The boards of European Smaller Companies Trust (ESCT) and European Assets Trust (EAT) have announced that they have reached agreement on the heads of terms for a proposed combination of the two companies. The merger will be implemented via a scheme of reconstruction under section 110 of the Insolvency Act 1986, resulting in the voluntary liquidation of EAT and the transfer of its assets to ESCT. The enlarged vehicle will continue to be managed by Janus Henderson Investors (JHI), with Ollie Beckett and his team retaining responsibility for the portfolio.

The transaction will offer EAT shareholders the option to roll over their investment into newly issued shares of ESCT or elect to receive cash for up to 15% of EAT’s shares in issue (excluding treasury shares). Any excess elections for cash will be subject to scaling back on a pro rata basis. The new ESCT shares will be issued on a formula asset value (FAV)-for-FAV basis.

Based on net asset values as at 30 May 2025, the combined entity would have net assets of approximately £780m, making it the largest trust in the AIC’s European Smaller Companies sector.

A merger designed to deliver scale, improved performance, and lower costs

The boards of both ESCT and EAT, together with JHI, believe the combination will unlock a number of strategic and operational benefits for shareholders of both trusts.

• Scale and liquidity: The enlarged ESCT will benefit from greater size, helping it stand out in a relatively niche sector and improving secondary market liquidity for investors. With assets of around £780m, it would surpass current peers in the sector in size.
• Superior performance record: ESCT has delivered a consistently stronger long-term NAV total return than EAT. Over the 10 years to 30 May 2025, ESCT returned 194.8%, compared with EAT’s 66.1%. It also outperformed its benchmark, the MSCI Europe ex UK Small Cap Index, over three, five, and 10 years.
• Discount convergence: ESCT currently trades on a discount of 7.3%, compared with 10.2% for EAT. As a result, EAT shareholders are expected to benefit from an uplift in value of over 3.2% upon roll-over into ESCT.
• Dividend policy alignment: To provide continuity for EAT shareholders, the enlarged ESCT will adopt a new dividend policy targeting a total annual distribution of at least 5% of NAV (based on year-end NAV), paid quarterly. This represents a material uplift compared to ESCT’s current yield, and brings it closer in line with EAT’s policy of distributing 6% of year-end NAV.
• Reduced management fees and lower ongoing charges: Conditional on the scheme completing, JHI has agreed to reduce its base management fee from 0.55% to 0.50% on net assets up to £800m, with the 0.45% tier on assets above this level remaining unchanged. The enlarged trust’s ongoing charges are expected to be around 0.70%, materially lower than EAT’s most recently reported 1.01%.
• Cost mitigation: JHI has also agreed to make a contribution to the cost of the transaction equivalent to nine months of its revised management fee on the value of the assets transferred from EAT. This, combined with a 2% discount on the cash option, helps ensure that the cost of the transaction has a neutral (or near-neutral) impact on NAV for both sets of shareholders.

Additional protections for shareholders

The enlarged ESCT will retain and extend a number of shareholder-friendly policies already in place at ESCT:

• Discount control: ESCT has an explicit aim to manage its discount at a mid-single digit level in normal market conditions through active share repurchases. This policy is expected to help stabilise the trust’s share rating post-merger.
• Conditional tender offer: ESCT has committed to offer a performance-related tender every three years. If ESCT fails to outperform its benchmark over a three-year period, it will offer to repurchase up to 15% of its issued share capital at a 2% discount to NAV (less costs). The current measurement period runs from 5 February 2025 to 30 June 2028.
• Board composition: Following completion of the transaction, the board of the enlarged trust is expected to include up to two directors from the EAT board, ensuring representation and continuity for EAT shareholders.

CT Savings Plan holders

Shareholders in EAT who have invested through Columbia Threadneedle’s CT Savings Plans will be treated the same as all other EAT shareholders, with access to both the rollover and cash options under the Scheme. Post-merger, Columbia Threadneedle will write to affected plan holders setting out their options with respect to their new ESCT shares.

Next steps and timeline

A shareholder circular and scheme documentation are expected to be sent to investors in both companies in September 2025, with general meetings to follow shortly thereafter. Subject to shareholder approvals and regulatory clearance, the transaction is expected to complete by the end of October 2025.

Chairmen’s comments

James Williams, Chairman of ESCT, said: “The ESCT Board is delighted to announce the proposed combination of ESCT and EAT. ESCT has seen a significant change in the composition of its share register following its recent tender offer. This has provided a stable platform which, alongside the strong long-term performance delivered by JHI, has enabled the ESCT Board to agree the terms of a combination with EAT. The ESCT Board would like to thank ESCT shareholders for their support, and believe the combination is the first step towards the future growth of ESCT for the benefit of all shareholders.”

Stuart Paterson, Chairman of EAT, commented: “The Board have considered a variety of options in order to address the performance issues of EAT and believes the proposed combination of EAT with ESCT will provide shareholders with access to a larger, more liquid, lower cost vehicle with a strong long-term performance track record. The strategy remains focused on the attractive European Smaller Companies sector and ESCT’s new dividend policy is intended to continue to provide EAT shareholders with an attractive yield. The board has consulted a number of EAT’s largest shareholders who have indicated their support and believe the combination is very attractive for shareholders as a whole.”

[QD comment Matthew Read: This deal makes a great deal of sense on multiple levels. EAT has been under pressure for some time, with persistent underperformance and high charges making it difficult to justify its standalone status. A combination with ESCT brings EAT shareholders exposure to a better-performing portfolio with a more competitive cost structure and improved liquidity. Assuming the discount of the combined vehicle continues to reflect that of ESCT’s which seems likely given the continuing commitment to maintain the discount in single figures, the uplift in value from the discount narrowing for current EAT shareholders will be welcome.

For ESCT, the transaction helps the trust cement its position as the dominant player in the European smaller companies space. The scale should support further cost efficiencies, and improve its appeal to larger investors, for example within the wealth management community, while the revised dividend policy could broaden its appeal to income-seeking investors.

The boards are also mindful of cost leakage and ongoing discount control, with mechanisms such as the performance-related tender and JHI’s fee contribution helping to align interests.]