Shires Income (SHRS ) has put itself in the front line to combine with Abrdn Smaller Companies Income (ASCI ), or ASCIT, or at least influence merger negotiations, revealing today it had recently discussed a proposal with its fellow sub-scale stable mate. 

Shires, an £85m UK equity income trust also managed by Abrdn, issued a statement in response to yesterday’s declaration by ASCI of a strategic review and search for a merger partner to address the lack of shareholder value from a stock that had languished on a 20% discount to net asset value (NAV).

The shares jumped 14% to 280p on Monday, cutting their discount to below 8%, as the market anticipated a line of potential suitors would present themselves to the £67m minnow.

Shires, which owns a stake in ASCI accounting for 7% of its assets, stated: ‘Over the last few months, Shires Income, which owns 13.6% of ASCIT, has been discussing a proposal with the board of ASCIT and its advisers, which the board of Shires Income believed delivered compelling benefits for both sets of shareholders. 

‘Shires Income will consider its position in the light of ASCIT’s announcement and a further announcement may be made in due course,’ it said.

Shires board, chaired by Robert Talbut, former chief investment officer at Royal London Asset Management, said the proposal did not anticipate Shires Income making any offer under the City Code.

Christopher Brown, investment companies analyst at JP Morgan Cazenove, who yesterday flagged up Shires as a potential merger candidate for ASCI, said: ‘Not too much should be read into SHRS statement that it does not intend to make an offer.

‘These types of transaction are commonly structured as section 110 reconstructions where the “target” company winds up and offers a rollover, often with a cash alternative, into the other fund.’

As such, Brown said they fall outside the City takeover and mergers code, and can proceed with only 75% of shareholders voting, ‘a relatively low barrier to success’.

According to Brown, Shires announcement implied ASCI had doubts about the proposal, which could refer to the former’s focus on larger FTSE stocks under fund managers Iain Pyle and Charles Luke, in contrast to ASCI’s smaller company approach under Abby Glennie and Amanda Yeaman.

‘Yet it is a 13.6% shareholder in ASCI … and this puts it in a strong position to determine the outcome,’ he said.

A more obvious solution is for ASCI to merge with Glennie’s flagship £481m Abrdn UK Smaller Companies Growth (AUSC ), although its lack of income and low 1.7% dividend yield could be problematic.

Brown also suggested 5%-yielding Invesco Perpetual UK Smaller Companies (IPU ), a £178m rival on an 11% discount could make a good merger partner. However, it pays part of its dividend from capital, which he said income investor ‘purists’ might object to.