Gresham House has refused to back down quietly in the battle for Strategic Equity Capital (SEC), after merger talks from Odyssean (OIT) broke down, in its second showdown with Harwood Capital over an investment trust.
In a regulatory filing today, the SEC board said it had ended discussions with the board of OIT and instead announced a series of proposals so the investment trust could exist as a “successful standalone vehicle”. The OIT announced in December it had been approached by SEC shareholders for a potential merger.
SEC shareholders will not have a chance to vote on the £350m merger proposals but can instead have their say on the discount control mechanisms proposed by the board, which include an increased tender offer, share buyback programme, a refreshed schedule for the continuation vote, a policy for proceeds from profitable realisations and a commitment from Gresham House to purchase more shares in the investment trust.
Any merger would have seen lead manager Ken Wotton (pictured), from GHAM, dropped as investment manager to be replaced by OIT fund managers Stuart Widdowson and Ed Wielechowski. Both strategies take an engagement approach to UK small caps.
Round two of Gresham House vs Harwood Capital
“We did not expect Gresham House to go quietly,” said Numis in an analyst note.
The battle over SEC comes hot on the heels of another fight that pitched Gresham House against Harwood Capital, where the latter tried to take over as manager on the Gresham House Strategic investment trust. The acrimonious battle ultimately led to the investment trust, now known as Rockwood Realisation, going into wind down.
Numis reckons a combined vehicle would have made sense. While at GVQ IM, Widdowson ran SEC before leaving in 2017 to join Harwood Capital where he created Odyssean Capital as a joint venture with the asset manager.
“We rate the management team of Odyssean highly,” Numis said. OIT launched in April 2018, raising £87.5m at IPO and growing to £154m in the period since through performance and share issuance.
SEC measures could lead to conflicts of interest for Gresham House
The board of SEC said it has received letters of intent from 26.4% of the investment trust’s share capital supporting its proposals. That compares to the 32.9% of share capital that initially approach OIT seeking a merger.
Numis wondered whether City of London, the largest shareholder with a 26.2% stake, had switched allegiances from OIT to SEC.
Alongside the letters of intent, Gresham House intends to vote in favour of the proposals with its 5.37% stake, although this brought up further concerns from Numis, namely the asset manager’s intention to buy further shares in the investment trust.
“The additional buying by the manager shows its faith in the strategy, but we believe it also creates increased conflicts with the potential for the manager to have too much ‘skin in the game’ which can influence future votes.”
Liquidity concerns for SEC
Numis also said tenders and share buybacks could reduce the market cap to around £160m from its current £197m.
“To maintain a consistently narrow discount we believe the manager Ken Wotton will need to deliver a strong period for performance and the fund will need a more supportive shareholder register, but this may not happen until the full exit in 2025,” the analyst note said.
“In addition, we believe any solution proposed by the SEC’s Board also needs to consider how to improve the trading liquidity and overall marketability of a trust.”
SEC’s discount currently runs at 11.37%, while OIT has a small premium of 0.51%. SEC shares were up 1.44% this morning.
