Alliance Trust (ATST) plans to buy back the 95.48m shares held by its largest shareholder, activist investor Elliott, which amount to £620m - nearly 20 per cent of its issued share capital. The repurchase is subject to independent shareholder approval at a general meeting on 28 February, and if passed will be done in five tranches, at a 4.75 per cent discount to the trust's net asset value (NAV) at the time. It follows Alliance Trust's proposal to outsource the management of its equity portfolio to eight managers via a multi-manager structure, which will also be put to the vote on 28 February.
Alliance Trust's board said that buying back Elliott's shares would lift the NAV by about 1 per cent and enable the trust "to move forward with its multi-manager proposal against the backdrop of a share register that is settled and supportive for the longer term, [while] the targeted annual costs of the ongoing company will remain competitive, amounting to no more than 65 basis points".
A target of under 0.65 per cent is an increase on the 0.6 per cent originally suggested when Alliance Trust announced its proposals for a multi-manager structure, although lower than its current ongoing charge of 0.78 per cent.
The trust's board also reaffirmed a proactive approach to buying back shares, saying that going forward it is prepared to do so at or around the same level as it has for Elliott. Between its announcement of the proposed new management structure on 15 December and this announcement on 27 January, it had already repurchased 30.8m shares - about 6 per cent of the total.
And since 15 December its discount to NAV has tightened considerably, coming in from around 8 per cent to about 4.6 per cent as of 27 January. Its share price has risen from about 596p to about 652p.
Elliott has held shares in Alliance Trust since 2010, over which period it has effected many changes. These have included getting the trust to start making share buybacks to control the discount - something it had virtually never done before; an overhaul of its board and the ousting of its chief executive, Katherine Garrett-Cox; a greater focus on equities and a drive to reduce costs.
Elliott said that when it "became a shareholder Alliance Trust had poor corporate governance and its shares traded at more than a 15 per cent discount to NAV. Since then, corporate governance has improved, an external asset manager has been proposed and the discount has narrowed to less than 5 per cent. We welcome the opportunity to participate in the offer being made to all other shareholders under the buyback programme."
But in December Elliott had told Investors Chronicle that it will continue to be a "patient investor".
Analysts are generally positive on the plan to repurchase Elliott's stake. "This is a good outcome for all sides," said Numis. "The results of the strategic review, announced in mid-December, were flawed as they failed to address the problem of how to find an exit for Elliott [which] would have been a thorn in the side for Alliance Trust and might even have added further to its stake.
"Hedge funds tend to have a reputation as disruptive short-term investors. In this case, however, Elliott's activism has resulted in a far more attractive vehicle for all shareholders. Alliance Trust, in its old guise, had a dull performance record and traded on a wide discount. By contrast, it now has a fully independent board, and a clear strategy to deliver attractive shareholder returns, offering access to some of the leading global equity managers through a low-cost vehicle with minimal discount volatility."
Laith Khalaf, senior analyst at Hargreaves Lansdown, added: "It remains to be seen whether the changes deliver long-term value for shareholders. However, the discount has narrowed significantly and on paper the new investment strategy looks like an improvement. The withdrawal of Elliott is also positive for remaining shareholders because it will boost the NAV of the trust, and hopefully lead to some much needed stability in terms of strategy."
