Schroder Asia Total Return (ATR) and Pacific Assets (PAC) have published circulars to put their planned merger into effect. The deal that was announced on 11 June will take the form of a s110 reconstruction and members’ voluntary winding-up of Pacific Assets. Pacific Assets shareholders have a cash option, at a 2% discount to NAV after costs, which is limited to 25% of its shares in issue.
The exchange ratio for Pacific Assets shareholders rolling into Schroder Asia Total Return will be determined by the ratio of each company’s NAV after costs.
PAC shareholders taking the share option get access to a trust with a much better performance track record, a good track record of discount control – helped by a stated ambition of keeping the ATR discount at 5% or less with the use of share buybacks if necessary, and a bigger marketing resource. There is also a pre-merger dividend of 3.8p per share.
Both sets of shareholders will benefit from being in a larger, more liquid vehicle and lower running costs. ATR’s manager has agreed that fees will be calculated on the lower of net asset value (NAV) or market value (which gives the manager an incentive to help keep the discount tight). The fee will be tiered at 0.5% on the first £500m, and 0.65% on any balance (currently it is a flat fee of 0.65% of gross assets less cash).
ATR has a performance fee of 10% of outperformance of a 7% per annum hurdle. There is a high watermark – so no fee can be collected while the NAV is lower than the last time a fee was due. Under this scheme, the annual cap on ATR’s total fees falls from 1.25% of NAV to 1.15% of NAV. Some adjustments have been made to this year’s fee structure so that PAC shareholders do not end up paying performance fees for the period before they rolled into ATR.
The estimate is that ATR’s ongoing annual running costs will fall to about 0.66% of NAV from about 0.80% currently.
ATR’s manager will make a material contribution to the costs of the scheme (about £2.4m currently, assuming the cash option is taken up in full). That contribution will come in the form of a fee waiver.
There is a performance-related tender offer in place for up to 15% of ATR’s issued share capital. The five-year performance measurement period runs until 31 December 2030.
Two PAC directors – June Ang and Edward Troughton – will join the ATR board, bringing the total number to six. The number of directors on the ATR board will fall back to four over time.
There are PAC meetings on 9 September and 24 September to approve the scheme. PAC shareholders have until 1pm on 16 September to submit their “forms of election” – but your platform will probably need your instructions well ahead of that. If you do not make an election, you will end up with ATR shares. PAC shares will be suspended from trading on 17 September and new ATR shares will start trading on 25 September. Cash should hit accounts by 8 October.
