ORIT and AERI

Alan Ray

Merger of ORIT and AERI could make sense for shareholders

We ask what factors make for a good merger and ask if these apply to ORIT and AERI…

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Just before Christmas, there was a light-hearted conversation on the Kepler internal chat system about who might put out an important announcement just as the market was closing for the festive period. It’s an ironclad rule that someone will. Sure enough, Octopus Renewables Infrastructure’s (ORIT) board announced that it had proposed a combination of ORIT and peer-group member Aquila European Renewables (AERI).

The board of AERI quickly confirmed that while it would consider the proposal, this was in the context of a wider process of thinking about future options. As a result, we got to thinking about what the ideal circumstances for a merger between two investment trusts might be. There is a lot of M&A going on in the trust sector right now. What are the factors that could make for an ideal combination?

A compatible match?

While it’s not totally unheard of to include a change of investment strategy as part of an M&A transaction, this presupposes that investors a) want to invest in a new asset class and b) are happy that the board can take on the role of fund selector. In other words, investors may be very interested in a new direction, but might quite like to research a number of potential managers themselves and make their own choice, and so perhaps would rather see a trust wind up and return cash to give them the freedom to choose for themselves. Thus, the most likely scenario involves a combination of similar strategies, where investors aren’t being asked to embrace a new manager and a new strategy. In the case of ORIT and AERI, while a very detailed examination may reveal some differences, in terms of the role both play in investors’ portfolios, it is very similar indeed: a geographically and technologically diversified portfolio of renewable energy infrastructure assets, including the important ability to invest in construction and development assets, potentially boosting returns. So, in essence, the two sets of shareholders are on the same wavelength.

The sum of the parts

A constant mantra in the investment trust sector is that scale matters and small investment trusts must consider merging to achieve scale, thus improving dealing liquidity and achieving economies of scale. We think that while these often do matter, it’s also perfectly possible for a small investment trust to go about its business if shareholders are happy. Not all investment strategies need or benefit from vast amounts of money, and one thing investment trusts are very well suited to is investing in unusual or more difficult-to-do areas.

Renewables infrastructure is, though, somewhat a numbers game. Yes, there are parts of that world that smaller investment trusts can focus on, but in the end, this is about delivering power to whole countries. Three or four years ago, the model for investment trusts in this space was to achieve ‘escape velocity’ by raising the first £100–£200m at IPO, and then periodically raising further funds each year. Big investors really wanted to see these trusts grow rapidly to £500m and beyond to a) be confident that they could play a competitive role in sourcing new deals, b) achieve the cost and liquidity benefits of scale and c) be large enough to make a difference to portfolio performance.

Today, while it’s not inconceivable that the very largest investment trusts in this space will be able to raise capital again in the next 12–24 months, it’s not looking very likely that the sector-wide pattern of raising new capital to a timetable of the manager’s choosing will return any time soon. So, having scale is going to be even more valuable than before. In an era of higher interest rates, it’s also likely that larger trusts will be able to achieve lower borrowing costs, which for an asset class that is usually leveraged, could make a significant difference.

Do investors want it?

As noted above, that mantra about investment trusts having to get bigger to survive presupposes that all shareholders care about such things, and sometimes they don’t. It is though, a pretty safe bet that a share register of largely professional investors does like and want scale. While we can’t say that AERI shareholders necessarily want this particular transaction to happen, we can say that a process to look at options was already underway because a significant minority of AERI shareholders have already expressed a view to the board that they want alternatives to be considered. In our view, this won’t therefore be an unwelcome approach for shareholders, even if the result is simply to catalyse a competitive process.

How much room to negotiate is there?

Again, going back to the ‘scale matters’ argument, whereas ORIT is above the notional threshold of £500m, AERI is some way below this level but is still a meaningful size. The combination of the two would create a vehicle that was definitively above £500m, with combined assets of over £900m. So, there is something in this for both parties, meaning that this is a negotiation rather than a fait accompli. As readers may know from personal experience, the negotiation where no-one is totally happy is probably the one that achieves the fairest result for everyone. That’s a bit of a trite statement of course, but one that helps us get our point across efficiently. Both sides have something to gain, so there is scope to negotiate.

In conclusion

As we write this, we note that infrastructure investor Macquarie has just raised a record sum of €8bn to invest in European infrastructure, with renewable energy infrastructure very much on the radar. This goes to show that even while the listed sector trades at a discount for various reasons we’ve discussed in the past, there is still very strong appetite for these types of investments, and that speaks to a competitive landscape for new transactions, which brings us back to scale being important.

One certainly can’t blame the recipient of the offer, AERI, from playing it cool. To our point above, this is a negotiation and so why would one just say ‘yes, please‘ if a simple stock exchange announcement might yield what we call ‘competitive tension’. That’s totally fair enough and shareholders would be right to ask ‘why not?‘ if this hadn’t been done. But if one thinks through the criteria that can contribute to a successful merger, ORIT and AERI seem to meet many of them.

The updated fcast dividend for the 1st quarter is £2,524.00

but with 3 Trusts still to report their dividends.

£2,524.00 should not be multiplied by 4 for the yearly total.

I’ve bought for the portfolio 12264 shares in GRID

Gresham Storage for 9k.

