Investors in the Wilson Asset Management stable of LICs will probably be aware that Wilson has quietly taken over control of Century Australia (CYA). Wilson are now raising $75m to add to the $80m already held in CYA. We take a look at the offer.
Investors in the Wilson Asset Management stable of LICs (WAM, WAA, WAX, WLE) will probably be aware that Wilson has quietly taken over control of Century Australia (CYA). Wilson are now raising $75m to add to the $80m already held in CYA to give it a total market capitalisation of around $150m.
For quite a while over 2015 and early 2016 Wilson built a large position in CYA, due to its steep discount to NTA at the time and a large amount of tax losses sitting on the balance sheet. Wilson has made a habit of profiting on LICs that trade a discount to NTA, and this was no exception. In early 2016 and keen to launch a large cap offering, Wilson unsuccessfully had a stab at taking over CYA. However, the eventual takeover was always inevitable, and earlier this year CYA shareholders agreed to have management of the LIC taken over by the Wilson team.
WAM’s existing four LICs include WLE, the reasonably recently launched large cap focused fund, WAM, the $1.5b small to mid cap focused behemoth, WAX, the ‘research driven’ offering and WAA, the reasonably small ‘market-driven’ offering. CYA on the surface will not differ materially from WLE, offering both the research and market driven approach Wilson is famous for as well as the ‘investment driven’ approach adopted by previous manager Perennial Value. It will also target the ASX300 index, rather than the ASX200 which WLE targets.
On the surface it appears the biggest benefit CYA provides to investors is the ability to invest at NTA (compared to around a 25% premium in the flagship WAM fund) and the large amount of tax losses to be made available to investors.
CYA has $25.9m of carried forward tax losses (with a total market cap of around $80m!). This is terrible news for anyone invested in CYA in the past (and explains why performance has been poor) but great for anyone investing now. Essentially, CYA will not pay any tax on profits until the $25.9m of tax losses have been used up. This means better performance can be expected (without the drag of tax being paid). However, this also means less franking credits available to investors, as traditionally franking credits for tax paid are passed back to investors within LICs, which is why yields tend to be higher than ETFs. Any franking credits paid to investors is restricted by franking credits received by CYA on franked dividends.
We are not sure what the market’s reaction will be to this. In theory the market would price CYA at a premium (if they expect performance to improve), however the market is not always rational, and investors love franked dividends. We’d expect dividends to be closer to the 3.68% CYA is currently paying, rather than the 6.02% paid by WAM until the tax credits are used and . Investors may continue to penalise CYA for this lower dividend, even thought it would be expected that NTA growth would be better than an equivalent fund with no tax losses in the bank. It will be interesting to see how this plays out.
There’s no ‘free options’ with this capital raising, however investors will be offered shares at the company’s net tangible assets. Management fees will remain at 1% pa, however performance fees will increase from 10% to 20% of outperformance above the benchmark.
The capital raising is open to everyone, however a priority offer is available to existing CYA, WAM, WLE, WAX and WAA shareholders.
This post was prepared with publicly available information available from Wilson Asset Management. ETF Watch did not receive any payment from WAM for this post.