REG - JPMorgan Japan Small JPMorgan Jap Smll - Proposed Combination with JFJ

JPMorgan Japan Small Cap Growth & IncomeAnnouncement

31/07/2024 07:00

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RNS Number : 4801Y  JPMorgan Japan Small Cap G&I PLC  31 July 2024

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THE SAME WOULD BE UNLAWFUL.

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acquire, securities in the United States or in any other jurisdiction in
which the same would be unlawful. Neither this announcement nor any part of it
shall form the basis of or be relied on in connection with or act as an
inducement to enter into any contract or commitment whatsoever.

This announcement contains inside information

 

31 July 2024

JPMorgan Japanese Investment Trust plc ("JPMorgan Japanese" or "JFJ")

JPMorgan Japan Small Cap Growth & Income plc ("JPMorgan Japan Small Cap"
or "JSGI")

Combination of JFJ and JSGI

 

Introduction

The boards of JPMorgan Japanese and JPMorgan Japan Small Cap are pleased to
announce that the companies have agreed heads of terms for a combination of
the two companies. The combination will be undertaken through a scheme of
reconstruction by JSGI under s110 of the Insolvency Act 1986 (the "Scheme"),
under which JSGI's assets will be rolled into JFJ in exchange for the issue of
new JFJ shares to the continuing JSGI shareholders (the "Transaction"). Under
the terms of the Scheme, JSGI shareholders will be entitled to realise up to
25 per cent. of their investment in JSGI for cash.

The current investment manager of both companies, JPMorgan Asset Management
("JPMorgan"), and JFJ's lead portfolio managers, Nicholas Weindling and Miyako
Urabe, will, following the successful completion of the Transaction, continue
to manage the enlarged JFJ, investing in accordance with JFJ's existing
investment objective and policy. Pending completion of the Transaction, Miyako
Urabe will remain lead portfolio manager, alongside Xuming Tao, of JSGI.

The respective boards and JPMorgan believe that the outlook for Japanese
equities remains compelling with a combination of improving economic
fundamentals, structural transformation and corporate governance reforms. The
new combined entity, JFJ, will represent a very attractive way to invest in
this opportunity. The Transaction would result in a company with net assets of
up to approximately £1.0 billion, depending on the uptake of the cash exit
opportunity, and an estimated ongoing charges ratio of 0.63%. As such, JFJ
will continue to offer access to the compelling investment opportunity in
Japan, led by Nicholas Weindling and Miyako Urabe and the substantial JPMorgan
investment team based locally in Japan.

 

Benefits of the Transaction

The combination is expected to result in substantial benefits for both JSGI
and JFJ shareholders:

·    Broad All-Cap strategy to capture a compelling investment
opportunity: The JPMorgan portfolio managers have an unconstrained approach.
This means that they can and do invest anywhere in the market cap spectrum,
depending on where they see the best opportunities. The investment opportunity
in Japan stretches across the full market capitalisation spectrum and JPMorgan
anticipate that a blend of investments in larger, mid and small cap Japanese
companies should enable investors to fully capture the revitalisation of the
Japanese equity growth story through the corporate governance revolution.

·    Continued access to the market leading resources of JPMorgan: The
investment manager of both companies is JPMorgan, an institutional asset
manager with $2.9 Trillion of AUM, including $15.5 billion in Japanese
equities as at 30 June 2024. JFJ will continue to benefit from the expertise
of its portfolio managers, Nicholas Weindling and Miyako Urabe, with Miyako
providing continuity from her other role as lead portfolio manager of JSGI.

·    Increased scale: JFJ is a constituent of the FTSE 250 Index, with a
market capitalisation of £773.0 million and net assets of £847.6 million as
at 29 July 2024. It is the largest Japanese equity investment trust. The
Transaction will increase the net assets of JFJ to up to approximately £1.0
billion, depending on the uptake of the cash exit opportunity. The expected
benefits should include increased secondary market liquidity, a larger
marketing presence, and a greater relevance to larger investors as a direct
consequence of size.

·    Reduced management fees: Subject to the successful completion of the
Transaction, the Board of JFJ has agreed a new and reduced investment
management fee with JPMorgan Funds Limited ("JPMF") for the enlarged JFJ that
is expected to reduce the blended annual management fee from 0.58% on net
assets to 0.49% on net assets, depending on the uptake of the cash exit
opportunity. The marginal fee rate will be 0.35% on net assets in excess of
£750 million. For JSGI shareholders rolling into JFJ, this represents a
significant reduction in headline management fees from 0.83%.

