Scottish Oriental Smaller Companies (SST) has scrapped plans for a 25% tender offer and launched a strategic review that could see it merge with a rival.
Following consultation with some of its largest shareholders, the biggest of which is discount hunter City of London Investment Management with a 17% stake, the £315m Asia small-cap trust said it had decided to assess its options.
The SST board, chaired by Jeremy Whitley, said it continued to believe in the merits of investing in Asian smaller companies and would focus on ensuring investors had access to an appropriately large and liquid vehicle.
“This will include consideration of a potential combination with another investment company,” it said, sparking the possibility of a merger with one of its sector peers, Aberdeen Asia Focus (AAS) or Fidelity Asian Values (FAS).
Winterflood analyst Emma Bird said: “Of these, we would expect AAS to be the frontrunner, given its significantly stronger performance over the last one, three and five years.”
Interested investment companies and fund management groups should contact SST’s corporate broker Investec, it said.
With some of the largest shareholders, who also include fund manager Columbia Threadneedle Investments with a 10.5% position, indicating they would not support the tender offer announced last month, SST has decided to cancel it and prioritise the strategic review.
SST will take account of shareholders’ expectations for a 25% cash exit, which it said had to be delivered promptly following the triggering of the conditional tender offer after the trust underperformed its benchmark in the five years to 31 August.
Also on the register are value investors Lazards and Allspring which hold 5.1% and 4.8% of SST respectively. Share-dealing platforms Interactive Investor and Hargreaves Lansdown hold 10.4% and 7.3% on behalf of private investors.
FSSA Investment Managers, or First Sentier Investors, whose Sreevardhan Agarwal has run the portfolio, will continue to manage SST’s assets during the strategic review. If the trust is merged away, it will represent the loss of First Sentier’s second investment company mandate this year. Pacific Assets (PAC) merged with Schroder Asian Total Return (ATR) last month.
SST shares fell 3p, or 1%, to 280p. They have returned just 10% over three years, below the 48% rise in the MSCI All Country Asia Small Cap index, and stand on an 8% discount to net asset value (NAV).
AAS, a £627m trust managed by Gabriel Sacks and Ng Xin Yao at Aberdeen Group, also shed 1%, or 5p, to 462p. It is the sector’s strongest performer with shareholder returns of 31% and 97% over one and three years but trades on a discount of nearly 10%.
FAS, a £379m value fund run by Nitin Bajaj and Ajinkya Dhavale at Fidelity, firmed 2p to 608p. Its shares have returned 6% and 35% over the same time periods and stand on a 5.5% discount.
Our view
QuotedData senior analyst Richard Williams said: “This is a significant change of direction for Scottish Oriental, having proposed a conditional tender offer only last month. The announcement makes clear that scale and share liquidity have become increasingly important concerns for shareholders, suggesting that maintaining the existing structure is no longer an option. We’d expect a solution that offers investors the 25% cash exit opportunity they had been expecting, while creating a larger, more liquid vehicle for those wishing to retain exposure to Asian smaller companies. Consolidation now looks a distinct possibility.”
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