abrdn New Dawn Investment Trust (ABD) has announced that it has agreed to terms with the board of Asia Dragon Trust in respect of a proposed combination of the two trusts. The combination, if approved by each company’s shareholders, will be effected by way of a scheme of reconstruction and winding up of abrdn New Dawn and the associated transfer of part of the assets and undertaking of abrdn New Dawn to Asia Dragon in exchange for the issue of new ordinary shares in Asia Dragon. Under the terms of the scheme an up to 25 per cent. cash exit opportunity will be offered to abrdn New Dawn shareholders to realise part of their investment in the company.
The current investment manager of both companies, abrdn Fund Managers Limited, will, following implementation of the scheme, continue to manage the enlarged Asia Dragon. The Asia Dragon board will propose certain amendments to Asia Dragon’s investment policy to its shareholders which will principally align Asia Dragon’s policy with the current investment policy in order to permit investment into Australasia and provide the management team with equivalent geographic flexibility. Asia Dragon’s existing benchmark comparative index (MSCI AC Asia (ex-Japan) Index) will be retained. The portfolio managers of the enlarged Asia Dragon will be Pruksa Iamthongthong and James Thom.
The board of abrdn New Dawn believes that, if the proposals are implemented, abrdn New Dawn shareholders rolling over into Asia Dragon will benefit from, amongst other things, the greater economies of scale that are expected to result from the enlarged asset base, including greater secondary liquidity in Asia Dragon shares and cost efficiencies.
abrdn New Dawn and Asia Dragon have received irrevocable undertakings to support the proposals from shareholders representing 27.0 per cent. of abrdn New Dawn’s issued share capital and 29.7 per cent. of Asia Dragon’s issued share capital (as at 20 July 2023).
Commenting on the proposal, abrdn New Dawn, chairman Donald Workman added:
“The combination of abrdn New Dawn Investment Trust plc with Asia Dragon Trust plc will provide additional scale and liquidity for continuing shareholders, whilst broadly retaining abrdn New Dawn’s existing investment policy. Both companies already benefit from a similar investment approach and management style within the same investment group. This additional scale and Asia Dragon’s tiered fee structure, combined with the reduced fee arrangements, will also result in a lower ongoing charges ratio for continuing shareholders. As part of the transaction abrdn New Dawn shareholders will be offered the opportunity to benefit from a partial realisation of their holding at a small discount to the formula asset value. The enlarged scale should also make Asia Dragon more attractive for potential new investors over time.”
Details of the scheme are outlined in full, below:
The proposals will be effected by way of a scheme of reconstruction of abrdn New Dawn under section 110 of the Insolvency Act 1986, resulting in the voluntary winding up of abrdn New Dawn and the transfer of part of abrdn New Dawn’s assets to Asia Dragon 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 proposals. However, the proposals will be subject to other regulatory and tax approvals. The proposals will also be subject to, inter alia, approval by the shareholders of each of abrdn New Dawn and Asia Dragon.
Under the scheme, abrdn New Dawn’s shareholders will be entitled to elect to receive in respect of some or all of their abrdn New Dawn shares:
· New Asia Dragon Shares (the “Rollover Option”); and/or
· cash (the “Cash Option”).
The Cash Option is limited to 25 per cent. of abrdn New Dawn’s shares in issue (excluding treasury shares). Should total elections for the Cash Option exceed 25 per cent. of abrdn New Dawn’s shares in issue (excluding treasury shares), excess elections for the Cash Option will be scaled back into New Asia Dragon Shares on a pro rata basis.
The Cash Option will be offered at a discount of 2 per cent. to the abrdn New Dawn FAV (the “Cash Discount”) less the costs of realising the assets allocated to the cash pool for the benefit of the shareholders electing for the Cash Option. The Cash Discount will be for the benefit of the enlarged Asia Dragon.
New Asia Dragon shares will be issued as the default option under the scheme in the event that abrdn New Dawn shareholders do not make a valid election under the scheme or to the extent elections for the Cash Option are scaled back as a result of the Cash Option being oversubscribed.
Rationale and Benefits of the Scheme
- abrdn New Dawn and Asia Dragon both invest in the Asia Pacific (ex-Japan) region and both are managed by AFML with a high level of commonality across their shareholder bases. In light of these similarities, the boards believe a combination of the companies will create an enlarged vehicle that offers similar investment exposure for each set of shareholders while offering shareholders in the enlarged Asia Dragon the following benefits:
- Enhanced profile: The enlarged Asia Dragon is expected to have net assets in excess of £700 million (as at 20 July 2023), creating a leading closed-ended vehicle for investment in the Asia Pacific (ex-Japan) region managed by abrdn. On the basis of the current market capitalisations of abrdn New Dawn and Asia Dragon, the enlarged Asia Dragon would be expected to qualify for inclusion in the FTSE 250 raising the profile and enhancing the marketability of the enlarged Asia Dragon.