·    Lower ongoing charges: JFJ's expected ongoing charges ratio (OCR),
pro forma for the Transaction (and excluding the costs and cost contribution
in relation to the Transaction) is expected to be 0.63% in the 12 months
following the Transaction. This compares to JFJ's OCR of 0.75% in the half
year to 31 March 2024 and JSGI's OCR of 1.20% in its financial year ending 31
March 2024.

·    Active approach to discount management: The JFJ Board takes an active
approach to managing the discount and has done so since early 2022. The JFJ
Board believes that this approach has dampened share price volatility and
moderated the discount. This has contributed to JFJ consistently trading at a
narrower discount than its immediate direct peer group. Over the 12 months to
29 July 2024, JFJ has repurchased 7.83 million shares, representing 5.15% of
the opening number of shares.

·    Direct cost neutrality: JPMF has agreed to cover the direct costs of
the Transaction such that there is no NAV dilution for either JFJ or JSGI
shareholders receiving new JFJ Shares pursuant to the Transaction from these
costs.

·    Economic uplift for JSGI Shareholders: JFJ is currently trading at a
c.8.8% discount to NAV - its 12-month average is 8.7%. This compares to a
current discount of c.13.8% for JSGI, with a 12-month average of 12.5%. JSGI's
shareholders are therefore expected to receive an uplift in the value of their
holding following completion of the Transaction. In addition, JSGI
shareholders may elect for the Cash Option, up to an aggregate limit of 25% of
JSGI's outstanding shares, at a 2% discount to the JSGI Residual FAV (as
defined below) less the costs of realising the assets required to create the
cash pool.

 

The Transaction

The Transaction will be effected by way of a scheme of reconstruction of JSGI
under section 110 of the Insolvency Act 1986, resulting in the voluntary
liquidation of JSGI and the transfer of JSGI's assets to JFJ in exchange for
the issue of new ordinary shares of JFJ ("New JFJ Shares") to existing JSGI
shareholders. The number of New JFJ Shares issued to JSGI shareholders will be
determined on a Formula Asset Value ("FAV") for FAV basis.

In accordance with customary practice for such transactions involving
investment trusts, the City Code on Takeovers and Mergers is not expected to
apply to the Transaction. The Transaction will be subject to, inter alia, the
approval of JSGI shareholders and the shareholders of JFJ, in addition to
necessary regulatory and tax approvals.

Subject to, and conditional on, the Scheme becoming unconditional and the
Transaction completing successfully, qualifying JSGI shareholders will be
entitled to elect to receive in respect of some, or all, of their JSGI shares:

(i)         New JFJ Shares; and/or

(ii)        a cash distribution (the "Cash Option") which, on an
aggregate basis will be limited to 25 per cent. of JSGI's shares in issue
(excluding treasury shares). Should total elections for the Cash Option exceed
25 per cent. of JSGI's shares in issue (excluding treasury shares), excess
elections for the Cash Option will be scaled back on a pro rata basis.

New JFJ Shares will be issued as the default option under the Scheme in the
event that JSGI shareholders do not make a valid election under the Scheme or
only elect for the Cash Option in respect of a proportion of their shares, or
to the extent elections for the Cash Option are scaled back as a result of the
Cash Option being oversubscribed.

The Cash Option will be offered at a discount of 2 per cent. to the JSGI
Residual FAV (the "Cash Discount") less the costs of realising the assets
allocated to the cash pool. The JSGI Residual FAV will be the NAV of JSGI
adjusted for the liquidation pool, dividends declared but unpaid (if
applicable), portfolio realignment costs and the costs of the Transaction.

JPMF has agreed to cover the direct costs of the Transaction incurred by both
JFJ and JSGI in the form of a fee waiver on the enlarged JFJ, subject to the
Scheme being implemented (the "JPMorgan Cost Contribution"). The JPMorgan Cost
Contribution will be for the benefit of JFJ and those JSGI shareholders
receiving New JFJ Shares, offsetting actual direct costs incurred by each
company.

The New JFJ Shares will be issued on the basis of the ratio between the JSGI
Rollover FAV and the JFJ FAV. The "JSGI Rollover FAV" will be the JSGI
Residual FAV adjusted for portfolio realignment costs, the JPMorgan Cost
Contribution, and the benefit of the aggregate Cash Discount (capped at the
value of the portfolio realignment costs). The JFJ FAV will be the JFJ NAV
adjusted for portfolio realignment costs, dividends declared but unpaid (if
applicable), direct transaction costs and the JPMorgan Cost Contribution.

Gearing

It is expected that JSGI's existing debt facilities will be repaid and closed
prior to the implementation of the Scheme. There will be no change to the
gearing policy of JFJ following completion of the Transaction.

