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Dissident Group's Threat Boosts Stake

A closed-end fund shareholder group that had stalled Aberdeen Asset Management's acquisition of EquitiLink Group, has worked out a deal that will double its stake in the First Australia Fund, clearing the way for the deal to proceed as planned.

Aberdeen Asset Management of London agreed to acquire Equitilink Group of Sydney, Australia in late October for $80 million. The deal required the First Australia Fund to seek shareholder approval for a new advisory agreement between it and Equitilink Group.

Mira L.P., a general partner of Zurich Capital Management, both New York-based units of Zurich Financial Services Group of Zurich, Switzerland, filed a counter-proxy Nov. 12 with the Securities and Exchange Commission. The counter-proxy asked shareholders to vote against the new advisory agreement because the fund persistently traded at a discount. By voting against the new advisory agreement, Mira hoped it would persuade the fund's directors to take measures to reduce the discount, according to the proxy filing.

But Mira withdrew its counter-proxy Nov. 16, announcing it had reached an agreement with Equitilink to purchase 2,742,461 shares of the fund, increasing its stake from 15.79 percent to 31.8 percent.

"As part of the agreement, Mira has agreed to vote all the Fund shares it currently owns in favor of the proposal of the Fund's Board of Directors ... for the approval of a new management agreement and new investment advisory agreement for the Fund," the proxy said. "Mira has also agreed not to solicit proxies in opposition to the proposal or, prior to the stock sale, to attempt to influence Fund management or policies or to take or support any action opposing the proposal." Calls to both Mira L.P. and Equitilink were not returned.

By filing the counter proxy, Mira effectively stalled Equitilink's sale to Aberdeen, according to Thomas J. Herzfeld, chairman and president of Thomas J. Herzfeld, a registered investment advisory firm in Miami. Herzfeld tracks closed-end funds and is a consultant to closed-end fund advisers.

Before the acquisition could be approved, the new management agreement had to be approved by shareholders of the First Australia Fund, he said.

"To get the deal done, they had to clean up the loose ends," Herzfeld said.

"And to deliver the funds, they had to get rid of the dissident."

It appears Mira may have forced the Equitilink Group to sell it the additional shares in exchange for its compliance and approval of the sale, Herzfeld said.

"Maybe Mira figured if they can buy a chunk of stock, they could make another proposal later and be in a good position strategically," he said.

Whatever its intent may have been, Mira increased its stake in the fund by leveraging the deal between the two groups, Herzfeld said.

"The rules and regulations governing closed-end funds favor management except in the rare times when a management agreement is sold because ... it requires a super-majority [of votes] to approve it," Herzfeld said. This is the first time he has seen such a strategy used, he said.

It also appears the EquitiLink Group may have been forced to approve a deal that required the First Australia Fund to lose a significant amount of money, Herzfeld said. Over the past year or so, the EquitiLink Group has bought out shareholders that held a significant stake in the First Australia Fund, he said. In March 1999, EquitiLink purchased roughly the same number of shares of the First Australia Fund that it recently sold to Mira. It purchased the shares from two of the largest shareholders in the fund - the Tattersall Advisory Group of Richmond, Va., and the President & Fellows of Harvard College. EquitiLink purchased the shares from Tattersall for an average $8.57 a share and from Harvard for an average $8.56 a share, he said.

Shares of the First Australia Fund were trading at $5.88 per share as of Nov. 17, according to Morningstar of Chicago. The fund was trading at a 16.44 percent discount to net asset value and had $161.7 million in assets under management as of Nov. 10.

EquitiLink may have decided that it was worth losing money in the First Australia Fund in order to get the $80 million deal completed, Herzfeld said.

Although EquitiLink may have lost money on its deal with Mira, its acquisition by Aberdeen will ultimately benefit the First Australia Fund's shareholders, said Brian Smith, executive director of the Closed-End Fund Association of Kansas City, Mo.

"I think this is a good thing for shareholders," he said. "Anytime an adviser is acquired, it's good in all aspects. This is a healthy thing in a free market system and ultimately is reflected in the fund management."