ASCI Abrdn Smaller Companies Income Trust Plc

TIDMASCI

RNS Number : 1814H

abrdn Smaller Companies Inc Tst plc

26 July 2023

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This announcement is not an offer to sell, or a solicitation of an offer to acquire, securities in the United States or in any other jurisdiction in which the same would be unlawful. Neither this announcement, nor any part of it, shall form the basis of, or be relied upon in connection with, or act as an inducement to enter into, any contract or commitment whatsoever.

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018, as amended. On the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

For immediate release

26 July 2023

abrdn Smaller Companies Income Trust plc ("ASCI" or the "Company")

Result of Strategic Review and proposed combination with Shires Income plc ("Shires")

Introduction

Following the Company's announcement on 13 February 2023, the Board of ASCI has conducted a thorough and extensive review of options for the future of the Company. The Board was very pleased with the interest shown, with proposals being received from more than a dozen candidates. Most of the proposals envisaged a combination of the Company's assets with another investment trust, which was an outcome the Board expected to consider as part of the strategic review.

After detailed negotiations the Board is pleased to announce that it has agreed terms with the board of Shires for a combination of the assets of ASCI and Shires (the "Proposals"). The terms of the Proposal have been improved, substantially so in relation to the Cash Option (as referred to below), from a proposal that Shires presented to the Company in February prior to the commencement of the strategic review. Both investment trusts, which are managed by abrdn Fund Managers Limited ("abrdn"), have UK equity income as a key part of their investment objectives, including exposure to UK smaller companies.

The Proposals

The Proposals will be implemented through a scheme of reconstruction and voluntary winding up of the Company under section 110 of the Insolvency Act 1986 and the associated transfer of assets to Shires (the "Scheme").

Subject to the approval of shareholders of both companies, the Scheme will give ASCI's shareholders the choice between receiving new ordinary shares of 50p each in the capital of Shires ("New Ordinary Shares") (the "Rollover" and "Rollover Option"); and/or cash (the "Cash Option"). If the Scheme is approved, ASCI's shareholders will Rollover into Shires unless they specifically elect for the Cash Option for all or part of their holding. For the avoidance of doubt, the Cash Option will be unlimited, with all valid elections to receive cash accepted.

The Company expects to pay out the vast majority of its accumulated revenue reserves via a pre-liquidation dividend to all of ASCI's shareholders, and intends to repay its floating rate credit facility prior to the implementation of the Scheme.

Shires' entitlements as a shareholder in ASCI under the Scheme will be satisfied on the Company's liquidation by the transfer of the Rollover assets to Shires (which will include Shires' pro rata share of ASCI's assets) without any issue of New Ordinary Shares to Shires under the Scheme.

The enlarged Shires will continue to be managed by abrdn in accordance with its existing investment objective: namely to provide a high level of income together with the potential for growth of both income and capital from a diversified portfolio, substantially invested in UK equities but also in preference shares, convertibles and other fixed income securities. Shires will continue to have exposure to UK small caps, though holding assets directly rather than indirectly via its shareholding in ASCI. Shires will be managed on the same management terms, and with the aim of providing the same dividend levels as Shires shareholders have received in the year to 31 March 2023, namely 14.20p per share, which represents a yield of 6.1 per cent. based on Shires' share price as at 24 July 2023. Shires' shares have traded at an average discount to net asset value ("NAV") of 1.5 per cent. over the twelve months to 24 July 2023 and Shires has periodically issued new shares to meet demand.

Benefits of the Proposals

Shareholders in the enlarged Shires are expected to benefit from:

-- an increase in scale, allowing the enlarged Shires to spread fixed costs over a larger asset base and to benefit from the tiered management fee structure, while also potentially improving secondary liquidity and aiding marketability; and

-- a differentiated UK equity income strategy with an attractive dividend, with some exposure to smaller companies and fixed income securities.

