Will Pigit proposal open the floodgates to hostile bids?

While the past year has seen greater corporate activity, this has usually come in the form of arbitrageurs trying to force a wind-up, tender or reconstruction of trusts to make money from wide discounts. When a trust is wound up in this way, it is usually done so at just below net asset value once costs and fees have been taken.

Hostile bids are less common because they are expensive and time-consuming. Indeed, the hostile bid from the £357m Pigit for the £366m STS trust, which is managed by Tom Maxwell at Martin Currie, follows an unsuccessful merger proposal in July 2004. The board of Pigit is now offering STS shareholders the opportunity to roll over their shares into Pigit or take a cash exit.

The STS board, however, has rejected the bid. Neil Donaldson, chairman-designate of STS, says: “The offer is opportunistic and does not offer best value for shareholders. Accepting the Pigit offer would result in a decrease in the level of gross income available to shareholders, which Pigit has estimated as a 20-31% cut.

“The offer translates to a small premium of only 2.3% relative to STS’s share price on March 2, 2005, while the limited and partial cash component translates to a premium of 4.8%. These premia largely arise from a dividend of 2.55p a share that STS has indicated it will be paying in any event.”

He says the board is reviewing its options. Martin Currie adds that it has made changes to improve the performance of the trust. Over three years, STS has returned 5% against 41% by Pigit.

Ross Leckie of Martin Currie says: “We have repaid gearing, introduced a progressive dividend policy and changed the mandate to enable us to focus more on stockpicking. We will be taking a barbell approach in which we separate the yield and the capital growth components of the trust.

“To help us in this process we have recruited Ross Watson [pictured below right] from Aberdeen Asset Managers. He starts this month and will co-manage STS until Tom retires, which will probably be next year.” Watson was manager of the £400m Murray Income trust at Aberdeen.

Julie Dent, manager of the F&C Multi-Manager investment trust, says it is a difficult decision for investors to know whether to support the hostile bid. “Mark Barnett [pictured left] has had terrific performance at Pigit. But while STS has not delivered as strong capital growth, it has had a higher absolute yield.

“With the rollover and cash options [Pigit is offering], though, STS will have to come up with a better offer to its shareholders. I am not sure of the attractions of the bid for Pigit shareholders, however. They already have good performance and their shareholding might be diluted.”

Most consolidation in investment trusts has taken place in the small-cap sector, says Dent. “A trust with less than £50m in assets is likely to look at merging to improve economies of scale and liquidity. For example, two trusts managed by Julian Cane – F&C Income Growth and F&C Capital and Growth – are in talks that may lead to a proposal for a merger.”

But while there has been consolidation, Dent says there have been launches as well, particularly for property trusts. “There has been renewed interest in investment trusts. This is because stockmarkets have picked up and investors are attracted by the specialist trusts. The high yield available on property trusts has attracted a lot of investors.”

The increased interest is reflected, says Dent, in the fact that Gartmore Irish Growth and British Empire Securities are at premiums of 3.9% and 5.4% respectively. “In 1999, British Empire Securities was at a 10% discount and no one wanted to buy it.”

New Star Fund of Investment Trusts manager Paul Craig says the move by Pigit is not a sign of more hostile bids on the way. “The corporate activity has been led by hedge funds as arbitrageurs try to profit from wide discounts. Some boards have been steamrollered by aggressive hedge fund managers where the trust may only be lagging behind in performance in the short term but is on a relatively wide discount.” These arbitrageurs include Weiss, Laxey and Carrousel.

This activity helps to narrow discounts. The process is also being aided, says Craig, by trusts offering share buybacks. These may be once a year and involve the trust buying shares at a slight discount to the NAV.

Another trend, adds Craig, is for trusts to change managers or mandates. This is being encouraged by directors’ responsibilities under the Code of Corporate Governance for investment trusts, published in August 2003 and revised in January 2004. This code insists that fund managers are reviewed on a regular basis and boards of directors have to explain annually whether they are happy with their managers’ performance.

Nick Greenwood, head of investment trusts at iimia, says the sector is currently undergoing evolution rather than consolidation. “The investment trust industry is evolving. We have seen that especially in the generalists sector where the likes of Witan and Foreign & Colonial have been changing their investment approach.

“It will be interesting to see how the Pigit bid plays out as hostile bids are rare and do not often succeed. If Pigit succeeds, it could lead to more bids. It is a sign of how the investment trust industry is moving on.”

Greenwood expects further activity by the arbitrageurs. “Any trust on a double-digit discount will quickly attract opportunistic investors. This pressure will trigger the introduction of discount pricing mechanisms.

“Therefore we have built holdings in a number of unloved trusts. Recent entrants include Monks, Chelverton, JPMF Mid Cap, F&C Eurotrust, Close Finsbury Eurotech and Eaglet.

“The fact they were acquired on wide discounts means they are vulnerable and also have the potential for greatest uplift if a discount mechanism is adopted.”