The boards of Asia Dragon Trust and Invesco Asia have agreed heads of terms on a proposed combination of the two companies.

The Asia Dragon board said it received interest from a large number of management groups during its strategic review but said that it believed Invesco Asia’s active core Asia (ex-Japan) investment strategy, alongside its policy of paying an annual dividend equal to 4% of NAV, would appeal most to Asia Dragon shareholders.  

It added that it was impressed by the distinctive and disciplined value-oriented investment approach employed by Invesco Fund Managers Limited, which has delivered attractive returns for Invesco Asia shareholders over the long term. 

The combination, if approved by each company’s shareholders, will be effected by way of a scheme of reconstruction and winding up of Asia Dragon under section 110 of the Insolvency Act 1986 and the associated transfer of part of the assets and undertaking of Asia Dragon to Invesco Asia in exchange for the issue of new ordinary shares in Invesco Asia.

It is intended that Invesco Asia will change its name to Invesco Asia Dragon Trust plc.

Cash exit opportunity

The scheme will include a partial cash exit opportunity for up to 25% of Asia Dragon’s issued share capital, and the enlarged Invesco Asia will introduce a triennial unconditional tender offer for up to 100% of its issued share capital alongside its existing discount management policy targeting an average discount of less than 10% of NAV over each financial year. Invesco Asia has also agreed a new management fee structure that will result in a lower blended management fee for Asia Dragon shareholders.

Shareholder support

Asia Dragon and Invesco Asia have each received an irrevocable undertaking from City of London Investment Management representing 30% of Asia Dragon’s issued share capital and 21% of Invesco Asia’s issued share capital and letters of intent or indications of support from shareholders representing a further 25% of Asia Dragon’s issued share capital and 17% of Invesco Asia’s issued share capital.

Rationale and benefits

The Asia Dragon board said that it believed the scheme presents an attractive proposal for the company and its shareholders for the following reasons:

• Strong long-term investment performance – Invesco Asia has delivered a total return of 49.4% over the five years to 30 September 2024, representing outperformance of 23.2% against the MSCI AC Asia ex Japan Index which has delivered a five-year total return of 26.2%;
• Unconstrained investment approach – Invesco Asia has an unconstrained investment approach and a focus on valuation whereby the managers seek to identify stocks that have become dislocated from fair value with a potential catalyst for change;
• Aligned investment exposure – the scheme will allow shareholders to continue their investment in a core Asia (ex-Japan) equity strategy;
• Increased dividend: Asia Dragon shareholders will benefit from a significant increase in dividend as a result of Invesco Asia’s policy of paying a distribution of 4% of NAV per annum, which will move from semi-annual to four quarterly payments each equal to 1% of NAV;
• Depth of resource –  Invesco Ltd, a global asset manager with $1.8trn of AUM, including $15.9bn in Asia and EM Equities (as at 30 September 2024), will remain as the investment manager of the combined entity. Invesco Asia will continue to benefit from the expertise of its portfolio managers, Fiona Yang and Ian Hargreaves, and from the depth of resource and experience offered by the wider Asian & Emerging Markets Equities Team;
• Partial cash exit – the scheme will provide Asia Dragon shareholders with the opportunity to elect to exit part or all of their holding in Asia Dragon for cash at a 2% discount to NAV, subject to an overall limit of 25% of the issued share capital of Asia Dragon;
• Continued scale –  the combination with Invesco Asia will allow Asia Dragon shareholders to continue to participate in a vehicle of scale, with the enlarged Invesco Asia expected to be a constituent of the FTSE 250, notwithstanding the potential substantial return of capital by Asia Dragon pursuant to the cash exit;
• Periodic exit opportunity – following completion of the proposals, Invesco Asia will introduce a triennial unconditional tender offer of up to 100% of the issued share capital of Invesco Asia at a 4% discount to the prevailing NAV, with the first tender offer expected to take place in 2028;
• Discount management policy – Invesco Asia will maintain its stated average discount target of less than 10% of NAV calculated on a cum-income basis over the financial year;
• Competitive management fee – Invesco has agreed that, with effect from the admission to listing and trading of the new Invesco Asia shares, the management fee will be reduced to 0.75% on the initial £125m of net assets; 0.6% of net assets between £125m and £450m; and 0.5% on net assets in excess of £450m. The new Invesco Asia fee structure will result in a lower blended management fee than is currently payable by Asia Dragon;
• 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; and
• Contribution to costs: – Invesco has agreed to make a cost contribution to the proposals equivalent to the management fees payable on the assets transferred from Asia Dragon to Invesco Asia for a period of nine months and based on Invesco Asia’s proposed new management fee structure.

Board structure

Following completion of the transaction, the Invesco Asia Dragon Board will be enlarged by a number of members of the Asia Dragon board joining the four directors already on the board of Invesco Asia.

Timetable

A circular providing further details of the scheme and convening general meetings to approve the proposals, and a prospectus in respect of the issue of new Invesco Asia shares in connection with the scheme, are expected to be posted to Asia Dragon shareholders in January 2025. The proposals are anticipated to become effective by February 2025. 

James Will, chairman of Asia Dragon, commented:

“The board undertook a full and robust review process and considered a wide range of options for the Company. The proposal to combine Asia Dragon Trust with Invesco Asia Trust was considered the most attractive outcome for shareholders, providing a partial capital return alongside the continuation of shareholders’ investment in a trust that has delivered strong long-term performance managed by a highly regarded team at Invesco. The combination will create a vehicle of scale with a diversified shareholder base, a significant increase in dividend and a more competitive management fee.  Furthermore, the introduction of a triennial unconditional 100 per cent. tender offer alongside ongoing buyback activity provides a compelling approach to discount management that we expect to serve shareholders well over time.”

DGN / IAT : Asia Dragon Trust and Invesco Asia Trust to merge