Contango Income (WCM Global L/S) & WAM Capital

Contango Income Generator Limited (ASX:CIE),has recently been trading at a discount to NTA of circa 16%. An upcoming Extraordinary General Meeting (EGM) is set for July 14th. The business of the meeting is to:

1. change the Company name from “Contango Income Generator Limited” to “WCM Global Long Short Limited”; and

2. conduct a selective buy-back of all of the Company’s fully paid ordinary Shares (each, a Share) held by WAM Capital Limited (WAM) (Selective Buy-Back).

Number 1 seems like a good idea. The Contango brand is perhaps not the best out there in ASX LIC land.

WCM Global Long Short Limited sounds a bit better to me. There is another LIC out there in WCM Global Growth Limited (ASX:WQG) and this LIC has managed to see it trade at a premium to NTA.

The second item for business concerns a selective buyback of the CIE shares held by WAM.

The board had recommended to vote in favour of both resolutions.

However..

The Independent Expert has concluded that the Selective Buy-Back is not fair but reasonable.

The way this selective buyback works is that WAM Capital (ASX:WAM) will get to sell its shares in CIE at a price equal to the pre-tax NTA (less certain agreed transaction costs).

Other shareholders who would like to sell their CIE shares do not unfortunately have this luxury. As mentioned earlier, at the end of May when CIE published their last NTA, the shares closed at a 16% discount.

If this buyback is NOT approved by shareholders, ”CIE intends to conduct an equal access buy-back of an as yet undecided portion of its Shares from all Shareholders at an as yet undecided after-tax NTA per Share (less transaction costs) buy-back price. To the extent that the Selective Buy-Back is not approved by Shareholders, CIE will publish details of the proposed equal access buyback to shareholders before the buyback is implemented.”

Reading the above, if enough shareholders vote AGAINST item of business no.2, the intention is to conduct an EQUAL ACCESS buy-back. That can mean other shareholders aside from only WAM Capital, also get the opportunity to tender some of their shares at a price very close to the NTA. Recently as I said shares have been trading at a discount of circa 16% to NTA.

Contango Income Generator takeover and failed strategy change attempts

CIE suggested that a takeover last year from WAM Capital was an effort from WAM to destabilize the company. In hindsight CIE investors would have been better served accepting the takeover from WAM. The current large discount CIE trades at is despite most other LICs seeing their discounts narrow substantially over the last year. It is also after the CIE board have made other failed attempts to narrow the discount to NTA. First it was a high cash weighting that was cited as a reason for sluggish performance so they changed that. Then they changed the dividend policy by lowering it compared to what they said in the IPO. Last year there was another strategy change as they switched to this WCM Global Long Short strategy. When switching strategies last year, they issued new shares at a discount to NTA and at 62.5 cents in August last year. Looking at the share price now they haven’t moved much. When I look at many other investments around the world since August last year, most have gone up a lot.

Contango Income Generator Limited (ASX:CIE) even got a special mention in a recent article about the performance of ASX LICs here..

Peak to peak, which LIC managers performed during COVID? (firstlinks.com.au)

For shareholders sake, hopefully the board eventually is proved smart by the latest strategy tilt in 2020 that thus far has not got off to a good start. I could understand if long time suffering shareholders were to read another board’s recommendation to vote in a certain way, and think here we go again.

I have recently become a Contango Income Generator Limited (ASX:CIE) shareholder am voting AGAINST item 2 business I mentioned earlier about the SELECTIVE buyback. I prefer the prospects of an EQUAL ACCESS buyback. In other words, I do not like to vote in favour of a resolution that an independent expert has decided is not fair. My shareholding is only small and I have only looked at this closely in the last few weeks but I hope a fair solution can come about for shareholders. Some might have more at stake than me, and some may have suffered in the past by being trapped in this stock. Whilst I would have preferred to have more skin in the game and been able to pick up more stock in late June, I haven’t noticed the directors looking to buy shares of late. The director’s skin in the game via their shareholdings to me look fairly modest.

However other shareholders have different circumstances so I am not suggesting how one should vote. There are advantages and disadvantages to all this, so I urge shareholders to read the documents relating to the EGM which spells them out.

I did observe some discussion on forums CONTANGO INCOME GENERATOR LIMITED (ASX:CIE) – Ann: Notice of Extraordinary General Meeting/Proxy Form, page-1 – HotCopper | ASX Share Prices, Stock Market & Share Trading Forum, about the upcoming meeting. However once again I stress that not everyone’s circumstances are the same, so it is all subjective.

Some of the advantages in voting FOR the resolution in line with the board recommendation however confuse me a little: The points raised in the documents about advantages are in italics below with my comments followed.

1 – An exit by WAM it says supports CIE’s focus on its new strategy. – Whilst that is true CIE does not have a good record picking the best strategies to focus on.

2. Ensuring CIE is fully invested in the WCM Global Long Short strategy and not holding significant high cash balances waiting to implement a buyback – If the selective buyback was changed to an equal access buyback of 50% of all shares for example, well I assume this outcome could be achieved anyway in a short period of time, but in a fairer manner.

3. Creating a more balanced register by removing WAM and one that is aligned with the future strategy – History to me suggests over a long period of time and many examples, that WAM on the register is positive for LICs, whether WAM agrees with the future direction or not. I would have been interested in some analysis by the independent expert on this, but I couldn’t see any work done on this aspect from them.

4. Removing WAM “overhang” to also better effectively pursue capital management – See my comments in point 3 above. I would also add that CIE have a history of conduction dilutive capital raisings, so whether they will conduct effective capital management in the future is debatable.

5. Directors believe the selective buyback is in shareholder’s best interests – Unfortunately the historical evidence is that CIE board don’t have the greatest of records in deciding what is in shareholder’s best interests. The director’s shareholdings that I can see are less than what I ideally like to see as a shareholder.

Another point I would add is that these independent expert reports can’t lay out the potential tax effects of individual shareholders and neither can I. What I would say though is that the CIE share price has gone from over $1 more than 6 years ago, to under 65 cents now. If all shareholders (not only WAM) had a chance to sell some shares into an equal access buyback near the NTA circa 75 cents, that might still be a capital loss for many shareholders.

As I mentioned earlier the meeting is set for July 14th. The procedure to vote online is quite simple with Link registries. No matter what your view is, it is good to make your vote count so doing so online well before the meeting date is ideal. Getting your votes in online in the next few of days, i.e. before Friday 9th would be on the safe side. Date listed for lodgement of proxy forms is the 12th but that is on a Monday morning. As I understand it though if you haven’t voted up until the meeting date, there still is a chance to login to the meeting itself then and cast your vote as it is taking place.

No matter what happens, despite the tough time for Contango Income Generator Limited (ASX:CIE) shareholders in recent years, WCM Investment Management have a strong long term track record. Perhaps the market will better appreciate that if item 1 for business above gets approved in terms of changing the name to WCM Global Long Short Limited. As I mentioned earlier, WCM Global Growth Limited (ASX:WQG) managed to get is shares trade at a premium to NTA

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