REG - abrdn Smll Co's IT - Result of Strategic Review

Abrdn Smaller Companies Income TrustAnnouncement

26/07/2023 07:00

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RNS Number : 1814H  abrdn Smaller Companies Inc Tst plc  26 July 2023

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This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic
law by virtue of the European Union (Withdrawal) Act 2018, as amended. On the
publication of this announcement via a Regulatory Information Service, this
inside information is now considered to be in the public domain.

 

For immediate release

 

 

26 July 2023

 

abrdn Smaller Companies Income Trust plc ("ASCI" or the "Company")

 

Result of Strategic Review and proposed combination with Shires Income plc
("Shires")

 

Introduction

 

Following the Company's announcement on 13 February 2023, the Board of ASCI
has conducted a thorough and extensive review of options for the future of the
Company. The Board was very pleased with the interest shown, with proposals
being received from more than a dozen candidates. Most of the proposals
envisaged a combination of the Company's assets with another investment trust,
which was an outcome the Board expected to consider as part of the strategic
review.

 

After detailed negotiations the Board is pleased to announce that it has
agreed terms with the board of Shires for a combination of the assets of ASCI
and Shires (the "Proposals"). The terms of the Proposal have been improved,
substantially so in relation to the Cash Option (as referred to below), from a
proposal that Shires presented to the Company in February prior to the
commencement of the strategic review. Both investment trusts, which are
managed by abrdn Fund Managers Limited ("abrdn"), have UK equity income as a
key part of their investment objectives, including exposure to UK smaller
companies.

 

The Proposals

 

The Proposals will be implemented through a scheme of reconstruction and
voluntary winding up of the Company under section 110 of the Insolvency Act
1986 and the associated transfer of assets to Shires (the "Scheme").

Subject to the approval of shareholders of both companies, the Scheme will
give ASCI's shareholders the choice between receiving new ordinary shares of
50p each in the capital of Shires ("New Ordinary Shares") (the "Rollover" and
"Rollover Option"); and/or cash (the "Cash Option"). If the Scheme is
approved, ASCI's shareholders will Rollover into Shires unless they
specifically elect for the Cash Option for all or part of their holding. For
the avoidance of doubt, the Cash Option will be unlimited, with all valid
elections to receive cash accepted.

The Company expects to pay out the vast majority of its accumulated revenue
reserves via a pre-liquidation dividend to all of ASCI's shareholders, and
intends to repay its floating rate credit facility prior to the implementation
of the Scheme.

Shires' entitlements as a shareholder in ASCI under the Scheme will be
satisfied on the Company's liquidation by the transfer of the Rollover assets
to Shires (which will include Shires' pro rata share of ASCI's assets) without
any issue of New Ordinary Shares to Shires under the Scheme.

The enlarged Shires will continue to be managed by abrdn in accordance with
its existing investment objective: namely to provide a high level of income
together with the potential for growth of both income and capital from a
diversified portfolio, substantially invested in UK equities but also in
preference shares, convertibles and other fixed income securities. Shires will
continue to have exposure to UK small caps, though holding assets directly
rather than indirectly via its shareholding in ASCI. Shires will be managed on
the same management terms, and with the aim of providing the same dividend
levels as Shires shareholders have received in the year to 31 March 2023,
namely 14.20p per share, which represents a yield of 6.1 per cent. based on
Shires' share price as at 24 July 2023. Shires' shares have traded at an
average discount to net asset value ("NAV") of 1.5 per cent. over the twelve
months to 24 July 2023 and Shires has periodically issued new shares to meet
demand.

Benefits of the Proposals

Shareholders in the enlarged Shires are expected to benefit from:

·      an increase in scale, allowing the enlarged Shires to spread
fixed costs over a larger asset base and to benefit from the tiered management
fee structure, while also potentially improving secondary liquidity and aiding
marketability; and

·      a differentiated UK equity income strategy with an attractive
dividend, with some exposure to smaller companies and fixed income securities.

