REG - AVI Japan Opport.Tst Fidelity Japan Trust - Proposed Transaction with Fidelity Japan Trust plc

AVI Japan Opportunity TrustAnnouncement

03/04/2025 07:00

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RNS Number : 4336D  AVI Japan Opportunity Trust PLC  03 April 2025

THIS ANNOUNCEMENT IS RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR
DISTRIBUTION DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, TO U.S. PERSONS, OR
IN OR INTO, THE UNITED STATES, AUSTRALIA, CANADA, JAPAN, THE REPUBLIC OF SOUTH
AFRICA OR INTO ANY OTHER JURISDICTION WHERE TO DO SO MIGHT CONSTITUTE A
VIOLATION OR BREACH OF ANY APPLICABLE LAW.

 

3 April 2025

AVI Japan Opportunity Trust plc
("AJOT" or the "Company")

Proposed Transaction with Fidelity Japan Trust plc ("FJV")

 

·      Proposed merger(1) between AJOT and FJV ("Proposed Transaction"),
with both sets of shareholders benefiting from a more liquid, larger fund,
targeting highly attractive investment opportunities in the Japanese equities
space

·      The Proposed Transaction is supported by FJV's largest
shareholder, City of London Investment Management, which holds approximately
23% of FJV's issued share capital

·      Potential for material uplift in the market value for FJV
shareholders due to the narrower discount to NAV at which AJOT's shares trade
compared with FJV's shares(2)

·      Attractive opportunity for FJV shareholders to join an
outperforming investment trust(3,4) driven by structural change in Japan, with
robust discount control mechanisms

·      FJV shareholders would be eligible to participate in AJOT's
annual uncapped redemption offered every October. FJV shareholders also
offered cash exit of up to 25% in connection with the Proposed Transaction

 

Notes:

(1) To be effected under section 110 of the Insolvency Act

(2) Since AJOT's IPO on 23 October 2018 to 31 March 2025, AJOT's shares have
traded at an average discount of 0.05% to NAV versus a 9.35% average discount
to NAV for FJV shares over the same period.

(3) Performance data provided below on a one, three and five year bases

i.      AJOT NAV total return: +20.9%, +47.3%, +93.3%

ii.     FJV NAV total return: -9.3%, -3.4%, +28.1%

iii.    MSCI Japan Small Cap index total return: +0.9%, +18.6%, +35.2%

iv.    TOPIX total return of -2.9%, +20.5%, +45.3%.

(4) AJOT is a top decile performer across Japan focussed open ended investment
companies and investment trusts over one, three and five years.

 

Norman Crighton, Chair of AJOT commented:

 

"The AJOT Board has closely followed Fidelity Japan Trust, its public
disclosures, performance and its interactions with shareholders and the market
over the last few years. We have sought to engage with the FJV Board on
numerous occasions to discuss the combination of the two companies to create a
market leading Japanese investment trust. We were disappointed to read in
FJV's final results statements that the FJV Board recommends a continuation of
the status quo, with no liquidity offered until 2028, instead of engaging in
constructive dialogue regarding our proposal, which we believe is in the best
interests of all shareholders."

 

Michael Sugrue, City of London Investment Management commented:

 

"City of London Investment Management supports consolidation in the UK
Investment Trust sector.  We believe Trusts that deliver outperformance
whilst protecting shareholder value through active discount management should
be the beneficiaries. The manager of AJOT has delivered strong investment
performance since inception and the ongoing discount control mechanisms
implemented by the Board have protected shareholder value in an environment
where many other listed closed end funds have seen their discounts
significantly widen."

 

To progress the Proposed Transaction, the AJOT Board has made efforts to
explore discussions with the FJV Board, beginning with a written proposal to
merge the two trusts in August 2024. Since then, prompted by FJV shareholders
who had not been consulted on AJOT's proposal, the AJOT Board met with two of
the directors of the FJV Board in March 2025 to discuss the proposals further.
No further response had been received from the FJV Board since this meeting.

 

AJOT is making this proposal public ahead of FJV's continuation vote in May,
such that FJV shareholders can independently assess FJV's performance and
consider the alternative solution presented to their Board.

 

 

Background on AJOT

 

AJOT launched on the premium segment of the main market of the London Stock
Exchange in October 2018, with an investment objective to achieve capital
growth through investing in a focused portfolio of over-capitalised,
small-cap, Japanese equities. The Company invests across equities listed or
quoted in Japan which are considered by its investment manager, Asset Value
Investors Limited ("AVI" or "Asset Value Investors"), to be under-valued and
where cash, listed securities and/or realisable assets make up a significant
proportion of the market capitalisation. Since IPO, AJOT has developed a track
record for successful active management of its portfolio, and thus performs
significantly better than its peers and against both the MSCI Japan Small Cap
Index and the TOPIX. AJOT's one year, three and five year NAV total return was
20.9%, 47.3% and 93.3% respectively, (FJV one year: -9.3%, three year: -3.4%,
five year: 28.1%)(3).