New Management Fee Structure

As part of the Transaction, and conditional upon the Transaction being
implemented, JPMF has agreed a new management fee structure for JFJ pursuant
to which JPMF will be paid an annual fee for its management services, as
follows:

-      0.6% up to and including the first £500 million of net assets;

-      0.4% on net assets between £500 million and up to and including
£750 million; and

-      0.35% on net assets in excess of £750 million.

The new management fee structure will apply with effect from 1 October 2024.
This compares to: (a) the existing management fee structure for JFJ of 0.65%
p.a. on the first £465 million of net assets; 0.485% p.a. on net assets
between £465 million and £930 million; and 0.4% p.a. on net assets in excess
of £930 million and (b) the existing management fee structure for JSGI of
0.85% p.a. on net assets up to £150 million; and 0.75% p.a. on net assets in
excess £150 million.

Board Structure

Following completion of the Transaction, it is expected that the Board of the
enlarged JFJ will consist of seven directors, with six from the current board
of JFJ and one director from the board of JSGI. The JFJ Board is expected to
revert to six directors over the medium-term.

Dividends

It is expected that JSGI will declare a pre-liquidation dividend on or around
1 October 2024 of 1% of the Net Asset Value as at 30 September 2024, in lieu
of a second interim dividend. Such dividend shall be paid to JSGI Shareholders
on or around the proposed date for completion of the Transaction and the
aggregate amount of such dividend shall be reflected in the JSGI Residual FAV.

New JFJ shares will rank pari passu for the expected final JFJ dividend, which
is expected to be declared in December 2024.

The Board of JFJ notes that JSGI has paid an enhanced dividend since 2018.
Following the completion of the Transaction, the enlarged JFJ Board intends to
undertake a review of JFJ's dividend policy, including consulting with JFJ's
major shareholders.

Timetable

It is intended that the documentation in connection with the Transaction will
be posted to each of JFJ's and JSGI's shareholders in September 2024, with a
view to convening general meetings in October 2024. The Transaction is
expected to conclude by the end of October 2024.

 

Stephen Cohen, Chair of JPMorgan Japanese, commented:

"The JFJ Board is pleased to have agreed heads of terms for a combination with
JSGI which will result in a larger, more liquid investment trust with net
assets approaching £1 billion and a highly competitive ongoing fee structure.
JFJ will continue to benefit from the expertise of its Tokyo-based portfolio
managers, Nicholas Weindling and Miyako Urabe. JFJ offers a broad all-cap
strategy and is ideally positioned to capture Japan's compelling investment
opportunity."

Alexa Henderson, Chair of JPMorgan Japan Small Cap, commented:

"Over recent months, the board of JSGI, together with its advisers, have
considered a number of possible alternatives for the Company. Following the
conclusion of this process, the board is delighted to propose the combination
of JPMorgan Japan Small Cap Growth & Income plc and JPMorgan Japanese
Investment Trust plc. The board believes that the proposed combination will
provide continuity of investment process and philosophy within a broader
market opportunity. The proposed combination will provide a much larger
investment trust with significantly lower costs for shareholders."

 

For further information please contact:

 JPMorgan Japanese Investment Trust plc                                         Contact via Company Secretary

 Stephen Cohen

 JPMorgan Funds Limited (Company Secretary)                                     +44 (0) 20 7742 4000

 Investec Bank plc (Sponsor, Financial Adviser and Broker to JPMorgan Japanese  +44 (0) 20 7597 4000
 Investment Trust plc)

 Lucy Lewis

 Tom Skinner

 Denis Flanagan

 JPMorgan Japan Small Cap Growth & Income plc                                   Contact via Company Secretary

 Alexa Henderson

 JPMorgan Funds Limited (Company Secretary)                                     +44 (0) 20 7742 4000

 Cavendish Capital Markets Limited (Financial Adviser and Broker to JPMorgan    +44 (0) 20 7220 0500
 Japan Small Cap Growth & Income plc)

 James King

 Andrew Worne

                                                                              +44 (0) 7947 364 578
 Lansons (for Press Enquiries)

 JPMorgan Funds Limited                                                         +44 (0) 20 7742 4000

 Simon Crinage

 Katie Standley (for JPMorgan Japanese)

 Simon Elliott (for JPMorgan Japan Small Cap)

 

Notes

JFJ Legal Entity Identifier: 549300JZW3TSSO464R15

JSGI Legal Entity Identifier: 549300 KP3CRHPQ4RF811

 

Important Information

This announcement contains information that is inside information for the
purposes of Article 7 of the UK version of Regulation (EU) No. 596/2014 which
is part of UK 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 JPMorgan Japanese is Priyanka Anand of JPMF and on
behalf of JPMorgan Japan Small Cap is Divya Amin of JPMF.

