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Another update on this months purchase.

9/6/2020

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Further to my last update I felt it would be remiss of me if I didn't provide another update, as somewhat unexpectedly City Of London Group (CLIG) have entered into a merger with a similar US outfit today. I say unexpected because they have not made a habit of this, although apparently they have been open to the idea and also a bit surprising that it didn't come with their year end trading update perhaps? 

Any way it comes as part of a trend of Asset managers merging to cut costs etc. as they struggle against the rising tide of passive investment management. In this case it is not so much about cost cutting and more about putting together two similar businesses in terms of the way some of their portfolios are managed to include closed end funds, but brings diversification in terms of client type and geography and thereby will help to dilute their current bias towards more volatile emerging markets. 

You can read the full announcement and details of the price they are paying (in shares) from this announcement on their website. While there is a useful sponsored note from Hardman & Co. here - which give more details on the Company Karpus that they are buying and also includes some upwardly revised forecasts reflecting the potential from this acquisition and the recent market recovery. 

This seems to suggest that it could be on a prospective 6 to 7x earnings with a 9 to 10% yield assuming the deal is consummated in the third quarter of this year, that markets remain OK and that they do not see too much in the way of outflows from the target. They do apparently have some limited protection in the terms to allow for this though apparently. It won't help the liquidity much as they have now also acquired a (retiring) founder shareholder with a large stake in the business having just seen their own founder sell out in recent years.

Thus assuming that they haven't dealt at the top of the recovery and we are about to be hit with the rest of the bear market, then it doesn't look like a bad deal. Indeed if the market does remain benign going forward then it might be possible for the shares, over time to return towards their previous peak around 470p or so which would still only leave them on around 10x with a 6% yield which is levels they have attained in the past. As ever I guess time will tell on which way that pans out from here.
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