Ashoka WhiteOak Emerging Markets (AWEM) has announced a proposed transaction with the Asia Dragon Trust (DGN). The proposal is supported in principle by a majority of DGN shareholders, with the company highlighting the opportunity for Asia Dragon shareholders to join an outperforming investment trust, with market-leading structural features, zero management fee and an annual redemption facility. Notably, the deal included a cash exit of up to 50% for Asia Dragon shareholders.
Regarding the deal, chair of AWEM commented:
“We have always sought as a company to put the interests of shareholders first, for example through our market-leading, shareholder-friendly structures. We believe this is the primary obligation of a truly independent board. We have listened to clear feedback from a majority of Asia Dragon shareholders and proposed a transaction that has their support. Sadly, we have not received any meaningful engagement with the board of Asia Dragon. Today we announce our proposed transaction alongside the re-confirmed support in principle of c. 56 per cent. of Asia Dragon shareholders to advance this transformational initiative that we believe is in the best interests of both sets of shareholders.”
[QD Comment (JC): The Ashoka WhiteOak fund offers a more shareholder friendly corporate structure and, for frustrated shareholders in its target, the chance of switching to a fund that ought to trade much closer to NAV, and for those that want it a cash exit. This deal would clearly be transformational for Ashoka WhiteOak Emerging even if a number of Asia Dragon shareholders tick the cash box. Sadly, in recent years Asia Dragon has disappointed its shareholders, with NAV returns that languish at the bottom of those of its peer group, and over the past year well behind those of the bidder.]
Details of the transaction are outlined in full below:
The Board of AWEM believes that the Proposed Transaction should deliver AWEM shareholders a vehicle of materially enlarged scale, with improved secondary market liquidity and a reduced Ongoing Charges Ratio. For Asia Dragon shareholders, the Proposed Transaction should deliver:
- Significant uplift in the market value of an Asia Dragon shareholder’s investment due to the superior rating at which AWEM’s shares are trading and have historically traded compared with Asia Dragon’s shares over the recent past2
- Access to the extensive resources of the seasoned WhiteOak team across the UK, Europe, and Asia. This high-performing team, led by Prashant Khemka, has a compelling track record of investment returns that materially outpace those delivered by Asia Dragon.3 Since listing, AWEM has achieved a NAV total return of 14.4 per cent., achieving top quartile performance in the GEM peer group driven primarily by superior stock selection across the market capitalisation spectrum, supported by the fact that GEM are a more under-researched and inefficient sector of the global equities asset class. Prashant Khemka’s GEM track record extends prior to his launch both of WhiteOak and AWEM, showing consistent outperformance versus Asia Dragon under its various manager stewardships
- Continued exposure to an investment universe with material overlap. 55 per cent. of Asia Dragon’s portfolio overlaps with AWEM and nine of Asia Dragon’s top ten stocks can be found within the AWEM portfolio. Over 90 per cent. of the geographical exposure of Asia Dragon’s benchmark, the MSCI Asia ex Japan Index, are GEM countries4
- Integration with an investment trust with a differentiated investment philosophy, market-leading structural features and proprietary frameworks, which provide shareholders with a unique offering
- Shareholder-friendly fee structure and full alignment with management, with WhiteOak charging a zero annual management fee and instead entitled to a fee on delivering outperformance in AWEM versus its benchmark1, paid entirely in AWEM shares. AWEM has an annual redemption facility that enables shareholders to exit all or part of their investment on an annual basis close to NAV
- Anticipated cost reduction for Asia Dragon shareholders rolling into AWEM, with the pro forma Ongoing Charges Ratio expected to decrease materially, both due to the cost-efficient structure of AWEM and the absence of an annual management fee. In addition, the total costs of the Proposed Transaction are expected to be mitigated in full as detailed below
- Opportunity for Asia Dragon shareholders who do not wish to participate in the proposed rollover to AWEM to exit all or part of their investment at close to NAV. The cash exit would be capped at 50 per cent. of Asia Dragon’s shares in issue (excluding treasury shares)
The Board of AWEM has received feedback from shareholders controlling c. 56 per cent. of Asia Dragon’s voting rights that they would be supportive in principle of the Proposed Transaction on the terms outlined, which are explained further below. To progress the Proposed Transaction, the Board of AWEM has made repeated efforts to explore discussions with the Board of Asia Dragon, beginning on 14 March 2024. Following a response on 18 March 2024, terms of the Proposed Transaction were outlined on 20 March 2024 and a formal proposal was sent on 28 March 2024 (the ‘Formal Proposal‘), with acknowledgement by the Board of Asia Dragon on 1 April 2024. Since this time, there has been no further correspondence from the Board of Asia Dragon despite several further attempts to engage.
The Board of AWEM has in recent days further consulted with the aforementioned Asia Dragon shareholders, who have re-confirmed their support in principle for the Proposed Transaction. The Board of AWEM welcomes further engagement by the Board of Asia Dragon on the Proposed Transaction.
Terms of the Formal Proposal
The Proposed Transaction would be effected by way of a scheme of reconstruction pursuant to section 110 of the Insolvency Act 1986 (the ‘Scheme’). In accordance with customary practice for such schemes involving investment companies, the City Code on Takeovers and Mergers is not expected to apply to the Proposed Transaction pursuant to the Scheme.
As outlined above, the Board of AWEM submitted the Formal Proposal to the Board of Asia Dragon on 28 March 2024, that included the following illustrative terms:
- Proposed Transaction to be effected by way of the Scheme, resulting in the voluntary liquidation of Asia Dragon and its shareholders being offered the choice of (i) rolling their investment into new shares to be issued by AWEM (the ‘Rollover Option‘) and/or (ii) electing for a cash exit, capped at 50 per cent. of Asia Dragon’s shares in issue (excluding treasury shares) (the ‘Cash Option‘). The terms and illustrative effects set out in this announcement assume the Cash Option is exercised in full
- 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 AWEM and Asia Dragon
- Asia Dragon shareholders electing for the Cash Option would have all or part of their shareholding in Asia Dragon realised at a one per cent. discount to FAV. The uplift arising from the Cash Option would be entirely allocated to shareholders utilising the Rollover Option, in such a way that this should more than cover all the estimated costs of Asia Dragon implementing the Proposed Transaction. In return, AWEM would issue its shares under the Rollover Option at a one per cent. premium to FAV
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 will take place at all. Should heads of terms for the Proposed Transaction be agreed, further details and a proposed timetable of the Scheme will be announced.
The Proposed Transaction remains subject to, inter alia, further due diligence, the recommendation of the Boards of Asia Dragon and AWEM to proceed, necessary approvals by the shareholders of Asia Dragon and AWEM, relevant tax clearances being received by Asia Dragon, and relevant Financial Conduct Authority (‘FCA‘) approvals.
AWEM : Ashoka WhiteOak Emerging Markets announces proposed transaction with the Asia Dragon Trust