Update: Baillie Gifford US Growth (USA) and stablemate Edinburgh Worldwide (EWI) want to merge, offering investors a 40% exit, but activist hedge fund Saba Capital, which owns around 30% of both investment trusts, is opposed.

At a meeting yesterday, Saba was presented with the proposal, the product of advanced talks between the two boards of the Baillie Gifford managed funds.

Under the plans EWI, a £721m investor in quoted and unquoted “smaller” companies around the world, would liquidate and its assets merge with USA, a £782m trust that invests in listed and private companies in the US. It would continue to focus on US growth companies.

The companies have substantial overlap making the task of merging and achieving economies of scale easier. EWI is 75% invested in North American businesses and both trusts hold Elon Musk’s private space rocket company SpaceX as their top position. The portfolios have eight investments in common, accounting for 31% of EWI’s assets.

However, according to EWI, Saba immediately rejected the proposal, reiterating its wish for a change of the board, for which it plans to requisition a general meeting of shareholders, and a review of the company’s future.

EWI chair Jonathan Simpson-Dent said this showed Saba’s “ultimate objective is to gain control of the company without offering a control premium, thereby trapping the remaining 70% of shareholders in a company run for the exclusive benefit of its largest investor.”

He said Saba had previously declined to meet with the company following its failure to oust the board earlier this year.

Simpson-Dent reiterated his view that EWI had made good progress since re-setting its “path for growth” a year ago but said the board believed “a merger with USA would accelerate value for shareholders, creating a larger, more liquid and cost-effective investment trust, while retaining the exposure to disruptive and transformative companies.

“Crucially, it would also provide a fair cash exit for those, such as Saba, whose agendas may differ,” he said.

USA, which also fought off Saba’s attempt to seize control of its board in February with the overwhelming support of shareholders, said it had also been rebuffed in its efforts to communicate with the US investment firm headed by Boaz Weinstein.

In October it was shocked when without warning Saba used its 29% stake to vote against the re-election of the board without proposing alternatives. The company narrowly avoided being left without directors and in breach of the law and its own articles that could have had “significant negative consequences for all shareholders”, said chair Tom Burnet.

Burnet said since the showdown in February, the USA board had engaged with other shareholders to find a way forward for the company. It found there was strong investor support for the strategy notwithstanding that, like EWI and other Baillie Gifford trusts, USA was recovering from a mauling in the 2021-2023 growth crash when its shares lost around two thirds of their value.

Burnet said shareholders had encouraged the company to consider merger opportunities and were very clear that they did not want to see a deal designed to benefit Saba over other investors.

This was the background to the “credible proposal” USA and EWI had agreed. Their shares respectively stand 6.7% and 4% below the net asset value of their investments, narrower than the 13%-14% average discounts among UK investment companies.

“We are highly disappointed that Saba has chosen once again to impede other shareholders by blocking the board from credibly presenting a potential merger opportunity that would result in a materially improved position for shareholders of both companies. This potential merger opportunity includes the offer of substantial liquidity for those shareholders who wish it.

“I and my fellow directors have always been very clear: we want to protect and create value for all our shareholders. That is our priority. We want to be able to put proposals for a way forward which are fair and equitable to all our shareholders,” Burnet said.

Saba responded with the statement: “By pushing for a merger that benefits Baillie Gifford rather than shareholders, EWI’s board has confirmed where its loyalties truly lie. Shareholders deserve a board that puts them first—not another cosy deal that entrenches an unaccountable manager.”

Analysts said Saba might be more responsive to the offer of a higher cash exit, although the trusts’ big holdings in illiquid unquoted stocks (EWI 22%, USA 31%) was an obstacle.

Winterflood’s Emma Bird was disappointed by Saba’s stance but wanted to hear from the US firm on its “proposed new directors as well as their reasons for rejecting the merger proposal, which may be entirely valid, such as wanting a larger cash exit initially or regular exit opportunities going forward.”

Stifel’s Will Crighton said: “However, we think this proposal gives Saba a route to gain more control. There is a scenario where Saba votes the merger through but then does not take the cash offer at all, and on the assumption other shareholders do take up the cash exit to an extent, Saba’s stake will rise.”

Our view

James Carthew, head of investment company research at QuotedData said: “I have to say that I am with Saba on this one. The whole point of persevering with EWI is that small caps are out of favour globally. I want to hold it for the eventual global small cap recovery. I don’t hold USA and don’t want to. If the merger did go ahead I would be ticking the cash exit box.”