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Barnett shares will not be transferred in Perpetual-Murray merger next month

16 October 2020

Unquoted and out-of-favour stocks set to be dumped ahead of the creation of a £1bn UK Equity Income giant.

The unquoted holdings and most of the shares bought by ex-Invesco manager Mark Barnett in Perpetual Income & Growth (PLI )’s portfolio will be not be transferred as part of its merger with Murray Income (MUT ), which is set to go ahead next month and create a new £1bn force in the UK Equity Income sector.

It was announced in July that fund group Invesco had lost the mandate to run PLI, which instead opted to combine with MUT, managed by Aberdeen Standard Investments (ASI)’s Charles Luke, in an unusual instance of consolidation in the investment trust sector.

The boards of both trusts have now published the fine details of the tie-up, which will see PLI’s assets rolled into the enlarged MUT on 17 November and a series of dividend payments made on both sides to ensure shareholders are not short-changed.  

 

Though Invesco’s Martin Walker has been caretaker manager since Barnett (pictured)’s exit in May, PLI’s portfolio still bears the stamp of the old manager. A heavy weighting towards out-of-favour ‘value’ stocks and UK domestic plays, as well as a disastrous flirtation with unquoted companies – some linked to failed fund manager and Barnett’s former mentor Neil Woodford – led to years of sub-par performance.

Rather than the two portfolios simply being spliced together and MUT assuming the legacy of those bets, ASI assumed effective control of PLI from 8 October and will remodel the holdings list during a ‘transition period’. The intention is that PLI’s portfolio will be ‘substantially similar’ to MUT’s by the time of the merger.

That is likely to mean a trimming of oil and gas, although some of the large stake in British American Tobacco (BATS) will survive given it is also a favourite of Luke (pictured). 

The ASI manager anticipates transferring 11 or 12 holdings to MUT out of 56 at the end of July, according to Winterflood Securities, which is PLI’s corporate broker. The funds currently have 11 holdings in common. Even if the five unlisted companies held by PLI, accounting for about 1% of assets, cannot be sold pre-merger, they will not migrate to MUT. Instead, the unquoteds will be left with the liquidator to dispose of, with former PLI shareholders receiving the proceeds subsequently.

Analysts at JPMorgan Cazenove praised the transition strategy.

‘Given the time taken to consummate this transaction, this seems like a sensible move although it is unclear whether the change will be immediate or phased over a number of weeks,’ wrote Christopher Brown and Adam Kelly.

They noted that, depending on how quickly the realignment takes place, some of the existing PLI holdings could benefit or miss out on a wider ‘value bounce’ and encouraged ASI to be clear about the speed of the transition.

Divvying up dividends

After the merger, the intention is to maintain 4.5%-yielding MUT’s status as a ‘dividend hero’, having racked up 47 consecutive years of rising payouts to investors. However, around the merger come a flurry of dividends payments to ensure shareholders in the enlarged MUT start on a level playing field.  

PLI’s board has declared a pre-liquidation special dividend of 13p per share, with the shares going ex-dividend on 15 October. That amounts to ‘substantially all’ its undistributed revenues from the current financial year and its revenue reserve, or the total revenue which it has received over time but not paid out to shareholders.

The reserve could not be transferred during the merger, meaning MUT must ask shareholders’ permission to make some future income payments from capital, while the special payout is also something of a sweetener given PLI’s shareholders are being asked to take a step down from its 6.3% yield.

MUT has declared three interim dividends. The ‘enhanced’ first interim dividend of 12.55p per share is ‘time-weighted’ from 1 July to the merger date, so existing shareholders do not see their share of income diluted.

Post-merger, all shareholders in the enlarged MUT will be in line for a second interim dividend of 3.95p per share, covering the period from the merger to the end of year, and a third interim dividend of 8.95p per share. The total of 24.75p is the same as MUT’s first three interim payments from its previous financial year to the end of June.

Assuming both sets of shareholders vote to go ahead with the merger at upcoming general meetings, PLI’s rollover pool of assets will be transferred to MUT in exchange for newly-issued shares, which will be admitted for trading on 18 November. The number of shares issued will be determined by the relative net asset values per share, minus merger costs, of both trusts.

PLI’s shareholders can elect to receive cash instead of new shares at a discount of 2% to the residual NAV. The cash option will be limited to a fifth of the shares in issue.

The ASI-run trust is also set to absorb the other’s borrowing, with the enlarged trust’s gearing likely to stand at about 10%.  Three of PLI’s six directors will also join MUT’s board.

On the state of MUT’s revenue reserves, these stood at 24.1p per share, after accounting for all dividends related to the last financial year, when income was hit by the pandemic. Reserves per share are forecast to fall to 12.3p following the merger and associated increase in the number of shares, a figure which the chairman noted would cover three years of a similarly difficult environment, according to Winterflood. 

Luke, along with Aberdeen Standard Equity Income (ASEI ) manager Thomas Moore, also became manager of the former Woodford Income Focus open-ended fund when ASI won that mandate following the implosion of Woodford’s fund management business.

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