 

The Proposals are also expected to deliver benefits (1) to ASCI's
shareholders, whether they wish to Rollover into Shires or wish to elect for
the Cash Option:

·      Payout of revenue reserves via pre-liquidation dividend:

o  It is expected that the vast majority of ASCI's accumulated revenue
reserves will be paid out before the Scheme becomes effective

o  All of ASCI's shareholders will be entitled to receive the pre-liquidation
dividend, whether they elect for the Rollover Option or the Cash Option

For those shareholders electing to Rollover into Shires:

·      Increased dividend:

o  An expected increase of 44.7 per cent. per annum in dividend income based
on the most recent four dividends for each company (i.e. a full year's
dividend)

·      Reduced costs:

o  Expected decrease of 31.9 per cent. in ongoing charges ratio based on the
pro forma OCR of the enlarged Shires as compared with the last published OCR
of the Company

o  A large part of this reduction is due to Shires' management fee, being
0.45 per cent. of NAV (including any borrowings up to a maximum of £30m, and
excluding commonly managed funds) per annum up to and including £100m and
0.40 per cent. of NAV (as above) per annum in excess of £100m

·      Improved average rating:

o  Over the twelve months to 24 July 2023, Shires' shares traded at an
average 1.5 per cent. discount to NAV, compared to ASCI's shares which traded
at an average 13.2 per cent. discount to NAV

o  As at 24 July 2023, the latest practicable date prior to publication of
this announcement, the discounts to NAV at which ASCI's shares and Shires'
shares traded were, respectively, 17.1 per cent. and 7.9 per cent.

·      Shires' historic investment performance (2):

o  Shires' NAV total return over 1, 3 and 5 years (measured to 24 July 2023)
has been 4.5 per cent., 25.8 per cent. and 16.1 per cent. respectively

o  Shires' share price total return over 1, 3 and 5 years (measured to 24
July 2023) has been -3.4 per cent., 20.5 per cent. and 12.2 per cent.
respectively

·      Significant cost contribution by abrdn and notice period waiver:

o  abrdn will offer a cost contribution to the Scheme by waiving the
management fee payable by Shires to abrdn that would have been due in respect
of the ASCI assets rolling over to Shires for a period of six months following
implementation of the Scheme (to the benefit of all shareholders of the
enlarged Shires). The reduction will be calculated by reference to the
percentage that those assets represent of the enlarged Shires at the point of
implementation of the Scheme

o  abrdn has also undertaken to waive, in full, the period of notice to which
it is contractually entitled under the management contract that it has with
the Company and has agreed that no compensation will be payable by the Company
to abrdn in respect of such wavier

·      Continued UK smaller companies exposure:

o  Circa 40 per cent. of the Company's portfolio is expected to be
transferred in specie to Shires, ensuring continued UK small cap exposure for
all Shires shareholders, with the expectation being that UK small cap exposure
will represent up to 20 per cent. of Shires' portfolio on an ongoing basis

For those electing for the Cash Option:

·      Unlimited cash exit:

o  All of the Company's shareholders will have the ability to elect up to 100
per cent. of their holding in ASCI for cash

Further details on the Proposals

The Proposals will be subject to inter alia the approval of shareholders of
the Company and Shires, as well as regulatory and tax approvals.

 

The formula asset value ("FAV") of ASCI (the "ASCI FAV") and the FAV of Shires
(the "Shires FAV") will be calculated, for the purposes of the Scheme, in
accordance with the respective company's normal accounting policies. FAVs will
be calculated based on the NAV (cum income with debt at fair value) of each
company, on a calculation date to be agreed by both parties, with any
necessary adjustments made, and will be reviewed by an independent accountant.

Shires will be protected from asset and income dilution under the Proposals
through the issue of New Ordinary Shares at a 0.80 per cent. premium to NAV.
As part of the Scheme, Shires, the largest beneficial shareholder in ASCI,
holding approximately 13.6 per cent. of the Company's issued share capital as
at 24 July 2023, will vote its full holding in favour of the Scheme.

 

Shareholders of ASCI who elect for the Cash Option for all of part of their
shareholding will receive an amount in cash equal to 98.5 per cent. of the
value of assets attributable to the Cash Option (after realising any non-cash
assets so attributed), with the balance being applied for the benefit of the
Rollover Option.

Each party will bear its own costs in respect of the Proposals, whether or not
the Proposals proceed.

For the avoidance of doubt, any costs of realignment and/or realisation of the
Company's portfolio prior to the Scheme becoming effective will be borne by
the Company. Any stamp duty, stamp duty reserve tax or other transaction tax,
or investment costs incurred by Shires for the acquisition of the ASCI
portfolio or the deployment of the cash therein upon receipt shall be borne by
the enlarged Shires. The London Stock Exchange admission fees payable in
connection with the issue of New Ordinary Shares to ASCI's shareholders will
also be borne by the enlarged Shires.