 

AJOT has successful discount control policies whereby if, under normal market
conditions, the four month average share price discount to NAV is greater than
5% the Company will buy back shares with the intention of reducing the
discount to a level no greater than 5%. In addition, AJOT also offers its
shareholders an uncapped annual exit opportunity due to the Board's strong
focus on corporate governance and discount management. In the 2024 exit
opportunity, only 2.58% of the Company's issued share capital was tendered at
a 2% discount to the prevailing NAV (less direct transaction costs). The Board
was pleased to see this strong signal of support from its shareholders and
considers that the annual exit opportunity provides a strong platform for the
future growth of the Company. Also, as part of the Investment Management
Agreement, AVI must invest 25% of its management fee in AJOT shares. This is
achieved through the regular purchase of AJOT shares in the secondary market,
a strategy designed to align the interests of AVI with AJOT shareholders as
well as creating an additional marginal buyer of AJOT shares.

 

 

Strategic Rationale

 

The AJOT Board believes that the Proposed Transaction should deliver AJOT
shareholders a vehicle of materially enlarged scale, with improved secondary
market liquidity and reduced ongoing charges ratio.

 

For FJV shareholders, the AJOT Board believes the Proposed Transaction should
deliver:

 

·     Potential for material uplift in the market value of a FJV
shareholder's investment due to the narrower discount to NAV at which AJOT's
shares are trading and have historically traded compared with FJV's shares
over the recent past.(2)

·      Continued exposure to Japanese equities: AJOT has a clearly
defined and differentiated investment philosophy that seeks to exploit
material undervaluation amongst Japanese equities via careful stock selection
and active engagement with management, boards and other stakeholders. It is,
therefore, best positioned to profit from the ongoing corporate governance
reform.

·      The merged entity is expected to have increased fire power to
take meaningful positions in companies where there is significant opportunity
to unlock value through active engagement, in line with AJOT's highly
effective investment strategy.

·    Strong performance since inception, with AJOT having delivered
strong performance with a NAV total return of 79.2%, materially in excess of
the 24.3% recorded for the MSCI Japan Small Cap Index and 38.8% recorded for
the TOPIX index. Over this period, AJOT has been one of the top performing
funds in the Japan Smaller Companies sector (as well as against all eight
remaining Japanese investment trusts).

·    AJOT's robust discount control mechanisms should protect against
material discount widening and include an uncapped annual redemption
opportunity every October.

·    Access to Asset Value Investors, AJOT's investment manager, with a
track record of successful execution of strategy. AVI continues to leverage
its experience investing in asset-backed companies to help unlock value in
this area of the market. Through proactive engagement with management of
investee companies and taking advantage of the increased focus on corporate
governance and returns to shareholders in Japan, AVI has unlocked value for
the Company.

 

 

Proposed Transaction Structure

 

The Board of AJOT submitted a written proposal to the FJV Board on 7 August
2024, that included the following illustrative terms. The Proposed Transaction
remains on these terms:

 

·      The Board of AVI Japan Opportunity Trust proposes a merger
between AJOT and FJV by way of a scheme of reconstruction under section 110 of
the Insolvency Act 1986, with the enlarged fund being managed by AJOT's
investment manager, Asset Value Investors Limited.

·      FJV shareholders to be offered the choice of (i) rolling their
investment into new shares to be issued by AJOT (the "Rollover Option") and/or
(ii) electing for a cash exit, capped at 25 per cent. of FJV's shares in issue
(excluding treasury shares) (the "Cash Option").

·      As is customary, the Proposed Transaction would be effected on
the basis of Formula Asset Value ("FAV"), being the prevailing NAV of each
company with customary adjustments to be agreed between AJOT and FJV.

·      FJV shareholders electing for the Cash Option would have all or
part of their shareholding in FJV realised at a two per cent. discount to FAV.
The uplift arising from the Cash Option would be allocated to cover the
estimated FJV costs of implementing the Proposed Transaction (for the benefit
of FJV shareholders electing for the Rollover Option). AVI has also offered to
underwrite FJV's reasonable costs associated with implementing the Proposed
Transaction.

 

The Proposed Transaction would be effected by way of a scheme of
reconstruction pursuant to section 110 of the Insolvency Act 1986.
Accordingly, the City Code on Takeovers and Mergers will not apply to the
Proposed Transaction.

 

It is emphasised that there can be no certainty that engagement will progress,
that heads of terms will be agreed (either on the basis set out in this
announcement or otherwise), or whether the Proposed Transaction (whether along
the lines of the illustrative terms set out in this announcement or
otherwise), will take place at all. Should heads of terms for the Proposed
Transaction be agreed, further details and a proposed timetable of the
Proposed Transaction will be announced.

 

In any event, the Proposed Transaction remains subject to, inter alia, further
due diligence, the recommendation and approval of the Boards of FJV and AJOT
to proceed, necessary approvals by the shareholders of both companies,
relevant tax clearances being received, and relevant Financial Conduct
Authority approvals.

 

 

For further information, please contact:

 

AVI Japan Opportunity Trust plc

Norman Crighton

norman.crighton@ajot.co.uk

 

MUFG Corporate Governance Limited (Company Secretary)

Eva Kulich

0333 300 1932

 

 

 

LEI: 894500IJ5QQD7FPT3J73

 

 

All data and performance figures are calculated as at 31 March 2025 in GBP.

 

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