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Friends Life to offload £230m Witan stake

Witan is preparing to buy back more than £200m of its own shares from one of its largest investors
May 5, 2016

IC Top 100 Fund Witan Investment Trust (WTAN) plans to buy back up to 31.6m of its shares from Friends Life, which is selling its entire stake in the investment trust. The stake represents around 16 per cent of Witan's issued share capital, worth about £231m. Witan's shareholders will get to vote on whether this goes ahead on 26 May, as this buyback would be in addition to the trust's existing ability to buy back 14.99 per cent of its shares over the next 12 months.

If shareholders agree to the plan, Witan will buy back the shares at a discount of 6.5 per cent to net asset value (NAV). However, some or all of Friends Life's stake may be sold to other shareholders, possibly at a tighter discount. Other investors are said to be interested in buying Witan's shares at a discount.

Witan's board says such a buyback could lead to an uplift in NAV, while removing a significant shareholder wishing to sell should improve the balance between sellers and buyers in the market and result in discount tightening.

Broker Winterflood estimates that the uplift could be as much as 1.2 per cent of NAV if Witan buys back the entire stake.

However, before the plan was announced the investment trust's discount was around 2.4 per cent, but has since widened to about 6.7 per cent - and is likely to trade at a similar level until the transaction. The trust traded at a premium for much of last year, and a tighter discount over 2014, following improved performance over the past few years. It swung back to a discount earlier this year as investors moved into less volatile assets amid market falls.

"The forthcoming placing provides an attractive value opportunity for investors seeking liquidity in the fund, and we can see it trading on a premium again as market conditions improve and retail investors' appetite for equities rebounds," says Simon Elliott, head of the investment trust research team at Winterflood.

However, if the trust's market cap falls this could slightly increase its ongoing charge, currently 0.99 per cent, although this is not expected to be more than about 0.05 per cent.

The trust has not said how it would finance the purchase, but Andrew Bell, chief executive officer of Witan, says it has a liquid portfolio and could readily realise assets. The trust also has 10 per cent gearing (debt), and he adds that they might increase this - but only if markets warrant it. The number of shares the trust ends up having to buy back will also be a factor in deciding how to fund the purchase, and Mr Bell adds that the portfolio will be run as normal until this is known.

"But we are very happy to buy the best part of this stake," he adds.

Friends Life is selling its stake after being acquired by Aviva, which was not previously a long-term shareholder in investment trusts. It follows Friends Life's sale of its £185m holding in Mercantile Investment Trust (MRC) earlier this year, which accounted for about 11.7 per cent of its assets. This was placed with around 30 investors at an 18 per cent discount to NAV.

Friends Life has also been selling down its position in other investment trusts, including British Empire (BTEM), Dunedin Income Growth (DIG) and Majedie Investments (MAJE), and still has stakes in the investment trusts listed below. It is reviewing its policy on holding these types of funds.

"Friends Life has significant legacy stakes in a number of investment trusts and we suspect that these funds will be following Witan's progress carefully over the next month," says Mr Elliott.

 

Friends Life's key investment trust holdings

Trust Holding (%)Value (£ms)Discount to NAV(%)*Discount at 31 Dec 2015
Witan15.8233.56.70.3
Aberdeen UK Tracker24.972.96.62.6
Scottish Investment Trust10.164.412.212.5
BlackRock Income Strategies13.143.66.22.4
Brunner Investment Trust18.843.713.715.5
Majedie Investments13.117.98.52.4
London & St Lawrence10.410.32.45.1

Source: Winterflood Securities, Thomson Reuters & Argus Vickers as at 3 May

*Source: Winterflood as at 4 May