Elliott Wants Easier Way To Replace Fondul Proprietatea Manager

04.02.2013 By Andrei Chirileasa

US hedge fund Elliott Associates, which has invested about EUR250 million in 17% of Romanian investment fund Fondul Proprietatea (FP.RO) over the last three years, is asking for a simpler procedure to replace Proprietatea’s manager.

The four-year term of the current manager, Franklin Templeton, expires in August 2014 and Elliott may not vote to extend it by another four years.

After having worked together to take control of the EUR3.5 billion assets of Fondul Proprietatea in the last two years and a half, following the biggest privatization in disguise conducted by the Romanian government after 1990, Elliott and Franklin Templeton might not be on such friendly terms any more, because their plans for the fund no longer seem in perfect sync.

Elliott’s request to alter the corporate charter of Fondul Proprietatea clearly shows the main shareholder of the fund wants the procedure to replace the manager to be as simple as possible. Brokers say Elliott’s request is perfectly normal and is not a declaration of war against Templeton.

“It doesn’t necessarily mean Elliott asked for Franklin Templeton to be replaced this year,” a broker commented.

Still, the mere proposal from Elliott is a strong signal for Franklin Templeton, as the hedge fund is known not to take such steps without a precise target and Templeton’s results in the last two and a half years are not exactly what shareholders expected.

The asset value has not gone up, capitalization is lower than it was when it went public, its shares are trading a discount to net asset value of about 48%, profits and dividends paid to shareholders solely came from the dividends Proprietatea collected from the companies in its portfolio and not from actively managing it.

Some even say Franklin Templeton did nothing more than the regional investment funds’ (SIF) managers did, while others commend Franklin Templeton for inducing transparency in the companies in the fund’s portfolio.

Which is quite little, since Templeton has collected more than 90 million lei (EUR20 million) in Fondul Proprietatea management fees so far.

The stake of the fight over Fondul Proprietatea besides fees and profits is the significant holdings in the main companies in the energy sector (20% in both OMV Petrom and Hidroelectrica, 15% in Romgaz and Transgaz, 10% in Nuclearelectrica).

Fondul Proprietatea has become the main tool to promote American interests in Romania’s energy sector, along with Exxon and Chevron, which are drilling for gas in the Black Sea and Moldova. The strategic importance of the fund for Americans shows in the nomination of former US Ambassador Mark Gittenstein for the Representatives Committee.

Fondul Proprietatea’s current corporate charter stipulates that the manager can be replaced if two thirds of the shareholders attending or represented at the general meeting of shareholders vote for it.

Elliott requests it be done by a simple majority instead. It also requested that the general meeting of shareholders be called six months before the manager’s term expires so as to decide whether to extend it or choose a new manager. If the second option is chosen, the Representatives Committee takes care of the recruitment of the new manager, with shareholders later asked to validate.

Elliott would like to maximize profit on its EUR250 million investment in Fondul Proprietatea shares faster and it traditionally wants to multiply its money several times, instead of settling for a yield of 20% to 30% like mutual or pension funds. To achieve that, it uses aggressive strategies and is actively involved in the management of the companies it buys into.

One of its favorite strategies is controlled liquidation of assets and distributing the money to shareholders by stock repurchase. It clearly showed it would prefer to do that with Fondul Proprietatea, when it proposed last year that Franklin Templeton should be rewarded for any additional amounts of money paid to shareholders after asset sales.

Franklin Templeton prefers a longer management of Fondul Proprietatea’s assets, to collect its fees for as long as possible. (EUR1=RON4.4179)

(English version by Loredana Fratila-Cristescu)