As a result of its strategic review, launched on 13 February 2023, abrdn Smaller Companies Trust (ASCI) has proposed that it combine with Shires Income (SHRS). The merger will also see ASI’s revenue reserve paid out as a pre-liquidation dividend. ASCI’s shareholders will have an option to either roll into SHRS or take a cash payout. ASCI’s credit facility will also be repaid prior to its merger. Further documentation is expected to be published in September, which may include details on the exact timetable.
ASCI’s board has highlighted what it believes are the benefits of the merger:
- An increased scale of the combined trust, which should reduce the costs of SHRS and increase its liquidity.
- Regardless of whether shareholders roll over into SHRS or take a cash option, they will receive an enhanced dividend from ASCI prior to its liquidation.
- SHRS pays a superior dividend to ASCI, with ASCI’s shareholders seeing a 44.7% increase should they roll over into SHRS.
- SHRS operates with 13.9% lower costs compared to ASCI, thanks to SHRS’ more attractive management fee; abrdn will also offer a management fee waiver for the assets that will be attributed to ASCI for the first six months of the merger.
- SHRS trades on a much narrower discount than ASCI, with a 12 month average discount of 1.5% compared to 12.2% respectively.
- SHRS will offer ASCI investors exposure to UK small caps, with small caps expected to represent up to 20% of SHRS’ portfolio.
QD view: [Another example of trust Darwinism, with ASCI been swallowed up by the bigger SHRS. While it is unsurprising, given the current trend in the market of subscale listed equity trusts being swallowed up, it is a sad reflection of the reality of today’s markets. Ever greater scrutiny being placed on not only the market’s returns, given how turbulent the last few years have been, but also the costs and liquidity characteristics of each trust.
The reality is that ASCI’s merger is likely the correct thing to do, with the trust failing to generate a positive five-year NAV return, and its c.4% yield being sub standard given the prevailing risk free rate. The question is now whether or not Shires will be able to justify its existence, though its increased scale makes that more likely. Even after recent developments, UK equity income is a competitive sector. Merging trusts together doesn’t resolve all of the underlying issues in the sector, but it does increase the likelihood that they will still be standing once the dust settles.
ASCI shareholders have a choice of taking their money and redeploying into what they believe is the most attractive opportunity or sticking with Shire’s, but in a quite different mandate without the small cap angle. After a long period where small cap has lagged large cap, it would be a shame if they missed out on any recovery.]