RIT Capital moves on Alliance Trust

Following the announcement, Alliance Trust's share price initially increased and the shares are now trading at around 520p, up from 508p, and RIT Capital's share price is around 1,580p down from 1,619p.

No detailed terms have been provided by RIT Capital, but it must make a definite offer or pull out by 27 June - 28 days after its announcement on 31 May - in accordance with Takeover Panel rules. It already has a small stake in Alliance Trust of less than 3 per cent.

But Alliance Trust, which recently appointed Canaccord Genuity to conduct a strategic review alongside other specialist advisers, said its board "wishes to thoroughly explore all options available to it for the long-term future benefit of shareholders", and that the strategic review outcome may not be determined for some months. It added that "there can be no certainty that any transaction will result from the strategic review".

Alliance Trust has undergone a tremendous number of changes over the past few years following pressure from activist investors, most recently Elliott Advisors. These included Katherine Garrett-Cox's demotion as chief executive and board member of Alliance Trust in October, after which she stepped down as chief executive of Alliance Trust Investments (ATI), which manages the investment trust's equity portfolio, and left the company in March.

Alliance Trust Savings (ATS), meanwhile, has just appointed Tim Tookey as chair of its board, as part of a process of becoming a standalone business with its own management and independent board.

A new benchmark and a single-digit discount to NAV target were also among the changes put in place at Alliance Trust.

Elliott had a number of concerns, including the investment trust's underperformance against sector peers and relevant benchmarks, internal management costs and losses in ATI and ATS. But last year it came to an agreement with Alliance Trust to appoint two of its suggested candidates to the board - Anthony Brooke and Rory Macnamara - as well as a third new candidate. Since then, there have been several changes to the board, including the departure of chair Karin Forseke in January

Alliance Trust's share price performance now beats the average for the AIC Global sector and its benchmark over one, three and five years. Its discount to NAV of 8.9 per cent is also tighter than the double-digit levels it had traded at for many years.

RIT Capital's takeover proposal has received a mixed response from analysts, one issue being that the two trusts are quite different from each other.

RIT Capital Partners is a multi-asset fund that alongside equities offers exposure to assets such as hedge funds and unquoted investments, and aims to preserve wealth. The trust, which we count among our IC Top 100 Funds, has a good performance record and has mitigated downside in difficult years such as 2008, as well as making good positive cumulative returns. Around 18 per cent of its shares are held by the Rothschild family - the trust was originally set up to manage their wealth. Alliance Trust focuses on equity investing.

Charles Cade, head of investment companies research at Numis Securities, thinks there are a number of reasons why the merger may not go ahead. These include possible resistance to Alliance Trust disappearing, and how RIT Capital would deal with ATS and ATI as these could lead to a loss of value. He also thinks "there may be further upside to Alliance Trust's share price in the coming months as speculation over its future increases".

But Simon Elliott, head of the investment trust research team at Winterflood, argues: "By merging with RIT Capital, it is reasonable to assume that shareholders in Alliance Trust would benefit from a substantial narrowing of its discount and exposure to a vehicle that has been more successful in achieving its objectives. As both are self-managed investment trusts, there should be a fall in the cost base and therefore ongoing charge ratio."

Trust performance

Source: Morningstar, as at 31 May 2016