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13 December 2005
The Scottish Investment Trust PLC
Tender Offer and New Stock Buyback Policy
Introduction
The Board of The Scottish Investment Trust PLC (the 'Company') has undertaken a long-term strategic review of the Company, having particular regard to the improved performance of the Company over the past two years, the reduction in the discount to net asset value at which Ordinary Stock ("Stock") has traded over the past six months, and the differing requirements of institutional and private Stockholders. Having completed that review, the Board has concluded that the Company remains an attractive vehicle for investors, particularly private investors and private client asset managers, who are seeking a cost-effective exposure to global equity markets through a diversified portfolio of investments. At the same time, the Board believes that it would be appropriate to provide an opportunity for those Stockholders who so wish, to realise all, or substantially all, of their investment in the Company.
The Proposals
The Board is today announcing its intention to put forward a set of proposals (the "Proposals") to Stockholders. The Proposals comprise:
(i) a tender offer (the "Tender Offer") for up to 40 per cent. of the Company's Stock at a discount of 9.0 per cent. to the Company's net asset value with borrowings valued at par; and
(ii) a new Stock buyback policy which is intended to help limit the discount to net asset value at which the Company's Stock trades.
Both the Tender Offer and the new buyback authority require approval from Stockholders prior to implementation. A circular will be sent to Stockholders later this month setting out the full terms and conditions of the Tender Offer, and convening an extraordinary general meeting of the Company at 10.00 a.m. on 27 January 2006 at which approval will be sought from Stockholders for the Tender Offer. The circular will be accompanied by the Company's annual report and accounts for the financial year ended 31 October 2005, which will contain notice of the Company's annual general meeting to be held on the same day, at which approval will be sought from Stockholders for, inter alia, authority to buy back Stock which will allow the introduction of the new Stock buyback policy.
Background
Since 2003, the Board and the management team have carried out a series of changes to the structure and investment approach of the Company. In January 2004, John Kennedy was appointed as lead manager. A number of personnel changes were subsequently made. In July 2004 the Company's surplus debt was repaid. The cost to net asset value of 3.1 per cent. was, in the Board's view, justified by the likely future benefit of removing high coupon surplus debt.
The new management team adopted a single global portfolio approach and a systematic investment process to drive stock selection. These changes have produced an improved relative performance by the Company which has been driven principally by stock selection. In the period 31 January 2004 to 8 December 2005 the Company's net asset value total return (with borrowings valued at par) has been some 35.7 per cent. (after deducting the 3.1 per cent. cost of debt repayment) compared to the benchmark return of 33.2 per cent.
Over the same period the Company's rating has also improved with the discount to net asset value (with borrowings valued at par) of some 20 per cent. at which the Stock traded in January 2004 having narrowed to an average of some 10.6 per cent. in the six months prior to 8 December 2005.
The improved investment performance together with the improved rating of the Company's stock has resulted in the Company's Stock price increasing from 275p to 407p over the period, a 48.0 per cent. increase .
Tender Offer
Under the Tender Offer, Stockholders will be entitled to have up to 40 per cent. of their Stockholding purchased by the Company at a price representing a 9.0 per cent. discount to net asset value (with borrowings valued at par). This represents a Stockholder's basic entitlement. Stockholders may tender any percentage of their holdings for purchase under the Tender Offer, but tenders in excess of the basic entitlement will only be satisfied, on a pro rata basis, to the extent that other Stockholders tender less than their basic entitlement. Tenders will be rounded down to the nearest whole number of Stock Units. ISA/PEP participants and STOCKPLAN participants will be treated in the same way as Stockholders for the purpose of pro rating.
In determining the maximum number of Stock Units that may be repurchased under the Tender Offer, the Board has sought to provide an opportunity for Stockholders who wish to realise their investment to do so in full, whilst ensuring that the Company's running costs after the Tender Offer (as a percentage of its assets) remain competitive. The Board believes that the Company's running costs will be reasonable in comparison with those of the other investment trusts within the AITC Global Growth sector.
The Tender Offer has been struck at a level which should provide an uplift to the net asset value per Stock Unit of approximately 2.5 per cent. (as at 8 December 2005) for continuing Stockholders. This uplift has been calculated on the basis that 40 per cent. of Stock is tendered in the Tender Offer and after taking account of the costs of the Proposals and providing for the potential costs of repurchasing a corresponding proportion of the Company's 53/4% Secured Bonds due 2030 (the "Secured Bonds"). On the same basis, if 20 per cent. of the Stock were to be tendered in the Tender Offer, the uplift to the net asset value per Stock Unit would be approximately 0.9 per cent.
