Acquisition of Spirit Group

1st Dec 2005 08:55

Punch Taverns PLC01 December 2005 NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION IN OR INTO AUSTRALIA, CANADA,JAPAN, SOUTH AFRICA OR THE UNITED STATES Punch Taverns plc Proposed Acquisition of Spirit Group Punch Taverns plc, the operator of over 8,200 pubs throughout the UK, todayannounces the proposed acquisition of Spirit Group, bringing the Group total toover 9,500 Highlights • Acquisition values Spirit Group ("Spirit") in aggregate at approximately £2,679 million, (including the assumption of approximately £1,250 million of debt) • Spirit is one of the UK's leading managed pub companies with an estate of 1,832 predominantly community pubs located across Great Britain • The Directors believe that: o Within the Spirit estate there are a large number of pubs, which would be better run on Punch's successful leased and tenanted model o The acquisition is in line with Punch's strategy to further increase the overall quality of its estate o This represents an investment in one of the finest pub portfolios in the UK, with further opportunities to enhance value • Acquisition will increase direct access to areas of retail growth such as food, wines and soft drinks and provide potential for further buying benefits • Acquisition funded by: o £1,250 million debt facilities o £1,250 million of assumed Spirit debenture o £275 million of convertible bonds o Up to £75 million of new ordinary shares • Significant earnings enhancement in the current financial year (pre exceptional items) • Generation of returns in excess of Punch's weighted average cost of capital in the first full year of ownership • Intention is to convert c.750 pubs to a leased/tenanted format within two years and initially sell 82 other pubs for alternative use. A detailed performance review will be undertaken to assess the best method of realising value from the rest of the portfolio • Sale of 203 pubs from the Punch estate to Admiral Taverns for £40 million also announced today (see separate announcement) The Acquisition is conditional upon the approval of Punch Shareholders. ACircular providing further details of the Acquisition and convening anExtraordinary General Meeting will be posted to Shareholders shortly. Giles Thorley, Chief Executive of Punch, commented "This is an exceptional deal for Punch. The proposed acquisition of Spirit willfurther increase the scale and quality of our estate. The acquisition alsoprovides shareholders with a strongly enhanced earnings profile, returns inexcess of cost of capital and excellent growth potential." 1 December 2005 Punch will be hosting a presentation for analysts today at 10.00am at theoffices of College Hill, 4th Floor, 78 Cannon Street, London EC4N 6HH. Pleasecall Jamie Ramsay at College Hill on 020 7457 2048 for further details. There will be a dial-in facility to access the analyst meeting. Participantsshould dial 020 7784 1014 and request the Punch Taverns conference call. ENQUIRIES: Punch Taverns plc Today: 020 7457 2020 Thereafter: 020 7868 8903 Giles Thorley, Chief ExecutiveRobert McDonald, Finance Director Financial Adviser to Punch Morgan Stanley 0207 425 5555Brian Magnus 020 7425 9446Henry Stewart 020 7425 3431 Advisers on Placing and Convertible 0207 425 5555 Morgan StanleyTim Pratelli 020 7677 4053Shyam Parekh 020 7677 7902 Citigroup 020 7986 4000Darrell Uden 020 7986 0410Chris Zeal 020 7986 0518 College Hill 020 7457 2020Justine WarrenMatthew Smallwood Morgan Stanley & Co. Limited ("Morgan Stanley") is acting exclusively for PunchTaverns plc in relation to the Acquisition and for no-one else, and will not beresponsible to any other person for providing the protections afforded toclients of Morgan Stanley nor for providing advice in connection with theAcquisition. Certain statements made in this announcement are forward-looking statements.Such statements are based on current expectations, and by their nature, aresubject to a number of risks and uncertainties that could cause actual resultsand performance to differ materially from any expected future results orperformance expressed or implied by the forward-looking statement. Theinformation does not assume any responsibility or obligation to update publiclyor revise any of the forward-looking statements contained herein. These materials are not an offer of securities for sale in the United States.Securities may not be offered or sold into the United States absent registrationunder the U.S. Securities Act of 1933 or an exemption therefrom. This summary should be read in conjunction with the full text of the attachedpress release. NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION IN OR INTO AUSTRALIA, CANADA, JAPAN, SOUTH AFRICA OR THE UNITED STATES Part I Punch Taverns plc Proposed acquisition of Spirit Group Overview Introduction The Board of Punch announces that Punch Taverns (Redwood Bidco) Limited (awholly owned subsidiary of Punch) and Punch have entered into an agreementrelating to the purchase of the entire issued ordinary share capital of SpiritGroup ("Spirit"). The Acquisition values Spirit in aggregate at approximately£2,679 million (including the assumption of approximately £1,250 million ofdebt). Spirit is one of the UK's leading managed pub companies with an estate of1,832 pubs located across Great Britain. In view of its size, the Acquisition is conditional upon the approval of PunchShareholders. A Circular convening the Extraordinary General Meeting will beposted to Shareholders shortly. Reasons for the Acquisition The Directors believe that it is in the interests of Shareholders as a whole toconsider acquisition opportunities