Shareholders of Alliance trusts rubber-stamp merger

Shareholders in the Alliance and Second Alliance investment trusts have approved proposals to merge the two companies.

With combined assets of 2.8bn, this will create the largest trust listed on the London Stock Exchange.

The merger of the trusts will be completed on June 21, with shareholders of Second Alliance receiving shares in Alliance on formula asset value basis.

The FAV calculation will be made on June 15.

The board has also announced that for the first time it will buy back its own shares to control its discount, with the trust seeking authority to repurchase up to 14.99% of its share capital.

Rather than pay dividends every six months, as is the case on Alliance and Second Alliance, the newly merged trust will pay on a quarterly basis.

Charles Cade, head of research at Wins Investment Trusts, says despite receiving 85.3% of votes cast in favour of the merger, the arbitrageur Carrousel Capital did its best to derail it.

He notes that in recent weeks the hedge fund has been bidding aggressively for Second Alliance, building up a stake of almost 8% of its share capital.

“We believe Carrousel objected to the merger of the two funds at a discount and was seeking to block the vote,” he says.

“Alliance Trust and its advisers were obviously aware of this position and were active in encouraging shareholders to vote.”

Alliance was successful. Some 55% of the share capital of Second Alliance voted on the merger and only 1.56 million shares voted against it. Cade notes that if Carrousel is excluded, this represents less than 0.5% of the trust’s entire share capital.

He adds: “Going forward, it is not quite clear what options Carrousel has.

“It bought much of its stakes at discounts of around 8% and is likely to face a significant loss if it sells in the market at the current discount of 10%.

“It could keep buying, but following the merger its stake will be diluted to just under 2% of the enlarged fund and there is no clear exit strategy.”

While encouraged that the vast majority of support for the merger was not derailed by one investor, Cade says it should not be taken as a forerunner for consolidation elsewhere in the sector.

“Corporate action is rife, encouraged by arbitrage investment, but mergers are notoriously difficult to achieve owing to conflicting interests, particularly when funds are trading at discounts,” he says.

“Inevitably there will be many in the sector who will be pleased to see an arbitrageur get a ‘bloody nose’. However, we feel that Second Alliance is likely to remain a rather isolated case.”