization. The aggregate net asset value of the shares of SMAPX received by the shareholders of the Fund will equal the aggregate net asset value of the shares of the Fund held by the shareholders of the Fund, in each case at the close of business on the date of the reorganization. Shares of SMAPX can be purchased or redeemed on any business day. SMAPX is an open-ended fund which is a series of Salient MF Trust with approximately $964 million in net assets and is also managed by Salient Capital Advisors, LLC, the investment advisor to SMM, using a similar investment strategy .
SMM, an intermediary MLP/CEF, was targeted by activists, Saba Capital, earlier this year. Saba currently owns 4.2 million shares of SMM, or approximately $38.0 million or 23.79% of all shares outstanding, giving him considerable influence over the direction of the fund.
Faced with the possibility of a substantial liquidation or takeover bid (effectively a partial liquidation) that would significantly reduce the fund’s assets under management, the SMM board acquiesced in a merger of the CEF in one of their open-end funds, Salient MLP & Energy Infrastructure Fund (SMLPX). We discussed the council’s proposal at the time in a previous CEF weekly digest (public link).
The proposal was approved by shareholders last week and as a result SMM will be merged into SMLPX at the close of September 13, 2022. However, Thursday September 8, 2022 was the last trading day for SMM.
Victory for Saba…
Since open-end funds (unlike closed-end funds) can always be redeemed at net asset value, the merger is beneficial to SMM shareholders in terms of closing the fund’s large discount. Indeed, SMM’s discount narrowed sharply when the merger proposal was announced and gradually approached zero as the shareholder vote approached. Therefore, the merger is one of the best possible outcome scenarios for Saba, which will see significant capital gains on its investment.
For the leaders of Salient, this is certainly not the worse results. While the assets in an open-end fund are obviously less “sticky” than in a CEF, they managed to avoid a substantial liquidation or takeover bid that would instantly reduce the AUM.
Oh, and Saba also managed to get another concession from fund managers. Before agreeing to support management’s merger proposal in exchange for their backing off from further militant agitation, Saba demanded that management make a one-time payment of $300,000 to SMM, to be paid to shareholders as ” Saba Special Distribution”. Probably just to make sure everyone knew who was pulling the strings behind the scenes! Admittedly, $300,000 isn’t much when spread over 17.7 million shares (corresponding to a special distribution of $0.0169), but it’s still a nice +0 increase, 18% of net asset value, thanks to management.
…(and our Tactical Income-100 portfolio)
Our Tactical income-100 portfolio in the CEF/ETF Income Laboratory member area also benefited from Saba’s successful efforts. On February 1, 2022, we bought SMM in this portfolio. The reasoning was that Saba was buying back shares of SMM, so we bet that Saba would succeed to some degree, which should lead to a narrowing of the discount (which stood at -13.25% at the time) .
As a result, we were able to sell SMM last week and reap the significant gains from this position since we bought it, largely due to shrinking discounts. SMM has returned around +26% since we bought the position in February, which is a great result, especially since the market (SPY) is down over -12% in the meantime. However, the most important result is that SMM significantly outperformed its NAV (+12.92%) and the benchmark AMLP (+11.43%) due to shrinking discounts. This is what we mean by generating alphaand it is something that perfectly suits our Tactical income-100 wallet, although we owe Saba a round of gratitude for this result. Thanks!
For longer-term SMM shareholders, they can access a similar investment in the open-end fund SMLPX, which also has a slightly lower fee structure to boot. One difference though is that SMLPX is unleveraged, giving it a lower risk/reward profile than leveraged SMM. Other than that, the two portfolios have tracked each other very closely over the past year, with the SMM being more volatile due to the use of said leverage.
Morningstar gives SMLPX a 4-star rating and ranks in the top half of funds in its category over 1-, 3-, and 5-year periods. Therefore, longer-term SMM shareholders can feel comfortable staying in SMLPX.