The Proposals are also expected to deliver benefits (1) to ASCI's shareholders, whether they wish to Rollover into Shires or wish to elect for the Cash Option:

   --      Payout of revenue reserves via pre-liquidation dividend : 

o It is expected that the vast majority of ASCI's accumulated revenue reserves will be paid out before the Scheme becomes effective

o All of ASCI's shareholders will be entitled to receive the pre-liquidation dividend, whether they elect for the Rollover Option or the Cash Option

For those shareholders electing to Rollover into Shires:

   --      Increased dividend : 

o An expected increase of 44.7 per cent. per annum in dividend income based on the most recent four dividends for each company (i.e. a full year's dividend)

   --      Reduced costs : 

o Expected decrease of 31.9 per cent. in ongoing charges ratio based on the pro forma OCR of the enlarged Shires as compared with the last published OCR of the Company

o A large part of this reduction is due to Shires' management fee, being 0.45 per cent. of NAV (including any borrowings up to a maximum of GBP30m, and excluding commonly managed funds) per annum up to and including GBP100m and 0.40 per cent. of NAV (as above) per annum in excess of GBP100m

   --      Improved average rating : 

o Over the twelve months to 24 July 2023, Shires' shares traded at an average 1.5 per cent. discount to NAV, compared to ASCI's shares which traded at an average 13.2 per cent. discount to NAV

o As at 24 July 2023, the latest practicable date prior to publication of this announcement, the discounts to NAV at which ASCI's shares and Shires' shares traded were, respectively, 17.1 per cent. and 7.9 per cent.

   --      Shires' historic investment performance (2) : 

o Shires' NAV total return over 1, 3 and 5 years (measured to 24 July 2023) has been 4.5 per cent., 25.8 per cent. and 16.1 per cent. respectively

o Shires' share price total return over 1, 3 and 5 years (measured to 24 July 2023) has been -3.4 per cent., 20.5 per cent. and 12.2 per cent. respectively

   --      Significant cost contribution by abrdn and notice period waiver : 

o abrdn will offer a cost contribution to the Scheme by waiving the management fee payable by Shires to abrdn that would have been due in respect of the ASCI assets rolling over to Shires for a period of six months following implementation of the Scheme (to the benefit of all shareholders of the enlarged Shires). The reduction will be calculated by reference to the percentage that those assets represent of the enlarged Shires at the point of implementation of the Scheme

o abrdn has also undertaken to waive, in full, the period of notice to which it is contractually entitled under the management contract that it has with the Company and has agreed that no compensation will be payable by the Company to abrdn in respect of such wavier

   --      Continued UK smaller companies exposure : 

o Circa 40 per cent. of the Company's portfolio is expected to be transferred in specie to Shires , ensuring continued UK small cap exposure for all Shires shareholders, with the expectation being that UK small cap exposure will represent up to 20 per cent. of Shires ' portfolio on an ongoing basis

For those electing for the Cash Option:

   --      Unlimited cash exit : 

o All of the Company's shareholders will have the ability to elect up to 100 per cent. of their holding in ASCI for cash

Further details on the Proposals

The Proposals will be subject to inter alia the approval of shareholders of the Company and Shires, as well as regulatory and tax approvals.

The formula asset value ("FAV") of ASCI (the "ASCI FAV") and the FAV of Shires (the "Shires FAV") will be calculated, for the purposes of the Scheme, in accordance with the respective company's normal accounting policies. FAVs will be calculated based on the NAV (cum income with debt at fair value) of each company, on a calculation date to be agreed by both parties, with any necessary adjustments made, and will be reviewed by an independent accountant.

Shires will be protected from asset and income dilution under the Proposals through the issue of New Ordinary Shares at a 0.80 per cent. premium to NAV. As part of the Scheme, Shires, the largest beneficial shareholder in ASCI, holding approximately 13.6 per cent. of the Company's issued share capital as at 24 July 2023, will vote its full holding in favour of the Scheme.

Shareholders of ASCI who elect for the Cash Option for all of part of their shareholding will receive an amount in cash equal to 98.5 per cent. of the value of assets attributable to the Cash Option (after realising any non-cash assets so attributed), with the balance being applied for the benefit of the Rollover Option.

Each party will bear its own costs in respect of the Proposals, whether or not the Proposals proceed.

