(Sharecast News) – Fidelity China Special Situations (FCSS) announced an agreement with Abrdn China Investment Company (ACIC) on Tuesday over a proposed combination of the two entities.
If approved by their respective shareholders, the combination would take place through a Guernsey scheme of reconstruction and winding up of ACIC, involving the transfer of part of ACIC’s cash, assets, and undertaking to FCSS in exchange for new shares in FCSS.
After that, FCSS said it would continue to be managed by FIL Investment Management Hong Kong, with Dale Nicholls remaining as the named portfolio manager.
Its board expected several benefits for shareholders, including economies of scale resulting from an enlarged asset base, improved market liquidity in FCSS shares, and cost efficiencies.
The proposals would need the approval of both FCSS and ACIC shareholders as well as regulatory and tax approvals.
The reconstruction scheme would lead to the voluntary winding up of ACIC, with ACIC shareholders given the option to receive new FCSS shares or cash for their ACIC shares.
A cash option, limited to 33% of ACIC’s shares, would be offered at a 2% discount to ACIC’s formula asset value per share.
The FCSS board expected the enlarged group to have net assets of £1.2bn, making it the flagship UK closed-ended vehicle for investment in China and a constituent of the FTSE 250.
That, it added, was expected to enhance the company’s profile and marketability.
Additionally, it said the larger scale of FCSS was anticipated to improve secondary market liquidity for shareholders, including its share buyback policy.
The proposals would also enable shareholders to consolidate their holdings across FCSS and ACIC, creating a more diversified shareholder base.
Additionally, FCSS was expected to benefit from lower ongoing expenses due to the spread of fixed costs over a more extensive asset base.
Fidelity, the company’s alternative investment fund manager, committed to making a material cost contribution of £0.5m plus an amount equal to eight months of management fees for the assets to be transferred from ACIC to FCSS.
That was expected to offset the direct transaction costs for FCSS shareholders.
Additionally, Fidelity would reduce the base management fee payable by FCSS to 0.65% from the current 0.7% for the company’s net assets over £1.5bn.
Each company would bear its own costs related to the proposals.
“I am pleased we are able to offer existing shareholders, as well as shareholders of ACIC who roll over, the benefits of an enlarged vehicle with additional liquidity, cementing the company’s status as the leading constituent of the China investment company sector,” said Mike Balfour, chairman of Fidelity China Special Situations.
“The proposals will also help spread costs over a larger base of assets, thereby reducing the ongoing charges for both new and existing shareholders.
“As a board, we are positive about the long-term prospects of investing in China.
“FCSS is seen by many as the one-stop shop solution for exposure to this asset class and this proposal enhances the prospect of the Company building on its long-term success story.”
Reporting by Josh White for Sharecast.com.