Abrdn China Investment Company (ACIC) and Fidelity China Special Situations (FCSS) have announced proposals to merge ACIC into FCSS. This will be implemented via a voluntary wind up and reconstruction of ACIC that will see a transfer of part of its cash and into FCSS in exchange for new FCSS shares. Assuming that the merger, which requires approval from both sets of shareholders proceeds, the intention is that an enlarged FCSS will continue to be managed, in accordance with its existing investment objective and policy, by FIL Investment Management (Hong Kong) Limited with Dale Nicholls continuing as the named portfolio manager. New FCSS shares will be issued to ACIC shareholders on a FAV-to-FAV basis – the FAVs will be calculated using the respective net asset values of each company, adjusted for the costs of the proposals. It is anticipated that the proposals will be implemented by the end of Q1 2024. Approximately 73 per cent of ACIC’s share register has indicated its support for the proposals.
Helen Green, chairman of ACIC says “After a very thorough review process, including consultation with the Company’s major shareholders, the Board has concluded that the best practicable option to address the Company’s over-concentrated register and to provide significantly improved liquidity to our shareholders is to merge with Fidelity China, which is both sizeable and the clear leader in the China investment company sector.” Mike Balfour, FCSS Chairman is similarly enthusiastic saying “I am pleased we are able to offer existing shareholders, as well as shareholders of ACIC who roll over, the benefits of an enlarged vehicle with additional liquidity, cementing the Company’s status as the leading constituent of the China investment company sector. The proposals will also help spread costs over a larger base of assets, thereby reducing the ongoing charges for both new and existing shareholders. As a Board, we are positive about the long-term prospects of investing in China. FCSS is seen by many as the one-stop shop solution for exposure to this asset class and this proposal enhances the prospect of the Company building on its long-term success story.”
Key benefits from the proposals
ACIC’s board has highlighted the following key benefits of the proposals for its shareholders:
- Fidelity China is the top performing UK listed investment company specialising in China over 1, 3, 5 and 10 years by NAV total return.
- Fidelity China, which was launched in 2010, is also the largest UK listed investment company specialising in China with net assets as at 31 October 2023 of £1.1 billion.
- ACIC shareholders rolling over into Fidelity China are likely to benefit from the far greater liquidity available in the market for Fidelity China shares, should they subsequently wish to realise their investment.
- The Proposals include a cash exit opportunity of up to 33 per cent of ACIC’s shares in issue, at a 2 per cent discount to formula asset value (“FAV”) per ordinary share.
- Fidelity China’s manager, FIL Investment Services (UK) Limited, has demonstrated its support for the Proposals by offering to underwrite a portion of the costs of implementing the Proposals.
Similarly, FCSS’s board has highlighted the following key benefits of the proposals for its shareholders:
- Scale and enhanced profile: the enlarged FCSS is expected to have net assets of approximately £1.2 billion (as at 28 November 2023). As the flagship UK closed ended vehicle for investment in China and a constituent of the FTSE 250 Index, it is expected that the enlarged FCSS would benefit from enhanced profile and marketability.
- Enhanced liquidity: the scale of the enlarged FCSS, as the largest and most liquid company in the sector, is expected to further improve secondary market liquidity for the Company’s shareholders (including in relation to its share buyback policy).
- Shareholder register: the implementation of the Proposals would allow a number of shareholders to consolidate their holdings across FCSS and ACIC whilst also creating a more diversified shareholder base through a combination of the two share registers.
- Lower ongoing charges: the enlarged FCSS would be expected to benefit from a lower ongoing expense ratio with the Company’s fixed costs being spread over a larger asset base.
- Contribution to costs: the Company’s alternative investment fund manager, FIL Investment Services (UK) Limited (“Fidelity”), is willing to make a material cost contribution in respect of the Proposals, which is expected to offset the direct transaction costs for FCSS shareholders.
- Lower tiered management fee: Fidelity has agreed that, with effect from the admission to listing and trading of the New FCSS Shares, the base management fee payable by the Company under the investment management agreement will be reduced to 0.65 per cent. (currently 0.70 per cent.) in respect of the Company’s net assets in excess of £1.5 billion.
Merger rationale for ACIC shareholders
ACIC’s Board recognises that the concentration in its share register is causing a lack of liquidity that is contributing to its persistent discount and that this is also a source of dissatisfaction for some large shareholders.it had hoped that the move to a China mandate and the merger with Aberdeen New Thai would help broaden the share register, but the share register continues to be excessively concentrated, with just three shareholders accounting for over 70 per cent of the Company’s issued share capital. ACIC has also been active in repurchasing shares but the discount continues to be wide. ACIC’s board says that it has following consultation with shareholders, it has become clear that the consensus is for a merger with Fidelity China with the option of a partial cash exit at a small discount to FAV was the preferred option.
Cash exit for ACIC shareholders
ACIC shareholders will be given the option to realise at least part of their investment via a cash exit for up to 33% ACIC’s shares in issue, at a 2 per cent. discount to FAV per share. Reflecting this, each ACIC shareholder will have a basic entitlement to elect to receive cash in respect of 33 per cent of their shares in ACIC. Shareholders will also be able to elect to receive cash in respect of a larger proportion of their shares, with elections in excess of the basic entitlement being accepted pro rata to the extent that any Shareholders choose not to elect for the cash exit. The benefit of the Cash Option Discount will be credited to the interests of the Shareholders rolling over their shareholdings in ACIC into the enlarged FCSS. The combination with FCSS is expected to greatly improve share trading liquidity for ACIC shareholders as well as spreading the fixed costs of FCSS, over a larger asset base.
Implementation of the Proposals is subject to the approval, inter alia, of Shareholders as well as regulatory and tax approvals and approval by the shareholders of Fidelity China. A circular providing further details of the proposals and convening the general meeting to seek the necessary Shareholder approvals will be published by the Company as soon as practicable.
[QD comment: In its previous guise as abrdn Emerging markets, ACIC operated successfully for many years with a funds of funds structure. This structure has become increasingly out of favour, in part due to the requirement to aggregate fees (something that, ironically, may soon become a thing of the past) and gave rise to its persistent discount. Underlying performance was solid and so it ended up with a narrow band of supporters that understood the fund and a concentrated share register. It was hoped that a shift to a Chinese mandate (which was flavour of the month at the time), plus a focus on direct investment (instead of funds), along with the absorption of Aberdeen New Thai (with the additional scale this would bring), would move the dial on the discount, but ACIC has failed to shake that off. We think that these proposals are good for all shareholders. Everyone will be invested in a larger, more liquid and efficient vehicle, that has a well-regarded manager with a decent long-term track record. There is also the option of a decent sized cash exit for those that want it.]