The information in this announcement is for background purposes only and does
not purport to be full or complete. No reliance may be placed for any purpose
on the information contained in this announcement or its accuracy or
completeness. The material contained in this announcement is given as at the
date of its publication (unless otherwise marked) and is subject to updating,
revision and amendment. In particular, any proposals referred to herein are
subject to revision and amendment.

The New JFJ Shares have not been, and will not be, registered under the U.S.
Securities Act of 1933 (as amended) (the "Securities Act") or with any
securities regulatory authority of any state or other jurisdiction of the
United States, and may not be offered or sold in the United States or to, or
for the account or benefit of, U.S. persons absent registration or an
exemption from registration under the Securities Act. Moreover, the new JFJ
Shares have not been, nor will they be, registered under the applicable
securities laws of Australia, Canada, Japan, New Zealand, the Republic of
South Africa, or any member state of the EEA (other than any member state of
the EEA where the shares are lawfully marketed). Further, JFJ is not, and will
not be, registered under the US Investment Company Act of 1940, as amended.

The value of shares and the income from them is not guaranteed and can fall as
well as rise due to stock market and currency movements.  When you sell your
investment you may get back less than you originally invested. Figures refer
to past performance and past performance should not be considered a reliable
indicator of future results. Returns may increase or decrease as a result of
currency fluctuations.

This announcement may include statements that are, or may be deemed to be,
"forward-looking statements". These forward-looking statements can be
identified by the use of forward-looking terminology, including the terms
"believes", "estimates", "anticipates", "expects", "intends", "may", "might",
"will" or "should" or, in each case, their negative or other variations or
similar expressions. All statements other than statements of historical facts
included in this announcement, including, without limitation, those regarding
the JFJ's or JSGI's respective financial positions, strategies, plans,
proposed acquisitions and objectives, are forward-looking statements.

Forward-looking statements are subject to risks and uncertainties and,
accordingly, JFJ's or JSGI's actual future financial results and operational
performance may differ materially from the results and performance expressed
in, or implied by, the statements. These forward-looking statements speak only
as at the date of this announcement and cannot be relied upon as a guide to
future performance. Subject to their respective legal and regulatory
obligations, each of JFJ, JSGI and JPMorgan expressly disclaims any
obligations or undertaking to update or revise any forward-looking statements
contained herein to reflect any change in expectations with regard thereto or
any change in events, conditions or circumstances on which any such statement
is based unless required to do so by law or any appropriate regulatory
authority.

Investec Bank plc ("Investec") which is authorised in the United Kingdom by
the Prudential Regulatory Authority and regulated by the Financial Conduct
Authority and the Prudential Regulatory Authority is acting exclusively for
JFJ and for no-one else in connection with the Transaction, will not regard
any other person as it client in relation to the Transaction and will not be
responsible to anyone other than JFJ for providing the protections afforded to
its clients or for providing advice in relation to the Transaction, or any of
the other matters referred to in this announcement.  This does not exclude
any responsibilities or liabilities of Investec under the Financial Services
and Markets Act 2000, as amended, or the regulatory regime established
thereunder.

Cavendish Capital Markets Limited ("Cavendish") which is authorised in the
United Kingdom by the Financial Conduct Authority is acting exclusively for
JSGI and for no-one else in connection with the Transaction, will not regard
any other person as it client in relation to the Transaction and will not be
responsible to anyone other than JSGI for providing the protections afforded
to its clients or for providing advice in relation to the Transaction, or any
of the other matters referred to in this announcement.  This does not exclude
any responsibilities or liabilities of Cavendish under the Financial Services
and Markets Act 2000, as amended, or the regulatory regime established
thereunder.

 

None of JFJ, JSGI, JPMorgan, JPMF, Cavendish or Investec, or any of their
respective affiliates, accepts any responsibility or liability whatsoever for,
or makes any representation or warranty, express or implied, as to this
announcement, including the truth, accuracy or completeness of the information
in this announcement (or whether any information has been omitted from the
announcement) or any other information relating to any of them, whether
written, oral or in a visual or electronic form, and howsoever transmitted or
made available or for any loss howsoever arising from any use of the
announcement or its contents or otherwise arising in connection therewith.
Each of JFJ, JSGI, JPMorgan, JPMF and Investec, and their respective
affiliates, accordingly disclaim all and any liability whether arising in
tort, contract or otherwise which they might otherwise have in respect of this
announcement or its contents or otherwise arising in connection therewith.

 

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