 

Shires following implementation of the Scheme

It is intended that the Shires portfolio will continue to be managed on the
same basis as it is currently, though Shires' exposure to UK small caps will
be through direct investments rather than via its shareholding in ASCI. It is
expected that up to 20 per cent. of the enlarged Shires' portfolio will be UK
small caps on an ongoing basis.

The Shires portfolio is managed by abrdn, led by Iain Pyle and Charles Luke.
Shires also has access to abrdn's Smaller Companies team, including drawing on
the expertise of the Company's portfolio managers Abby Glennie and Amanda
Yeaman. Shires' existing management fees of 0.45 per cent. of NAV (including
any borrowings up to a maximum of £30m, and excluding commonly managed funds)
up to and including £100m and 0.40 per cent. of NAV (as above) in excess of
£100m per annum will continue to be charged. A new administration fee of
£120,000 plus VAT per annum, effective from the completion of the Scheme,
will also be payable by Shires to abrdn. Shires' gearing will remain subject
to a maximum equity gearing level of 35 per cent. of net assets at the time of
draw down (for information, net gearing was 22.2 per cent. drawn down as at 31
March 2023) and the Shires board has no current intention of increasing the
Company's borrowings above the loan facility already in place following
implementation of the Proposals.

A role on the enlarged Shires board was not offered to ASCI's directors as
part of the revised proposals.

Timetable

It is anticipated that the documentation in connection with the Scheme will be
posted to shareholders in September 2023, with a view to convening general
meetings in October/November 2023 in order to complete the transaction by that
time.

A further announcement is expected when the Company and Shires publish their
respective Scheme documents.

Dagmar Kent Kershaw, ASCI's chairman, commented "After a thorough review
process, during which a number of excellent proposals were received, the Board
of ASCI is pleased to recommend the Proposals to shareholders. For
shareholders who wish to continue their investment we believe this will
provide them with an attractive and potentially growing level of dividend and
the potential for future capital growth, whilst also retaining an exposure to
smaller companies overseen by the UK Equities team at abrdn. ASCI's
shareholders will also be able to elect to receive cash for some or all of
their shareholding as part of the Scheme and to do so on materially improved
terms to those which Shires proposed to the Company in February. The Board
would like to thank ASCI's investment managers Abby Glennie and Amanda Yeaman
for all their hard work, dedication and expert stewardship of the Company's
investments, through some very challenging times for the Smaller Companies
sector."

Important Information

This announcement contains information that is inside information for the
purposes of the Market Abuse Regulation (EU) No. 596/2014 as it forms part of
UK domestic law by virtue of the European Union (Withdrawal) Act 2018, as
amended. The person responsible for arranging for the release of this
announcement on behalf of the Company is Holly Kidd of abrdn Holdings Limited.

This announcement is not for publication or distribution, directly or
indirectly, in or into the United States of America. This announcement is not
an offer of securities for sale into the United States. The securities
referred to herein have not been and will not be registered under the U.S.
Securities Act of 1933, as amended, and may not be offered or sold in the
United States, except pursuant to an applicable exemption from registration.
No public offering of securities is being made in the United States.

Past performance is not a guide to future performance. The value of
investments, and the income or capital entitlement which may derive from them,
if any, may go down as well as up and is not guaranteed. The information
contained in this announcement is for background purposes only and does not
purport to be full or complete and may not be used in making any investment
decision. Nothing in this announcement constitutes investment advice and any
recommendations that may be contained herein have not been based upon a
consideration of the investment objectives, financial situation or particular
needs of any specific recipient. No representation or warranty is given to the
achievement or reasonableness of future projections, management targets,
estimates, prospects or returns, if any. The information contained in this
announcement will not be updated.

 

( )

(1)  Unless otherwise stated illustrative financial effects within this
section are based on figures as at or to 24 July 2023 and exclude any impact
from the Company's portfolio realisation costs. All figures are illustrative
only, using currently available information and estimates. Assumes 25 per
cent. of the Company's issued share capital will elect for the Cash Option.
All figures are subject to change. Past performance is not a guide to future
performance. The value of investments, and the income or capital entitlement
which may derive from them, if any, may go down as well as up and is not
guaranteed.

(

2) Source: Refinitiv Datastream

 

 

Enquiries:

Dagmar Kent Kershaw, Chair

0131 372 2200

 

Neil Morgan, Winterflood Securities

0203 100 0292

 

Legal Entity Identifier: 213800J6D2TVHRGKBG24

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