The consolidation trend has moved to BlackRock with its Throgmorton (THRG) small-cap trust agreeing to merge with the larger BlackRock Smaller Companies (BRSC).
Shareholders will be offered 38% and 28% cash exits in both investment trusts respectively at 1% discounts to net asset value.
Saba, the activist holding 17.8% of BlackRock Throgmorton and 10.4% of BlackRock Smaller Companies, welcomed the move and has committed to vote in favour.
Under the proposal, Throgmorton will be wound up and new shares issued to its investors rolling into the enlarged BlackRock Smaller Companies.
Assuming shareholders approve the merger and take up the cash exits in full, the £550m BlackRock Smaller Companies should emerge with net assets of around £780m, boosting its status as the second largest UK small-cap trust behind the £1.3bn Aberforth UK Smaller Companies (ASL).
Throgmorton fund manager Dan Whitestone will join BRSC manager Roland Arnold to co-run the portfolio. Both held many of the same stocks producing a 75% overlap that will make the merger easier, Throgmorton said.
James Will, chair of BlackRock Throgmorton, said the board had hired Stanhope Consulting to undertake a sector-wide review of its rivals and best options for the future. It concluded that a merger with its £495m stable mate was in shareholders’ best interests.
Will, who oversaw the mergers of Scottish investment trust into JPMorgan Global Growth & Income (JGGI) in 2022 and the combination of Asia Dragon with Invesco Asia to form Invesco Asia Dragon (IAD) last year, said: “The proposed combination follows a comprehensive review of available options by the board and is focused on driving long-term value for shareholders through greater scale, liquidity and cost efficiencies.”
BRSC chair Ronald Gould said: “This proposed combination represents an exciting opportunity for our shareholders: they will maintain their exposure to this highly attractive sub-sector with an enhanced management team whilst gaining the added benefit of being part of a larger and more liquid vehicle with reduced fees which we believe will have the lowest ongoing charges of those companies in the AIC UK Smaller Companies sector without a performance fee.”
Taking a very different stance to its decision to block the recent merger proposal between Edinburgh Worldwide (EWI) and Baillie Gifford US Growth (USA), Saba welcomed the announcement, which it said “includes several shareholder-friendly initiatives for the combined company such as reduced management fees, lower ongoing charges, an initial cash exit opportunity and a triennial conditional exit opportunity. We appreciate the constructive dialogue we’ve had with the companies’ boards of directors and their advisors and believe the combination proposal is in the best interests of shareholders.”
The three-yearly exit opportunity will see BRSC shareholders offered a 100% tender to sell all their shares at a 4% discount to NAV if the enlarged trust does not beat the Deutsche Numis Smaller Companies plus AIM index.
BlackRock will waive its annual management fee for six months and cut it to 0.5% of assets up to £500m, and 0.475% over £500m, and 0.45% above that. That should see annual ongoing charges fall to 0.63% compared to its five-year average of 0.8% average and THRG’s 0.82%.
The past five years have been tough for both trusts as UK smaller companies have fallen out of favour with investors pulling capital out of the sector, depressing share prices. THRG shareholders have lost just over 7% including dividends with BRSC down nearly 6% on a total return basis. This compares to a sector average return of 16.6%.
This morning BRSC jumped 4.3% to £14.33, narrowing its near 13% discount. THRG edged 0.6% higher to 661p from a 9% discount at last night’s close.
Our view
James Carthew, head of investment company research at QuotedData, said: “Many investors have wondered why BlackRock ran two fairly similar UK small-cap trusts and knocking them together makes sense, especially as it will get Saba off their back for a few years and allow them to focus on delivering long-term outperformance of the benchmark. I am very much in favour of this proposal and pleased to see that Arnold and Whitestone will be co-managers of the combined vehicle.”
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Dear James
This merger looked so obvious years ago – I raised its possibility at least two or three times at Throgmorton AGMs since there was considerable overlapping but the board didn’t want to know.
Trust you’re keeping well. Kind regards Alan 20.ii.26