Yielding around 10% and trading at a discount of 50%.

Bought for the yield so I am content if this

isn’t the bottom of the trend.

I’ve sold the portfolio shares in SERE Schroder European

Property for a loss of £55

Total portfolio profit in SERE now £860.00

Mr. Market is always right but not always that bright.

With the recent changes to the portfolio, the first quarter fcast, with

two companies still to declare a dividend is £2,299.00

The second quarter target is £2,191.00 which brings the year’s

target to £8764.00 (plus)

A lot of water to flow under a lot of bridges before the target

can become the fcast.

There is currently £115,431.00 invested in the portfolio.

At the end of the ten year plan that figure should grow

to £225,000 invested the value of which is the

unknown. I would guess based on my history of

investing, if the markets are strong at the time

the value will be excess of the total but of

course it could be less if the markets have crashed.

Of course that matters little to u as the plan is to

spend the dividends, with the option to sell a position

if an emergency arises which would be similar to selling ten years

dividends in advance.

With compound interest the most cash is made in the last

years of re-investing so the plan would have kept u out

of the lifestyling disaster.

If the plan falls behind the options will be to

increase the time scale

or

add new fuel to the fire.

The plan fails by the month not the year.

Current dividends received £1,406.14 which is not

indicative for the year but should be ahead of the

fcast at the first quarter.

I have tidied up the Snowball portfolio by buying 989

shares in SERE for £700.00.

There is one more position RECI to be added to then

the decision will be to either re-invest the dividends back

into the Snowball or open a new position.

By then the decision may have been made for me.

The investment trusts that could beat savings rates by paying 5%-plus dividends

Investors had a tough time working out how to make money in 2023.

Uncertainty over the global economy and continuing geopolitical tensions meant that for many the prospect of stock market investing proved very much hit and miss.

Nonetheless, the temptation to take money out of the stock market and put it into high interest savings accounts was strong, particularly with some of the best fixed rate savings deals paying more than 6 per cent.

But those rates are gone now and the top one-year fixed rate deal in  

This is Money’s independent best buy savings tables pays 5.3 per cent, with rates on a downward trajectory.  pays 5.3 per cent, with rates on a downward trajectory.

Looking for income?: 48 investment trusts have a dividend yield of over 4% according to new research from the Association of Investment Companies © Provided by This Is Money

Meanwhile, looking at the bigger picture, investing in the stock market has been proven to be the best path to accumulating long-term wealth.

Enter investment trusts – and as savings rates dip, these are looking more attractive.

There are 48 which invest mostly in equities and have a dividend yield of at least 4 per cent, delivering both potential growth and income to investors, research from the Association of Investment Companies shows.

 A total of 28 yield 5 per cent or more, so they could deliver an income in excess of interest rates if they start to fall this year.

There are 28 investment companies which have a dividend yield of 5% or more© Provided by This Is Money

Fourteen of the trusts on the 28-strong list are from the UK Equity Income sector, accounting for nearly a third of the highest yielding investment trusts.

The trust with the highest dividend yield is Henderson Far East Income. It invests in Asia Pacific equities and yields 11.5 per cent. Managed by Janus Henderson, it is trading on a 4.5 per cent discount to the value of its net asset value.

Next on the list is Marwyn Value Investors which has a yield of 10.8 per cent and sits in the UK Smaller Companies sector. Managed by Marwyn Investment Management, some of the trust’s holdings include luxury goods companies, such as Le Chameau and software companies like AdvancedAdvT Limited.

Another trust in the top three high-yielders is British & American, which invests in global equities and yields 9.2 per cent.

As UK inflation unexpectedly rose again for the first time in 10 months to 4 per cent, the Bank of England may cut rates later than previously expected.

Some investment trusts have a focus on providing a generous income to investors and the structure of investment companies is a big benefit when it comes to this.

They allow investment managers to hold back up to 15 per cent of the dividends they receive each year from the companies they invest in and build a revenue reserve to smooth payouts in leaner years.

Eight of the highest yielding investment trusts are what the AIC calls dividend heroes, which means they have raised their dividends for at least 20 years in a row.

The highest yielding of these dividend giants is abrdn Equity Income Trust, which has raised its dividend for 23 years and offers a 7.7 per cent yield.

There are a further 13 trusts which have increased their dividend for ten years in a row.

Why investment trusts?

Investment trusts are a popular way for investors to get exposure to stock markets for all kinds of reasons.

They are easy to buy and sell, especially through an online investment platform.

They are managed by an investment manager steeped in market knowledge, hold a range of stocks (diversifying risk) and are not too greedy when it comes to charges.

Investment companies also have structural benefits which help them maintain and grow their dividends year after year. But even with all these compelling factors, there is no guarantee that they will guarantee positive returns year in year out.

Annabel Brodie-Smith, communications director of the AIC says: ‘For investors seeking income, this list of high yielding equity investment trusts is a good place to start.

These investment trusts offer access to equities in a wide range of regions and sectors from the UK and across the globe including commodities, infrastructure and biotechnology.

‘More than a third of these 48 investment trusts have raised their dividends every year for the past ten years, and eight have raised their dividends for 20 years or more.’