Two of the UK’s biggest investment trust providers, Alliance Trust and Witan, plan to merge to create a £5bn AUM business.

The news comes a few months after Witan CEO Andrew Bell announced in March his plans to retire this year after 14 years, prompting the company to begin a strategy review.

Assuming the merger is backed by shareholders, the enlarged firm will become one of the largest listed investment managers and is expected to be a contender for promotion to the FTSE 100 index.

The deal, if confirmed, will mean Witan's assets will be “rolled into” Alliance Trust in exchange for new ordinary shares in the newly-named Alliance Witan plc.

Alliance Trust says that its investment strategy, focused on using major active managers globally, will remain unchanged.

The companies promise a “new, more competitive management fee structure” and greater economies of scale.

The merger should result in an enlarged portfolio of approximately £5billion and a lower Ongoing Charges Ratio, particularly for Witan shareholders, the firms say.

There will be enhanced third and fourth interim dividend payments for shareholders in the enlarged Alliance Witan.

According to the firms, Witan shareholders can expect to see an "immediate uplift" in market value on completion of the transaction and will have the option of a partial cash exit.

Assets to be moved into Alliance Trust will include Witan's listed investment company holdings and Witan's Secured Loan Notes which will be novated to Alliance Trust.

Alliance Trust's investment manager, Willis Towers Watson, is expected to make a significant contribution to help absorb the transaction costs.

Alliance Trust shareholders are not expected to suffer any Net Asset Value dilution from the direct costs of the deal while Witan shareholders should suffer no or minimal Net Asset Value dilution, depending upon the level of take-up of the cash exit option, the firms state.

The deal is expected to be completed in late Q3/early Q4.

Dean Buckley, chairman of Alliance Trust, said: "The formation of Alliance Witan brings together the two leading open-architecture multi-manager investment company propositions in the UK to form a FTSE 100 equity investment vehicle with the quality, cost efficiency and profile to play a leading role in the UK investment market. 

Andrew Ross, chairman of Witan, said: "Since Andrew Bell (CEO) announced his intention to retire, we have been through an extensive process to identify the best candidate to take on the management of our shareholders' assets. The board assessed a number of very strong proposals, including single-manager candidates with impressive track records.

"However, the board was unanimous in recommending the combination with Alliance Trust, which allows the continuation of our multi manager approach at lower fees and in a larger, more liquid vehicle. The companies share similar cultures and a mutual desire to provide a "one stop shop" for retail investors in global equities. I am delighted to announce this transaction, the largest ever investment trust combination, in Witan's 100th year as a quoted company on the London Stock Exchange. The deal will result in one of the leading investment companies listed in London and will stand our shareholders in good stead for many years to come."

Analysts have said the merger is a major move in the investment trust sector.

Laith Khalaf, head of investment analysis at platform and SIPP provider AJ Bell, said: “This is a blockbuster merger of two of the biggest and oldest names in the investment trust world. The deal will result in lower annual charges for investors, as well as preserving the long dividend track records of both trusts.

"The share price of both trusts rose on the back of the news, especially Witan, which suggests the market thinks the deal provides decent value to both sets of shareholders. The £5 billion merger will probably catapult Alliance Witan into the FTSE 100, where it will sit alongside global competitors F&C Investment Trust and Scottish Mortgage.

"Inclusion in the FTSE 100 is likely to increase liquidity and visibility for Alliance Witan, though most passive funds tracking the UK stock market follow the FTSE All Share, and most active funds eschew investment trusts, so we shouldn’t expect this to be a total gamechanger. Scale is likely to be the greater driver of liquidity, with institutional investors and pension funds feeling more comfortable dabbling in a larger vehicle, because they can make a meaningful investment without owning too much of the trust."