The board of The European Smaller Companies Trust (ESCT ) has agreed to tender up to 42.5% of the listed fund’s shares, following two months of negotiations with activist investor Saba Capital.

The tender offer will comprise a cash exit option as well as an ‘in specie consideration option’, whereby professional investors can opt to receive a proportion of the fund’s underlying portfolio instead, according to an announcement today.

The tender offer, if taken up in full, will likely see the portfolio shrink to around £430m in size. Analysts said that should mean the trust retains sufficient scale to succeed in the future, while ending months of wrangling with Saba and, ultimately, creating a way to get the activist off the share register. 

Those who opt for a cash exit are expected to receive their money by 2 July, while professional investors who opt for an in specie consideration will receive a proportion of the fund’s assets directly by 27 May.

Shareholders will be able to vote on the tender offer at a general meeting scheduled for 7 May. The board recommends voting in favour, although it said none of the directors intend to take part, as they believe the £703m European smaller companies trust should survive and can continue to deliver for shareholders in its current form.

‘It remains an exciting time for the sector, with Europe being a provider of key enablers of big structural growth trends such as artificial intelligence, the “green transition” and industrial automation,’ the directors explained.

‘While the board is of the view that now is not the time to divest from European smaller companies, the tender offer will provide those shareholders that wish to exit the opportunity to do so.’

ESCT said it had reviewed several options and, following discussions with Saba, had decided to implement a tender offer to provide shareholders with an opportunity to exit. The board believes this will put the trust in a strong position, so it can focus on the fundamentals with a supportive shareholder base.

Saba agrees to back off

Linked to the tender offer, Saba has agreed to make no further interventions before the 2028 AGM, including at the trust’s November continuation vote. The US hedge fund, headed by Boaz Weinstein, will tender 115.4m of its shares – believed to represent its entire 29% stake in the trust – under the in-specie exit option.

Saba is known to hedge the underlying portfolios of its targets, so that its profits are primarily linked to any narrowing of discounts or engineering exits close to net asset value (NAV). Analysts said receiving the underlying stocks directly would enable Saba to close out short positions, which rely on borrowing the relevant shares – Stifel said the cost-efficient step ‘should benefit both sides’.

Weinstein commented: ‘We are pleased to have reached a constructive agreement with ESCT’s board that puts shareholders first. From the outset, our objective has been clear: to unlock value for shareholders across the UK investment trust sector.’ 

He said this agreement with ESCT marks a significant step in this direction.

Weinstein added that ESCT is the fifth trust, of those that Saba requisitioned general meetings at, which has taken ‘decisive, shareholder-friendly action following our engagement’. 

Avoiding a costly EGM

Saba and ESCT have been in discussions that led to the tender since 14 February, three days after Saba requisitioned another extraordinary general meeting (EGM) to pressure the trust and three others to provide liquidity for shareholders by transitioning into open-ended funds.

ESCT was one of seven investment trust targets, also including three Baillie Gifford closed-end funds, which Saba originally began a high-profile campaign against before Christmas.

That first attempt to oust the board and take control of ESCT proved unsuccessful in early February.

The board said today that it had decided to engage with Saba to avoid another costly EGM, which it believed was not in the best interests of shareholders. 

Shares in ESCT, which is managed by Janus Henderson’s Ollie Beckett, Rory Stokes and Julia Scheufler, are up 7.3% over the past year. Over the three years to yesterday, it has delivered a 30.4% share price gain versus 24.2% for the MSCI Europe Ex-UK Small Cap index. It closed on Monday on a discount of 6%, according to Deustche Numis data. 

Following the announcement, the shares rose another 2.5% this morning, in the context of a broader European market rally. 

‘It does make sense’ 

Analysts were broadly supportive of the announcement. Although, Stifel’s Will Crighton noted that the extent of Saba’s exit depends on wider uptake of the tender offer, meaning it is ‘reliant on significant shareholders wanting to remain in the trust’.

According to Refinitiv data, other top 10 shareholders include Lazard, City of London Investment Management and Allspring. All run ‘discount hunting’ strategies focused on the sector, meaning they could also be interested in exiting at close to NAV. 

‘Ultimately, we believe it does make sense to provide an exit for Saba, given they are viewed as an overhang, which is likely to impact the longer-term rating, and likely to lead to ongoing legal costs as [Saba] pushes for an exit... The size of the tender appears balanced to give all shareholders the chance of an exit, whilst also giving the opportunity for Saba to exit of most of its stake, if other investors do not tender,’ said Deutsche Numis’ Ewan Lovett-Turner. 

He still expects Saba will be ‘after quick resolutions elsewhere’ at other investment company holdings. 

Deutsche Numis’ head of research in the sector also pointed to an important detail in the documents. ‘We note that Saba may potentially make a subsequent payment of 2% of the exit value to ESCT, which could make it effectively an exit on a 2% discount, if Saba obtains an exit of more than 15% of share capital from another trust in 2025 at wider than a 1% discount (including the impact of taxes).’

In layman’s terms that means, unusually, that ‘ESCT shareholders now stand to benefit if Saba gets a large exit from another trust on better terms than it received’.

Most costs from the exercise will be borne by exiting shareholders, although carrying out the tender is expected to cost the trust £690,000.