by Tristan Harrison

WAM Capital Limited (ASX: WAM) surprised investors this afternoon by announcing a off-market takeover bid for Wealth Defender Equities Ltd (ASX: WDE).

As a reminder, WAM Capital is one of the largest listed investment companies (LICs) on the ASX, having operated for around two decades with an excellent outperformance record.

Wealth Defender is a much smaller LIC that aims to outperform the S&P/ASX 300 Accumulation Index.

The takeover offer is one WAM share for every 2.5 Wealth Defender shares. This represents a premium of 15.1% to the Wealth Defender share price on 29 August 2018.

WAM Capital made a compelling case to Wealth Defender shareholders saying that Wealth Defender’s investment manager has underperformed its benchmark since inception has always traded at a discount to the reported pre-tax net tangible assets (NTA) per share.

WAM Capital said that following a decision made by the Wealth Defender Board, it adopted a discretionary approach to the use of portfolio protection, which represents a substantive change to the approach disclosed to investors in the prospectus and employed since it commenced trading on the ASX.

Despite these issues, “the Wealth Defender Board of Directors has not employed any effective capital management initiatives to provide shareholders with opportunities to exit their positions at or above the announced pre-tax NTA.”

If the offer is successful Wealth Defender shareholders can stay as WAM Capital shareholders or exit their position.

WAM Capital shareholders will benefit from realising all or part of WAM’s 16.27% holding of Wealth Defender shares that were purchased at a discount to the pre-tax NTA. In addition, the all-scrip offer allows WAM shareholders to benefit from new shares issued at a premium to the WAM pre-tax NTA.

Foolish takeaway

It seems like everyone would be a winner from the deal. Wealth Defender shareholders get a 15% gain and WAM Capital shareholders will see the pre-tax NTA value rise. It seems like a good time to do this with WAM Capital close to its 2018 share price high.

I’d definitely accept the offer if I were a Wealth Defender shareholder, as its underlying performance has been very disappointing.