which enhance the business and may generateadditional value. Having identified the Acquisition as a key strategicopportunity, and having conducted a thorough due diligence process, theDirectors believe that the combination of Punch and Spirit, together withassociated disposals and the conversion of certain pubs to lease agreements,will increase the quality of the Punch estate and enhance returns toshareholders. Punch intends to convert around 750 (40 per cent.) of the acquired pubs to aleased/tenanted format over the first two years, and to sell 82 other acquiredpubs, which have higher alternative use property value. Punch will undertake adetailed performance review of the remaining acquired pubs to assess the bestmethod of realising value. During this review, the pubs will continue underdirect management and the infrastructure will be retained. This will also ensurethat the performance of the pubs being converted to a leased/tenanted format ismaintained during the conversion period. In this way, it is expected that the Acquisition: • will further increase the overall quality of the Punch estate; • offers the potential for significant earnings enhancement; • will further increase Punch's diversity of estate and attractiveness to high quality retailers; • will maximise the trading potential of each lease conversion site byattracting independent retailers who, through their individualism coupled withmotivational arm's length agreement, will enhance the customer focus andoffering of these local community pubs. Information on Spirit Spirit owns and operates one of the finest managed pub estates in the UnitedKingdom comprising a total of 1,832 pubs (as at 19 October 2005). Spirit wasformed as a result of the demerger of the managed pub business of Punch GroupLimited and its subsidiaries on 3 March 2002. Spirit has since grown through anumber of acquisitions, most importantly the acquisition of the Scottish &Newcastle retail business from Scottish & Newcastle plc in November 2003. Of the 1,832 Spirit pubs to be acquired by Punch, 1,316 pubs are freehold orlong-leasehold properties, and 516 pubs short leaseholds. In the financial yearended 21 August 2004, Spirit generated group turnover of £1,319 million, grossprofit of £314 million and operating profit of £196 million. The Spirit Group has raised £1,250 million by way of a debenture under asecuritisation structure. The debenture is secured by way of fixed and floatingcharges over 1,066 pubs in the Spirit Group. The terms of the securitisationinclude various covenants upon the Spirit Group commensurate with this type offinancing. There are no current plans to repay the debenture and it is intendedthat the debenture will remain in place following Completion. Consideration for the Acquisition The consideration is being financed from new facilities totalling £1,250 millionarranged by Citigroup,, Morgan Stanley and The Royal Bank of Scotland PLC, anissue by Jerseyco of £275 million convertible bonds and a placing of newordinary shares ranking pari passu with existing shares raising up to £75million both arranged by Citigroup and Morgan Stanley. The issue of theconvertible bonds and the placing of new ordinary shares are not conditionalupon the completion of the Acquisition. Financial Effects of the Acquisition The Directors of Punch expect the Acquisition will be earnings enhancing in thecurrent financial year. Once the programme for converting pubs from managedhouses to a leased and tenanted format is successfully completed, the Directorsare of the view that the improvement in the overall quality of the Punch estatewill offer the potential for further growth of the Punch business. Specifically, the Directors expect the return on investment to exceed the PunchGroup's weighted average cost of capital in the first full year of ownership. As part of the Acquisition, Punch will acquire aggregated gross assets of £3,502million of which £3,154 million relate to fixed assets and £347 million tocurrent assets including £227 million of cash at bank and in hand. Theacquisitions will also include total aggregated liabilities of £2,864 millionand therefore net assets of £638 million. A fair value exercise will be conducted by Punch at the next year-end reportingdate on the assets acquired and goodwill will be calculated. Current Trading and Prospects of Punch, Spirit and the Enlarged Punch Group Punch Trading at Punch to the date of this announcement has been satisfactory and inline with the Directors' expectations since the publication of the preliminaryunaudited results for the 52 weeks ended 20 August 2005 and the Directors arepositive about the underlying financial and trading prospects of Punch for thecurrent financial year. Spirit In the fourth quarter ended 20 August 2005, like for like sales for the SpiritGroup were 3.9 per cent. higher compared to the same period in the prior year,adjusted for disposals. The Enlarged Punch Group The Directors believe that, following completion of the Acquisition, theEnlarged Punch Group is well placed to take advantage of opportunities arisingfrom the increase in the size of its estate. The Directors have confidence inthe financial and trading prospects of the Enlarged Punch Group for the currentfinancial year. Part II Proposed Acquisition of Spirit Group Further Information Background on Punch Punch is a leading pub company specialising in leased and tenanted pubs. As atAugust 2005, the Punch estate comprised 8,227 pubs located across Great Britain,all operated by independent retailers under a lease or tenancy agreement fromPunch. The Company has pursued a focused strategy of developing the operation of