- Lower tiered management fee: AFML has agreed that, with effect from the admission to listing and trading of the New Asia Dragon Shares (“Admission”), the management fee payable by Asia Dragon to AFML will be reduced to 0.75 per cent. (currently 0.85 per cent.) on the initial £350 million of Asia Dragon’s net assets and 0.5 per cent. on Asia Dragon’s net assets in excess of £350 million. In addition, the enlarged Asia Dragon will benefit from lower costs following implementation of the proposals as Asia Dragon’s tiered fee structure will have the effect of reducing the weighted average fee given the increase in Asia Dragon’s net assets.
- Lower ongoing charges: Existing and new shareholders in Asia Dragon are expected to benefit from a lower ongoing expense ratio with the enlarged Asia Dragon’s fixed costs spread over a larger asset base.
- Enhanced liquidity: The scale of the enlarged company is expected to improve the secondary market liquidity of Asia Dragon’s shares.
- Shareholder register: The proposals will allow a number of shareholders to consolidate their holdings across the two companies while also creating a more diversified shareholder base through a combination of the balance of the two share registers.
- Contribution to costs: as described below, AFML has agreed to make a cost contribution in respect of the proposals which, in addition to the contribution to the costs from the Cash Discount described above, is expected to offset the direct transaction costs for Asia Dragon shareholders.
- Conditional tender offer: Asia Dragon offers a five-yearly performance related conditional tender (“Conditional Tender”) with the current performance period running from 1 September 2021 to 31 August 2026 (“2026 CTO”). It is proposed that, in the light of the proposals and conditional on the scheme being implemented, the 2026 CTO will be amended such that, in the event Asia Dragon underperforms the benchmark over the performance period, Asia Dragon will offer shareholders the opportunity to tender up to a maximum of 15 per cent. of their shares; a reduction from the maximum of 25 per cent. previously proposed. This reflects the revised Conditional Tender being of broadly a similar size to that previously proposed for the 2026 CTO, given the greater scale of the enlarged Asia Dragon.
- Continuation Vote: Asia Dragon shareholders will have the opportunity to vote on the continuation of Asia Dragon at every fifth AGM (“Continuation Vote“) with the next Continuation Vote to be put forward at the AGM in December 2026.
Costs of the Proposals and AFML Contribution
Each company intends to bear its own costs incurred in relation to the proposals and the direct costs will be reflected in the FAV for each company.
AFML has agreed to make a contribution to the costs of the scheme by means of a reduction in the management fee payable by Asia Dragon to AFML. The fee reduction will constitute a waiver of the management fee that would otherwise be payable to AFML in respect of the assets transferred by abrdn New Dawn to Asia Dragon pursuant to the scheme for the first six months following the completion of the scheme (the “AFML Contribution“). The AFML contribution will be for the benefit of the shareholders of the enlarged Asia Dragon following implementation of the scheme.
Debt Facilities
It is expected that abrdn New Dawn’s existing fixed rate and revolving credit facilities, which are currently drawn at £28.55 million (as at 20 July 2023), will be repaid and closed prior to the implementation of the Scheme.
Change of Asia Dragon Investment Policy
It is intended that Asia Dragon will seek shareholder approval for the Investment Policy Change at the general meeting to be held by Asia Dragon in connection with the proposals. The proposed amendments to the Asia Dragon investment policy will, inter alia, allow for investment in Australasia in order to provide the management team greater geographic flexibility, already reflected in abrdn New Dawn’s current investment policy. Asia Dragon’s existing benchmark comparative index (MSCI AC Asia (ex-Japan) Index) will be retained.
Board Structure
Following completion of the proposals, it is expected that the board of the enlarged Asia Dragon will consist of eight directors and will include the five existing Asia Dragon directors and three of the existing abrdn New Dawn directors. After a transition period that will end on the six month anniversary of Admission, it is intended that the board of the enlarged Asia Dragon will reduce to five directors consisting of three existing Asia Dragon directors and two existing abrdn New Dawn directors.
Annual Financial Statements and Second Interim Dividend
In light of the proposals, the company’s annual financial report for the year ended 30 April 2023 will be published in August 2023. A second interim dividend for the year then ended is expected to be declared at the end of July 2023
Expected Timetable
A circular to shareholders of the company, providing further details of the scheme and convening general meetings to approve the scheme, together with a prospectus published by Asia Dragon in respect of the issue of New Asia Dragon shares in connection with the scheme are expected to be published in September 2023. The proposals are anticipated to become effective in October 2023.
[This has been a long time coming – in fact I have been arguing that the two funds should be merged since 2003 when Aberdeen took over Edinburgh Fund Managers, bringing Edinburgh Dragon (now Asia Dragon) into the Aberdeen stable. The combination is good news therefore but there is still work to do. Lower fees and greater liquidity are welcome. However, ahead of this Asia Dragon was trading at a wider discount than abrdn New Dawn (16.5% – the widest in the sector – to ABD’s 15.9%). I must also point out that Asia Dragon has underperformed ABD over all time periods and is the worst-performing fund in its peer group over 10 years by a sizeable margin. I’ll talk more about it on this week’s news show. QuotedData’s James Carthew]
ABD : abrdn New Dawn announces proposed combination with Asia Dragon Trust