Sprott Asset Management LP is leaping into the middle of a proxy fight and plans to launch a hostile takeover bid for two funds owning gold and silver bullion.
Toronto-based Sprott proposed on Thursday to acquire the outstanding units of both Central GoldTrust and Silver Bullion Trust, and merge them into its own, similarly-designed funds, Sprott Physical Gold Trust and Sprott Physical Silver Trust. Sprott's offer would involve trading units of the target trusts for units in Sprott's trusts, all on a one-for-one, net-asset value basis.
Sprott said the deal would improve unitholders investments. "What they want to own are units in a fund backed by physical gold that they can exchange if they want to, and that trades close to its intrinsic value all the time," said John Wilson, chief executive of Sprott Asset Management. "All they have to do is exchange their units for our units."
Combined, there are about $898-million (U.S.) worth of assets in the two Central trusts, and Sprott believes its deal will amount to $69.5-million in additional value. Sprott's existing assets in its trusts are $2.5-billion.
Central GoldTrust issued a release saying it wasn't approached by Sprott with a formal offer, but it has formed a special committee of its trustees to "evaluate and consider the adequacy of Sprott's offer, if and when it is made."
The offer comes as Central GoldTrust and Silver Bullion – which are both run from the same office in Ancaster, Ont. – have been the subjects of a proxy battle with Polar Securities Inc. The Canadian investment manager took issue with the price at which the units were trading, which was consistently below the underlying value of the metal in the trust, and proposed to change the way the units can be redeemed. Polar's idea is that, if it's easier to access the underlying bullion, the units will trade close to the value of the metal.
Polar's chief investment officer Paul Sabourin said in a statement the Sprott offer represented an "elegant solution to this ongoing problem that the existing management teams have been unwilling to resolve on their own." But Polar said it would continue its campaign to elect new trustees to the board of Central GoldTrust at the annual meeting on May 1, since existing leadership was "neither willing nor capable of objectively evaluating alternatives."
Sprott said the target funds have been run poorly and its own trusts already have a redemption feature in place that helps to close the trading gap.
"Holders of our trusts want to know that there's actual physical gold backing up the units that they own. They want to know where that's stored and they like the fact that our units are stored outside the banking system. So, we store our gold at the Canadian Mint," Mr. Wilson said. Sprott's unit holders can redeem their units for the physical metal and the company is exploring making coin delivery available for investors with smaller holdings.
For Sprott's existing clients, larger trusts are more liquid and fund costs can be shared more widely, Mr. Wilson said. He believes the deal should lead to a decline in the management expense ratio.
This new proposal already has the support of one of the largest stakeholders – Pekin Singer Strauss Asset Management Inc., which Sprott says is the largest unitholder of Central GoldTrust. The asset manager has previously expressed support for shaking up Central GoldTrust and has agreed to back Sprott's offer.
Polar's campaign for change hit a snag earlier this month when proxy advisory firm Institutional Shareholder Services Inc. (ISS) recommended that its clients vote for Central GoldTrust's nominees. ISS criticized Polar's lack of a new business plan to better manage the trust and the "opportunistic nature" of its proposal.
Sprott's trusts trade at more competitive levels than the Central GoldTrust's and Silver Bullion's do. The company said that as of the end of Wednesday trading, Central Gold's units were trading at a 7.6-per-cent discount to net asset value, while Sprott Physical Gold Trust units were trading at a 0.37-per-cent discount on the Toronto Stock Exchange and NYSE Arca, respectively. There is a similar relationship among the silver trusts.
Closing the gap will take more than a change in how unitholders can redeem their holdings, Mr. Wilson said, adding that Sprott would dedicate more resources to product marketing and investor engagement efforts.
Sprott Physical Gold Trust (PHYS)
Close: $9.86 (U.S.), up 6 ¢
Central GoldTrust (GTU.UN)
Close: $51.40, up $1.87
Silver Bullion Trust (SBT.UN)
Close: $10.80, up 54 ¢
"What's required is not just the redemption feature. What's required is a manager that invests in the product to create buying demand for the product – that's what keeps it close to the NAV," said Mr. Wilson, adding that he attributes the trading performance at Sprott to these efforts.
Sprott doesn't see this as an activist move, but just a good fit with the firm's interest and expertise in precious metals.