Abrdn China Investment Company Limited (ACIC) announced that heads of terms have been agreed in principle for a proposed combination of the fund with the assets of the Fidelity China Special Situations (FCSS) fund.

Fidelity China said the enlarged FCSS fund is expected to have net assets of £1.2 billion and, as the flagship UK closed ended vehicle for investment in China, a constituent of the FTSE 250 Index.

Abrdn China said Fidelity China “is the top performing UK listed investment company specialising in China over 1, 3, 5 and 10 years by NAV total return.”

It said Fidelity China, which launched in 2010, is also the largest UK listed investment company specialising in China.

The combination, if approved by each company’s shareholders, will be implemented through a Guernsey scheme of reconstruction under which Abrdn China will be placed into voluntary liquidation and part of its cash, assets and undertaking will be transferred to Fidelity China in exchange for the issue of new ordinary shares in Fidelity China to Abrdn China shareholders.

“ACIC shareholders rolling over into Fidelity China are likely to benefit from the far greater liquidity available in the market for Fidelity China shares, should they subsequently wish to realise their investment … ” said Abrdn China.

“The proposals include a cash exit opportunity of up to 33 per cent of ACIC’s shares in issue, at a 2 per cent discount to formula asset value (FAV) per ordinary share …

“Fidelity China’s manager, FIL Investment Services (UK) Limited, has demonstrated its support for the proposals by offering to underwrite a portion of the costs of implementing the proposals.”

Abrdn China chair Helen Green said: “After a very thorough review process, including consultation with the company’s major shareholders, the board has concluded that the best practicable option to address the company’s over-concentrated register and to provide significantly improved liquidity to our shareholders is to merge with Fidelity China, which is both sizeable and the clear leader in the China investment company sector.”

Abrdn China said its board has long been working on ways to address the concentration of the fund’s share register “and the consequent lack of liquidity and persistent discount at which its shares trade.”

“… the company’s share register continues to be excessively concentrated, with just three shareholders accounting for over 70 per cent of the company’s issued share capital and, despite an active share buyback campaign, the discount at which the company’s shares trade remains disappointing,” said Abrdn China.

“The board has considered alternatives for improving the situation, including potentially liquidating or merging with another trust. 

“The board has consulted with the company’s major shareholders and it has become clear that the consensus is for a merger with Fidelity China with the option of a partial cash exit at a small discount to FAV.”

FCSS chairman Mike Balfour said: “I am pleased we are able to offer existing shareholders, as well as shareholders of ACIC who roll over, the benefits of an enlarged vehicle with additional liquidity, cementing the company’s status as the leading constituent of the China investment company sector.

“The proposals will also help spread costs over a larger base of assets, thereby reducing the ongoing charges for both new and existing shareholders.

“As a board, we are positive about the long-term prospects of investing in China.

“FCSS is seen by many as the one-stop shop solution for exposure to this asset class and this proposal enhances the prospect of the company building on its long-term success story.”