The Alliance Trust PLC (LSE:ATST) and Witan Investment Trust plc (LSE:WTAN) merger "makes sense for shareholders", says Stifel, with attractive charges and both sides already using a relatively unique multi-manager approach.
This was "the most logical move" and the "best fit" for Witan in its strategic review, says Stifel analyst Iain Scouller in a note to clients after the £5 billion merger was announced on Wednesday.
Combining £3.4 billion Alliance with £1.6 billion Witan creates a larger, more liquid company, he said, which will potentially propel the combined company into the FTSE 100 post-merger.
The analyst said his view was that joining the ranks of the blue chips "tends to be a double-edged sword".
"We think the share price of FTSE 100 companies can be quite highly influenced by 'basket trades' and other index activity, which can increase share price volatility", he explained.
A lower ongoing charge ratio for the combined company is a key attraction of the deal, Scouller said, with a projected 'high 50's' ratio in terms of basis points on a combined basis, compared with 0.76% for Witan and 0.62% for Alliance currently.
As for dividend yields, both trusts are currently similar, at 2.3% for Witan and 2.1% for Alliance, with the combined company planning to continue delivering a growing dividend each year.
The analyst noted that Alliance has historically paid out a dividend that is uncovered by revenue earnings, with cover only 0.74x in the past calendar year, while Witan also paid an uncovered dividend of 0.80x in the same year.
He noted that Alliance has been the best performer in the year to May, helped by its investment in Magnificant Seven US tech giants, with 22.9% growth in net asset value, whilst Witan has seen an increase of 17.6%.
"Going forward, we think the future performance of the Mag 7 companies will have an important influence on the returns of the combined trust," he said.
"Taking everything into account, we do think this merger makes sense for shareholders and is a logical outcome of the review process."
In recent weeks, Alliance has de-rated from trading close to NAV to trade on a c.6% discount yesterday, with Witan on a c.8% discount.
With Witan's discount having narrowed in recent months from double-digits and Alliance's discount widened from close to NAV, Stifel changed its recommendations, upgrading Alliance to 'neutral' from 'negative' and downgrading Witan to 'neutral' from 'positive'.