leasedand tenanted pubs on the principles of stability and organic growth. The Companyachieves this through ownership of a high quality estate of mainly freeholdpubs, let to independent retailers, and generating four main income streams: • rent; • profit from the sale of beer; • profit from the sale of other goods and services; and • profit share from gaming machines. Profit improvement has been achieved through a combination of organic growth andselective acquisitions of individual pubs and pub estates from other companies,using cash and financial leverage generated by the core estate. This hasresulted in the expansion of the Punch estate by approximately 82 per cent. overthe past three years. An efficient capital structure, using securitised debtwhich provides stable fixed rate finance, complements the business model and isdesigned to enhance shareholder value. A History of Successful Acquisitions Punch has a successful history of corporate acquisitions and their integrationinto the core estate. The Company's recent acquisition history includes: • Pubmistress Limited in December 2003 which, after related disposals,increased Punch's estate by 2,859 pubs to a total at that time of over 7,400pubs; • InnSpired Group Limited, in September 2004, which after subsequentdisposals in January 2005, added 471 pubs to the estate; and • Avebury Holdings Limited, in August 2005, which after disposals, added368 pubs to the estate. Each of these major acquisitions has, in the view of the Directors: • enhanced Punch's prospects for organic growth through improving itsability to manage the overall estate particularly through synergy benefitsderived from scale and expertise; • generated returns in excess of Punch's weighted average cost of capital; and • enhanced the earnings per share attributable to Shareholders. Opportunities for Further Growth Focus on leased and tenanted pubs continues to provide excellent opportunitiesfor organic growth and the pubs converted from direct management will benefitfrom the individuality conferred by independent retailers with the support ofservices and investment from Punch. This strategy has been successful in drivingorganic profit growth in recent years. In addition, as not all of the pubs being acquired are best suited to the leased/tenanted model in its current format, some pubs will be retained under directmanagement. These pubs offer significant future opportunity, realisation ofwhich will be considered fully in the detailed performance review. In themeantime, through the operation of a mixed estate, Punch will gain access togreater growth opportunities than is currently the case. These include: • the ability to convert pubs from managed to leased/tenanted, depending oneconomic circumstances, to maximise value; • greater attractiveness to suppliers and the opportunity for purchasingsynergies; • greater direct access to areas of retail growth such as food, wines andsoft drinks; • greater attractiveness to pub retailers, company management andemployees, through the greater diversity of operation; and • improved understanding and proximity to the consumer and the ability toextend consumer knowledge across the wider estate. Further Information on Spirit Spirit owns and operates one of the largest managed pub estates in the UnitedKingdom comprising a total of 1,832 pubs (as at 19 October 2005). Spirit wasformed as a result of the demerger of the managed pub business of Punch GroupLimited and its subsidiaries on 3 March 2002. Spirit has since grown through anumber of acquisitions, most importantly the acquisition of the Scottish &Newcastle retail business from Scottish & Newcastle plc in November 2003. The geographic profile of the Spirit estate is as follows: Region Percentage Split of Spirit Estate (%) South East 26North West 17London 14Midlands 15North, Yorks and Humber 14Scotland 6South West and Wales 6East Anglia 2Total 100 Other than as set out below, there has been no significant change in the tradingor financial position of the Spirit Group since 21 August 2004: Sale/leaseback • On 14 October 2004, the Spirit Group completed the sale of SpiritIntermediate Star Limited and its subsidiary, Spirit Wisley Limited, which ownedthe reversionary titles to a portfolio of 65 licensed properties. The netproceeds of £168.6 million were used to reduce debt and the properties continuedto be operated by the Spirit under 30 year leases; Refinancing • On 25 November 2004, the Spirit Group completed an intra-groupreorganisation and £2.2 billion refinancing. New financing arrangements wereentered into comprising (i) the issue by Spirit Issuer plc of £1.25 billionFloating and Fixed/Floating Secured Debenture Bonds, secured against a portfolioof 1,080 freehold and long leasehold pubs in the Spirit Group estate and (ii)bank loans of £875 million (subsequently increased to £1.0 billion on 23December 2004) secured against a portfolio of 951 freehold, long and shortleasehold pubs. The balance outstanding on the pre-existing bank debt was repaidon 25 November 2004 and the Floating Rate Secured Notes issued in April 2002 andAugust 2003 pursuant to the Spirit Funding securitisation were called on 26November 2004 and redeemed at par on 29 December 2004; Non-core pub disposals • On 7 December 2004, the Spirit Group sold the shares of a non-coreportfolio of 364 pubs by way of a sale of New Pubco (TC) Limited and itssubsidiary company, New Pubco (MC) Limited, to Hackremco (No 2165) Limited, acompany formed by a consortium of investors including Robert Tchenguiz, for £345million including the repayment of intercompany loans. The proceeds of thetransaction together with further available