O'Leary takes action on weak OGE unit price

It is fair to say that even I’m now bored with this structured product topic, but with the conflicted main stream media continuing to ignore the inner workings at the O’Leary Global Equity Income Fund (OGE.UN:TSX), it falls to the blogosphere to delve in. Again.

The most recent news is not that the net asset value of OGE continues to have a remarkably close correlation with the performance of the Dow Jones 30: 95.6%. Nor that Terence Kevin O’Leary still can’t beat the Dow’s performance: the Dow is off 36.1% since OGE was formed while OGE’s NAV is down 38.0%.

The most recent news is that Mr. O’Leary is unhappy with the unit price of OGE, even though it already trades at a 13% premium to the value of the underlying assets in his fund. Onex (OCX:TSX) shares, for example, historically trade around 30% below their NAV (see prior post “Decade of Daddy Mirror Fund™ Monthly Report” December 20-08).

Despite this rich valuation, Mr. O’Leary has launched a normal course issuer bid that gives him the right to spend upwards of $3 million of the $44 million he raised last summer to buy back his own units (which own a stock portfolio currently valued at $27.3 million), rather than use those funds to invest in the promised superlative dividend producing, capital gains-oriented securities that were trumpeted on the IPO roadshow.

This from his press release:

“The purpose of the normal course issuer bid is to provide the Fund with a mechanism to decrease the potential spread between the net asset value per unit and the market price of the trust units and to provide enhanced liquidity for the trust units. Under the normal course issuer bid, the Fund intends to purchase up to 357,334 trust units, representing 10% of the public float of the securities issued and outstanding.”

Since the fund is already trading at a premium to NAV, and cash on hand trades at NAV, how exactly does buying back units at a 13% premium “decrease” the spread between the “net asset value per unit and the market price of the trust units”?

By my math, this buyback proposal will push the NAV down by another 2%, beyond the existing 38% decrease that the fund’s NAV has already suffered since the capital was raised last June.

Now, I’m assuming that the Board of Directors of OGE thinks this makes a ton of sense. Traditionally, a buyback is put in place if a company’s Directors believe the units or shares are undervalued. In the case of an investment trust structure, that is easy to determine. So unless, OGE is sitting on a bunch of unrealized gains, which under GAAP you’d think would be marked-to-market in any event, I’m at a bit of a loss.

Perhaps trading in the Units isn’t sufficiently illiquid to satisfy KO’s expectations of the Unit’s market maker, and OGE Directors have decided that the Trust needs the right to be able to buy units itself to prevent wild downward swings on days when no one else is really bidding. As we all know, a normal course issuer bid for an already illiquid stock just reduces the trading float further, making the security even more illiquid than it was previously.

Where are OGE’s Underwriters? Do they think this is wise?

I must be missing something in this plan, since most of Bay Street’s smartest Equity Capital Markets players just signed a new prospectus touting Mr. O’Leary’s talents as a TV Personality and international investor.

Even the Globe and Mail’s star columnist Andy Willis is paying Mr. O’Leary compliments, as have now been immortalized on OGE’s website.

Who thinks that buying Units at a price above their intrinsyc value will do anything but exacerbate the pain that Unit Holders have already suffered with the 38% NAV drop over a period of less than 9 months?

KO: if I have this wrong, please let us know and we’ll gladly print the explanation. Unlike the DTM, we have no newsprint costs and are not bound by conventional rules about column length, breadth or how much room advertisers might need on any given page.

MRM
(disclosure – this post, like all blogs is an Opinion Piece)