For the avoidance of doubt, any costs of realignment and/or realisation of the Company's portfolio prior to the Scheme becoming effective will be borne by the Company. Any stamp duty, stamp duty reserve tax or other transaction tax, or investment costs incurred by Shires for the acquisition of the ASCI portfolio or the deployment of the cash therein upon receipt shall be borne by the enlarged Shires. The London Stock Exchange admission fees payable in connection with the issue of New Ordinary Shares to ASCI's shareholders will also be borne by the enlarged Shires.

Shires following implementation of the Scheme

It is intended that the Shires portfolio will continue to be managed on the same basis as it is currently, though Shires' exposure to UK small caps will be through direct investments rather than via its shareholding in ASCI. It is expected that up to 20 per cent. of the enlarged Shires' portfolio will be UK small caps on an ongoing basis.

The Shires portfolio is managed by abrdn, led by Iain Pyle and Charles Luke. Shires also has access to abrdn's Smaller Companies team, including drawing on the expertise of the Company's portfolio managers Abby Glennie and Amanda Yeaman. Shires' existing management fees of 0.45 per cent. of NAV (including any borrowings up to a maximum of GBP30m, and excluding commonly managed funds) up to and including GBP100m and 0.40 per cent. of NAV (as above) in excess of GBP100m per annum will continue to be charged. A new administration fee of GBP120,000 plus VAT per annum, effective from the completion of the Scheme, will also be payable by Shires to abrdn. Shires' gearing will remain subject to a maximum equity gearing level of 35 per cent. of net assets at the time of draw down (for information, net gearing was 22.2 per cent. drawn down as at 31 March 2023 ) and the Shires board has no current intention of increasing the Company's borrowings above the loan facility already in place following implementation of the Proposals.

A role on the enlarged Shires board was not offered to ASCI's directors as part of the revised proposals.

Timetable

It is anticipated that the documentation in connection with the Scheme will be posted to shareholders in September 2023, with a view to convening general meetings in October/November 2023 in order to complete the transaction by that time.

A further announcement is expected when the Company and Shires publish their respective Scheme documents.

Dagmar Kent Kershaw, ASCI's chairman, commented "After a thorough review process, during which a number of excellent proposals were received, the Board of ASCI is pleased to recommend the Proposals to shareholders. For shareholders who wish to continue their investment we believe this will provide them with an attractive and potentially growing level of dividend and the potential for future capital growth, whilst also retaining an exposure to smaller companies overseen by the UK Equities team at abrdn. ASCI's shareholders will also be able to elect to receive cash for some or all of their shareholding as part of the Scheme and to do so on materially improved terms to those which Shires proposed to the Company in February. The Board would like to thank ASCI's investment managers Abby Glennie and Amanda Yeaman for all their hard work, dedication and expert stewardship of the Company's investments, through some very challenging times for the Smaller Companies sector."

Important Information

This announcement contains information that is inside information for the purposes of the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018, as amended. The person responsible for arranging for the release of this announcement on behalf of the Company is Holly Kidd of abrdn Holdings Limited.

This announcement is not for publication or distribution, directly or indirectly, in or into the United States of America. This announcement is not an offer of securities for sale into the United States. The securities referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States, except pursuant to an applicable exemption from registration. No public offering of securities is being made in the United States.

Past performance is not a guide to future performance. The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed. The information contained in this announcement is for background purposes only and does not purport to be full or complete and may not be used in making any investment decision. Nothing in this announcement constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty is given to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. T he information contained in this announcement will not be updated.

(1) Unless otherwise stated illustrative financial effects within this section are based on figures as at or to 24 July 2023 and exclude any impact from the Company's portfolio realisation costs. All figures are illustrative only, using currently available information and estimates. Assumes 25 per cent. of the Company's issued share capital will elect for the Cash Option. All figures are subject to change. Past performance is not a guide to future performance. The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed.

(2) Source: Refinitiv Datastream

Enquiries:

Dagmar Kent Kershaw, Chair

0131 372 2200

Neil Morgan, Winterflood Securities

0203 100 0292

Legal Entity Identifier: 213800J6D2TVHRGKBG24

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July 26, 2023 02:00 ET (06:00 GMT)