Stockholders on the register of members of the Company on 6 January 2006 will receive the final dividend of 4.35p per Stock Unit proposed to be paid on 10 February 2006 whether or not they tender their Stock. No dividends in respect of the current financial year to 31 October 2006 will be payable on any Stock which is repurchased and cancelled under the Tender Offer.
The Tender Offer will be open to all Stockholders other than Stockholders in certain overseas jurisdictions. Any Stock repurchased by the Company under the Tender Offer will be cancelled.
Stock Buyback Policy
The Board is also proposing to introduce a new Stock buyback policy. Under this policy, the Company will actively seek to buy back Stock with the aim, in normal market conditions, of maintaining a discount of 9.0 per cent. or less to net asset value (with Secured Bonds at their market value). As at 8 December 2005, this 9.0 per cent. discount level (with Secured Bonds at their market value) is equivalent to the 9.0 per cent. discount level (with borrowings at par) proposed for the Tender Offer, taking account of the uplift in net asset value provided to continuing Stockholders if the Tender Offer had been carried out for at least 33 per cent. of the Company's Stock on that date.
This new Stock buyback policy will help to ensure that in normal market conditions the discount to net asset value at which the Stock will trade is at least as good as the improved rating at which the Company's Stock has traded over the past six months.
The Company took authority to repurchase its Stock at its annual general meeting earlier this year, and proposes to take authority at its forthcoming annual general meeting to buy in the market up to 14.99 per cent. of the Stock in issue following completion of the Tender Offer. Subject to Stockholder approval, the Company will buy in Stock on the basis of the new buyback policy described in the above paragraph.
Gearing
The Company currently has outstanding £150 million nominal of Secured Bonds and three perpetual Debenture Stock issues amounting to £2 million nominal. The Company repaid £75 million nominal of Debenture Stock in 2004 and the Board has a stated policy of maintaining a strategic ceiling for effective gearing of 120 per cent. Accordingly, the Board considers that following the Tender Offer an amount of the Secured Bonds corresponding to the proportion of Stock successfully tendered will be surplus to requirements.
The Company will therefore neutralise the effect of movements in long-term interest rates on the value of 20 per cent. of its Secured Bonds by entering into a hedging arrangement shortly by way of a Swap agreement. The Board may undertake additional hedging corresponding to the level of Stock successfully tendered. The Board will retain any hedge into which it has entered over the surplus amount of Secured Bonds pending their redemption.
Proposed Amendments to Investment Objective
The Board would prefer the Company to be managed without reference to market capitalisation-weighted indices which may from time to time be dominated by a small number of large companies. Subject to approval by Stockholders at the forthcoming Annual General Meeting of the Company, the Company's investment objective is being amended to dispense with the link to a formal benchmark, thereby removing the constraint it imposes on investment policy. Future performance will be reviewed in the context of returns achieved by a broad basket of UK equities through the FTSE All-Share IndexTM and of international equities through the FTSE All-World IndexTM, but the portfolio will not be modelled on any index.
Irrevocable Undertaking
An irrevocable undertaking to vote in favour of the Tender Offer has been received from Carrousel Capital Limited, the Company's largest Stockholder, which has also irrevocably undertaken to tender its entire holding of 10.6 per cent. of issued Stock under the Tender Offer.
Appendix
For the purposes of this announcement, the following Assumptions apply:
a) for the purposes of the Tender Offer, the net asset value will be calculated in accordance with the Company's normal accounting policies and in keeping with the usual methodology employed by the Company in calculating its published net asset value (taking borrowings at par value). This net asset value excludes net revenue from 1 November 2005, deducts the final dividend in respect of the financial year ended 31 October 2005, values the Company's Secured Bonds at their par value (meaning for these purposes the nominal value of the Secured Bonds less any unamortised issue expenses) and values the portfolio of investments at their bid close or last price, as the case may be. In the case of the Company's Secured Bonds, their par value as at 31 January 2006 (being the expected Calculation Date) will be £146.0 million; and
b) as at 8 December 2005, the net asset value per Stock Unit was 454.3p (with borrowings at par) and was 445.9p (with borrowings at market), both calculated taking the valuation of investments at mid close or last price.
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