Fund management giant abrdn (ABDN) has proposed the merger of investment trusts abrdn New Dawn (ABD) and Asia Dragon (DGN) in a move that would create an enlarged fund with combined net assets north of £700 million and a market cap big enough for inclusion in the FTSE 250.

Combining the trusts makes sense, since both invest in the Asia Pacific (ex-Japan) region with a similar approach and have a notable overlap in terms of holdings.

However, they trade on wide double-digit discounts to net asset value and FTSE 250 inclusion would raise the profile and marketability of the enlarged vehicle.

The news follows on from another recently announced merger from the abrdn stable, with abrdn Japan (AJIT) planning a combination with Nippon Active Value Fund (NAVF).

WHAT ARE THE BENEFITS FOR SHAREHOLDERS?

So long as the shareholders of each investment trust give the combination the nod, the transaction will see Abrdn New Dawn rolled into Asia Dragon via the voluntary liquidation of the former, with new Asia Dragon shares issued based on a formula asset value (FAV) to FAV basis.

Shareholders in Abrdn New Dawn, bid up 6.6% to 263.3p on today’s news, will be offered a cash exit for some or all of their holding at a 2% discount to FAV up to a total of 25% of the share capital.

(Chart could not be loaded)

Rolling abrdn New Dawn into Asia Dragon will allow the enlarged trust’s shareholders to benefit from the greater economies of scale expected to result from a bigger asset base, including improved liquidity in Asia Dragon shares and a lower ongoing charges ratio.

Based on the current market capitalisations of abrdn New Dawn and Asia Dragon, £258 million and £417 million respectively at last count, enlarged Asia Dragon would be expected to qualify for inclusion in the mid cap ranks.

WHO WILL MANAGE THE FUND?

Following a merger expected to become effective in October 2023, the new beefed up Asia Dragon will be managed by abrdn’s Pruksa Iamthongthong and James Thom and Asia Dragon’s MSCI AC Asia (ex-Japan) index benchmark will be retained.

It should be noted that Asia Dragon will seek shareholder approval to amend its investment policy to permit investments in Australasia ‘in order to provide the management team greater geographic flexibility, already reflected in abrdn New Dawn’s current investment policy’.

Baby formula US trial victory sends Reckitt Benckiser’s shares higher

abrdn New Dawn’s chairman Donald Workman pointed out that as part of the transaction, abrdn New Dawn shareholders will be ‘offered the opportunity to benefit from a partial realisation of their holding at a small discount to the formula asset value’ and the enlarged scale ‘should also make Asia Dragon more attractive for potential new investors over time’.

Meanwhile, Asia Dragon’s chairman James Will expects the enlarged Asia Dragon to be ‘of sufficient size to enter the FTSE 250 in due course’.

He stressed the merger will allow abrdn to ‘focus its marketing efforts on one all-cap growth trust in the Asia Pacific (ex-Japan) sector, rather than two; all of which has the potential to broaden investor interest in the company over time.’

THE NUMIS VIEW

‘We have long been calling for consolidation in the sector and we believe these are attractive proposals,’ commented Numis.

‘It makes sense for management groups to seek to combine funds and we agree with the benefits being highlighted by the boards.’

Numis also pointed out that both funds have been trading at a wider discount than the peer group over the past year.

‘Abrdn New Dawn was not the most liquid fund, given its size, and we believe that investors have the potential to benefit from increased trading liquidity,’ continued the broker. ‘In recent years, there have been a number of examples of successful M&A in the investment companies sector and these mergers have seen the successor vehicle delivering significantly higher trading liquidity than the combined liquidity of the two independent vehicles.’

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account.