Schroder UK Mid Cap Fund plc has reached an agreement with activist investor Saba Capital that appears to draw a line under the threat of a prolonged campaign against the trust.
The company is proposing a tender offer for up to 100% of the share capital at NAV less costs, giving shareholders the option of a full cash exit while preserving the trust for those who wish to remain invested. Crucially, Saba – which controls 19.5% of the company – has agreed to support the proposals, tender its shares and enter into a three-year standstill agreement.
Under the standstill arrangement, Saba has agreed not to requisition meetings, seek board changes or vote against board recommendations during the period. It has also agreed not to increase its holding ahead of the tender completing. The agreement removes a significant overhang for the trust and gives the board and manager breathing space to focus on performance and narrowing the discount.
The board said that it continues to see strong support for the trust’s long-term future and retains confidence in Schroders’ management of the portfolio. Chair Harry Morley said the agreement with Saba would “facilitate their exit” and allow the company to focus on its “differentiated proposition going forward”.
The trust has a strong long-term record versus its benchmark and the board says the outlook for UK mid-caps remains compelling, with valuations looking unusually attractive and corporate activity in the sector remaining elevated. The tender offer will only proceed if shareholder approval is secured and if tenders do not exceed the maximum level that would reduce the trust below a viable size (a maximum of 49.87% of shares tendered which, based on the NAV per share as at the last practicable date before publication of the circular, would result in a Company with net assets in excess of £125m and an estimated ongoing charges ratio of approximately 1.06%). Assuming the proposals go ahead, the board also intends to adopt a discount control policy aimed at keeping the shares trading at a mid-single digit discount in normal market conditions.
Our view
Matthew Read, senior analyst at QuotedData, said: “SCP’s 100% tender looks like a pragmatic outcome for both sides. Saba gets a route to exit at close to NAV, while remaining shareholders avoid the prolonged uncertainty and distraction of an activist battle. The three-year standstill agreement removes the immediate threat of further agitation, giving the board and manager space to prove the merits of the strategy. Given recent signs of improving sentiment towards UK equities and persistent takeover interest across the mid-cap space, Schroders may feel the timing is right to defend the trust’s continuation rather than pursuing a wind-up.”
