The Magellan Financial Group Ltd (ASX: MFG) share price has jumped 4% after announcing its plans for MGF options.
Magellan Financial Group is the fund manager, and Magellan Global Fund (ASX: MGF) is the (closed-ended) fund it manages.
What’s going on?
A couple of years ago, Magellan issued ‘options’ for investors to buy more MGF units at a 7.5% discount to the net asset value (NAV) of the underlying fund per unit.
The original idea was that unitholders could benefit from receiving options at no cost, and they could get those units at a discount, or selling options, while Magellan Financial Group would benefit from an increase in its funds under management (FUM) if the options were utilised.
The fund manager had agreed to fund that 7.5% discount itself.
With MGF seeing the discount to the NAV per unit significantly reduce over the last 12 months, the chance of the options being exercised has “increased”.
There has been reporting that particular investors, including Keybridge/Nick Bolton, who were looking at buying/own options and potentially exercising them, “possibly in combination with other strategies that are designed to bring about the delisting and winding-up of the fund.”
Magellan wouldn’t want to lose MGF as a closed-ended fund, and it wants the fund to stay operational because it comes with locked-in management fees.
Magellan’s plan
The fund manager has decided to acquire options on the market to reduce both the financial liability on its balance sheet and the value of “inhibiting the potential actions of market participants that are not aligned” with Magellan Financial Group’s interests and those of its shareholders.
Magellan said it will acquire up to 500 million outstanding options at a price of $0.10 per options, which will be done on-market. This includes the purchase of approximately 178 million options from Keybridge Capital, which has entered into a ‘standstill deed’ in support of Magellan’s purchase.
Final thoughts on the Magellan share price
This seems like the right move by Magellan to reduce the risk of it taking a bad financial hit. It’s costly though, Magellan could have used this cash to invest for growth.
It still hasn’t stopped the outflow of funds either, it regularly continues to be $1 billion per month.
If the fund outflows slows, or stops, then Magellan shares could keep rising, but until then it looks like a tough slog for the manager and shareholders.
