Victory for Saba: Middlefield offers investors cash exit or ETF rollover

Middlefield Canadian Income has responded to pressure from activist investor Saba by offering shareholders a cash exit or shares in a new active ETF.

Shareholders in Saba target Middlefield Canadian Income (MCP) will be offered a cash exit at close to net asset value (NAV) or the option to receive shares in a newly created exchange-traded fund (ETF).

If it goes ahead, this will be the first investment trust rollover into an ETF. 

Listed on the London Stock Exchange, the actively managed ETF will follow Middlefield’s current strategy with a total expense ratio below 1%, which compares to 1.3% today. Middlefield targets high quality, dividend-paying Canadian and US large caps.

Shareholders who do not wish to roll over into the new active ETF will be offered an uncapped cash exit at close to NAV or they can elect to receive a combination of shares in the ETF and cash.

These proposals follow months of negotiations with Saba Capital. Back in February, the US hedge fund had requisitioned an extraordinary general meeting to pressure the trust, alongside three others, to provide liquidity for shareholders by transitioning into an open-ended fund.

The board believes the rollover proposal is in the best interests of shareholders because it addresses the issue of limited liquidity in the shares and the discount to NAV, which stood at 6.4% prior to today’s announcement. It also gives shareholders the option to stay invested in the trust’s investment strategy.

Chair Michael Phair said the board continues to have strong conviction in the strategy but was proposing the change in structure after hearing from investors.

‘The board has listened to feedback from shareholders and recognises that the constrained liquidity and persistent discount to NAV remain impediments to new and further investment,’ he said.

Following discussions with various parties, the board said it had considered other potential closed-end fund rollover options but it believes the ETF represents the most suitable rollover option for shareholders.

The board also noted that Middlefield, the trust’s manager, has previously rolled several of its Canadian closed-end funds into ETFs listed on the Toronto Stock Exchange. It said Saba has indicated it will vote in favour of the proposals which will be put forward to shareholders at a general meeting.

Saba responded to the announcement by declaring it a ‘win’ and said the transition to an ETF will ‘provide all shareholders the long-overdue liquidity opportunity they deserve’.

‘It marks the fourth of Saba’s nine UK campaigns to result in liquidity at NAV, clear evidence that meaningful reform of the UK trust sector is achievable,’ a spokesperson for Saba added.

The new Middlefield ETF is expected to benefit from a tight bid-offer spread, which is the difference between the ‘offer’ buy price and the ‘bid’ sell price. It will also pay quarterly distributions at a level similar to the current dividends paid by trust. The new ETF will be able to use financial derivatives, such as total return equity swaps, to support its dividend policy in a similar way to the trust.

‘Wake up call’ for boards

Deutsche Numis analyst Ewan Lovett-Turner commented: ‘Investment companies can deliver excellent outcomes for investors and have historically outperformed open-ended peers. However, in this case it is hard to argue with the outcome if investors are going to get the same strategy, run by the same manager at a lower cost, with a tighter bid offer spread and more trading liquidity.’

He added that today’s announcement should act as ‘another wake-up call’ for investment trust boards to assess whether a zero discount mechanism could be the way forward, particularly for strategies that invest in liquid large-caps.

Over the 12 months up to yesterday, MCP’s shares had risen by 19.8% which compares to a 4.2% loss by the average trust in the AIC’s North America sector. However, MCP’s shares were down 2.5% over three years, which compares to a 28.9% return by the sector average.

MCP isn’t the first trust to take action under pressure from Saba. In mid-April, European Smaller Companies Trust (ESCT ) announced it would tender up to 42.5% of its shares. In response, Saba agreed to make no further interventions before the 2028 AGM.

Saba Capital also withdrew its second round of proposals at CQS Natural Resources Growth & Income (CYN ) following a series of ‘very constructive discussions’ between the two parties.