Manchester & London (MNL ) is believed to be holding merger negotiations with several investment trusts targeted by Saba Capital. A source familiar with the situation said MNL was in ‘tentative discussions’ with multiple boards at a ‘very early’ stage.

The trusts in question reportedly see consolidation with MNL as the only way to shake off the activist shareholder, which is increasing its stakes in discounted investment companies and pressuring them to wind-down. For firms managing multiple trusts, doing so could allow Saba to cash in its shares for a profit, then reinvest the proceeds in another of the same manager’s heavily discounted trusts, potentially exacerbating the problem.

‘You could make a deal with Saba like BlackRock did and pay them to go away, but that is extremely unpalatable for most people to do,’ the source said.

‘The other solution is to liquidate the fund, but if you’re a group with multiple trusts like Baillie Gifford, then all Saba is going to do is get their money and reinvest it in the next fund and pull the same trick.

‘Once you think those two points through, it’s clear that the only real solution is to do a deal with someone else.’

One potential advantage of Manchester & London in a merger scenario is that its manager, Mark Sheppard, owns the vast majority of shares in the trust, which would dilute Saba’s influence in any combined vehicle. 

It is an equally attractive deal for MNL, which is at risk of losing its investment trust status if it cannot water down the manager’s holdings.

At least 35% of shares must be held by the public for a company to be deemed a trust, which MNL is fast approaching. Via a holding company, Sheppard owns 62.3% of the trust, leaving just 37.7% in public hands.

The board has subsequently paused buybacks and is ‘reviewing structural options’ to remove voting power from some of Sheppard’s shares, but is eager for a longer-term solution.

A successful deal from the current negotiations could result in a ‘much bigger entity’ of up to £850m – more than double the technology-focused global trust’s current size of £323m.

Pressure is mounting on Saba-targeted trusts to find a solution too, with the US hedge fund run by Boaz Weinstein showing no signs of relenting. Just last week, Baillie Gifford US Growth (USA ) narrowly survived an attempt to oust its board, with almost half (48.7%) of votes cast to remove its chair and directors.

The clock is ticking for some trusts on Saba’s radar, and they would rather find their own exit than give in to its demands, according to the source.

‘A lot of them just want to save face. They’d rather do a deal with anyone, quite frankly, than do a deal with Saba,’ they said.

‘Saba has a lot of money to invest, they are receiving huge inflows...so they are not going away.’