Putnam Looks to Merge Closed-End Muni Bond Funds

Putnam Investments wants to merge two closed-end municipal bond funds into open-end funds with similar investment strategies.

The plans call for the merger of the $67 million (PCA - Cramer's Take - Stockpickr) Putnam California Investment Grade Municipal Trust into the $2.08 billion (PCTEX - Cramer's Take - Stockpickr) Putnam California Tax Exempt Income Fund, while the $38 million (PMN - Cramer's Take - Stockpickr)Putnam New York Investment Grade Municipal Trust would be merged into the $1.16 billion (PTEIX - Cramer's Take - Stockpickr) Putnam New York Tax Exempt Income Fund.

In the case of Putnam California Invesment Grade Municipal Trust, the proposed merger is at least partly in response to an attempt by a shareholder, the Mildred B. Horejsi Trust, to gain control of the closed-end fund and fire Putnam as an investment manager. On Jan. 22, the trust announced a tender offer for the fund's outstanding common shares of $14.16 a share.

It comes as Putnam announced last week that it would be sold to Canada's Power Financial for $3.9 billion.

In its tender offer, the trust said it wants to change the management and investment mandate of Putnam California Investment Grade Municipal Trust, citing the fact that "current management is embroiled in litigation, investigations and other allegations of varying improprieties which have led to various settlements with the Securities and Exchange Commission and the Massachusetts Securities Division."

In September, the SEC ordered Putnam to return $1.3 million plus interest to investors who were overcharged for performance-based fees between April 1997 and December 2004.

The tender offer also cites Putnam's sale to Power Financial as a potential concern, saying the Canadian company "may not necessarily have experienced management in the affairs of United States closed-end funds or funds traded on the American Stock Exchange."

The tender offer price reflects a discount of 4.4% to the fund's net asset value of $14.81 a share as of the end of trading on Feb. 2. The fund's share price closed at $13.92 Friday, or a discount of 6.42%, according to fund tracker Morningstar.

"This is an opportunity for shareholders to realize a sale on their shares greater than the highest price the shares have traded on the American Stock Exchange for the previous 2 1/2 years," the trust said in its offer.

Puntam said the funds' boards had planned to consider formal approval of the mergers at their regular meetings scheduled for Feb. 8-9, but decided to accelerate the process as a result of the tender offer. The trustees of the California Investment Grade Municipal Trust rejected the tender offer, arguing that the offer is inadequate.

"If shareholders accept the offer they will likely receive less than their full net asset value," the company said in a statement. It added that the merger of the two funds would "give shareholders shares of an open-end fund with a value equal to the full net asset value of their shares."

Putnam said it expects the mergers to be tax-free to shareholders, while the tender offer would be a taxable event. It also announced that it has no intentions of changing the portfolio's management team and investment process -- athough, as open-end funds, they no longer would be able to invest with borrowed money, as many closed-end funds do.

The merger is subject to the approval of fund shareholders and certain other conditions. If fund shareholders approve the merger, they would be able to redeem their shares of the open-end fund at their net asset value. However, if they do so within seven days of the merger, they will have to pay a 1% redemption fee.

Putnam also said that, as a result of the merger proposals, the two closed-end funds have suspended their share-repurchase program for the funds, under which the funds have been authorized to repurchase up to 10% of their outstanding shares at current market prices.