Nick Bolton cheers $17.6m payday from Magellan options play
Activist investor Nick Bolton has taken on beleaguered funds management giant Magellan Financial Group and won, pocketing $17.6m in the process.
Nick Bolton has proved himself to be a winner – again – after a $17.6m payday from beleaguered funds management giant Magellan Financial Group after hoovering up options in its underperforming Magellan Global Fund (MGF).
Bolton shot to fame 15 years ago when at the age of 26 he took on Macquarie Bank and Leighton Holdings over Queensland toll road operator BrisConnections and won, netting himself a $4.5m payday from an $80,000 investment. Bolton had snapped up the securities, which had fallen as low as $0.001 with no bids, and threatened to wind up the financially ailing company.
This time the now 41-year-old activist investor was staring down the $1.36bn giant Magellan. And Magellan was the one to blink.
It’s understood Bolton’s firm Keybridge Capital had the backing of at least one major US hedge fund and would have moved to have Magellan replaced as the manager and responsible entity for MGF. This could have caused even bigger issues for Magellan as a whole, as it struggles to address a plummet in funds under management, from more than $100bn just over a year ago to $35.2bn at the end of November.
The issue for Magellan was the closed class of MGF, which like a lot of LICs in the market, was trading at a significant discount to net asset value. If the discount narrowed sufficiently the MGF closed class options would be in the money and therefore more likely to be exercised, requiring Magellan to fund the discount. A conflict of interest dilemma to be sure.
Seeing an opportunity Mr Bolton had snapped up the options and demanded change. New executive chair of Magellan Andrew Formica met with Bolton and Keybridge director Antony Catalano in Sydney on Wednesday and agreed a deal where Magellan will buy 500m of the MGF options at a cost of up to $50m. Keybridge will be paid $18.8m for its options which cost $1.2m.
“It was a really sensible approach from the new head of the organisation that he was able to bring a simple pragmatic thinking and accept that this was a great opportunity for the unit holders for the closed fund and for the Magellan Fund itself,” said Mr Catalano.
“He came into the business three months ago and discovered the structure had issues and they’ve taken corrective action. For all the option holders this is a great outcome. They will convert the closed fund to an open fund and that addresses the gap in the Net Asset Value.”
Magellan, as the parent of MGF, had the obligation to fund the circa $160m required to exercise all outstanding options in MGF – at a 7.5 cent discount – and has carried it as a liability on its balance sheet as a result.
Keybridge could have exercised the 180 million options it had snapped up on the cheap, paying 92.5c on the dollar – if it had the capital – with Magellan having to pay the remaining 7.5c. Perhaps due to the threat of a US hedge fund backing Mr Bolton, Mr Formica decided the best approach would be to buy back the options, reducing its potential future funding obligations and reducing the chance of market participants such as Mr Bolton trying to wind-up the fund.
It’s money the beleaguered fund manager, already dealing with falling profits and a dramatic down spiral of funds under management from more than $100bn to $35bn at last count, would not want to pay.
High profile fund manager Geoff Wilson who frequently butts heads with Bolton despite being a shareholder in Keybridge, had last month described Bolton’s strategy to realise value from the MFG options as “naive”, telling The Australian the options would likely expire “worthless.”
After the Magellan announcement that it would buy back the shares Mr Wilson said it would appear that the “naive” operator was Magellan instead.
“My perspective is that it’s now the Magellan behaviour that looks naive,” he said, adding that Keybridge should now pay a fully franked dividend of the amount it had just earned from the deal.
Mr Catalano said this transaction showed the market that Mr Bolton had the ability to create wins for all shareholders.
“I think for Nick it demonstrates his skill and expertise in these markets and he has won a whole lot of support from a whole band of new followers that will keep a keen interest in his next move,” said Mr Catalano.
Perhaps in a sign investors are pleased that at least someone at Magellan is now taking decisive action on something, its shares rose 3.8 per cent to $8.13 after the announcement. Shares in MGF rose 0.3 per cent on Thursday and have jumped more than 33 per cent this year.
Magellan has also said it would convert the closed MGF fund to open by the second quarter.