cash were used to make a partialredemption of the unsecured guaranteed loan notes 2013 issued by SpiritIntermediate Holdings Limited in November 2003 together with payments in respectof the group employee investment scheme and the zero cost and at cost options;and • On 18 September 2005, the Spirit Group sold the "Night and Day" portfolioof High Street bars and nightclubs comprising the trade and certain assets andliabilities of 178 licensed properties (and the shares in New Pubco (SLB)Limited, which held leases in respect of certain of the properties) to TCHHoldings Limited and TCG Acquisitions Limited, a company formed by a consortiumof investors including Alchemy Partners, for £174.8 million. The net proceeds ofthe transaction was used to partially repay debt and transaction costs, thebalance remaining being held to the credit of a disposal collateral account. Post Acquisition Plan Spirit operates pubs under the managed house model, whereby the company employsall of the staff, including a manager, and is responsible for all of theoperating expenses and retains all of the income of the pub. Punch plans toconvert, in the first two years, approximately 750 of the Spirit pubs into theleased and tenanted model (as operated for the existing Punch estate), wherebypubs are run and managed by an independent retailer who does not own thepremises but who operates the pub under a lease or a tenancy agreement. In order to provide full focus and accountability of the managed houseoperation, the management of this business will be kept separate from Punch'sleased and tenanted activities. Shortly after acquisition, Punch will appoint aDirector responsible for the Managed Business. This role will form part of theExecutive Management Committee of the group and report to the CEO and the GroupBoard. The managed business will retain autonomy over operational property,human resources and sales and marketing activity. This mirrors the structurewithin the existing leased/tenanted business. However, all of these functionswill be co-ordinated with the assistance of the senior management of Punch tomaximise the buying benefits available to the wider group and to ensure positivecollaboration where necessary. Spirit has gone through a period of considerable change over the last few years.Despite this, the business is performing well and Punch believes the Group willbe able to call upon a high quality core management team currently operating theSpirit business. The proximity of the Punch and Spirit head offices, both basedin Burton upon Trent, will assist in the task of overseeing transition andutilisation of staff and resources. The leased/tenanted division of Punch will continue to be run as before, withonly very minor disruption as pubs are converted from managed and others aresold. In particular, operational management will continue to focus on thecurrent estate. For those outlets that are to be converted onto a leased/tenanted format the keyissue is to provide continuity of support during the conversion period. Thiswill be provided by the managed house division. The letting process will behandled by a separate team of specialists from within the leased division. Thisteam will be able to capitalise on the talent bank of existing applicants forsites, together with their extensive knowledge of good operators for this typeof property. Punch has extensive experience of managing acquisitions and of integrating pubsinto the leased/tenanted estate, the most recent examples being the acquisitionsof Avebury, InnSpired and Pubmaster. Prior to that, in 2002, Punch was a sistercompany of Spirit within the Punch Group, and the Punch management team havedirect experience of converting pubs from the managed estate to leased pubs, andin some cases of working directly with mixed estates of managed and leased/tenanted pubs. Principal Terms of the Acquisition Punch and the Buyer have entered into an Acquisition Agreement with shareholderswho hold more than 67 per cent. of the shares of Target. Following completion ofthe Acquisition Agreement, the "drag-along" provision contained in the articlesof association of the Target will be used to enable the Buyer compulsorily toacquire the remaining shares of Target. The Buyer will also procure that Spiritredeems all of the current shareholder loan notes. The aggregate considerationpayable in cash in respect of all of the Target's shares is expected to be£422.5 million, of which £25 million will be placed in an escrow account for ashort period to enable Punch to satisfy itself as to certain matters. As is customary in the case of purchases of businesses from financial sellers,the Buyer has only received very limited warranties in connection with theAcquisition. The obligations of the Buyer are guaranteed by Punch. The Acquisition is conditional upon the approval of the Shareholders at anExtraordinary General Meeting. The Buyer has agreed to pay Spirit the sum of£19.5 million (inclusive of VAT, except to the extent such VAT is recoverable)inthe event that the Shareholders do not approve the Acquisition by 31 January2006. The On-Sale In view of its size, the Acquisition qualifies for investigation by the Officeof Fair Trading ("OFT") as a relevant merger situation under the Enterprise Act2002. In order to address possible competition concerns, Punch plans to sellapproximately 190 pubs from the existing Punch estate to one or more third partybuyers before or shortly after Completion of the Acquisition. Punch may givecertain warranties to such buyers under the terms of the On-Sale which arecustomary for a transaction of this nature. Punch is confident that on this basis, the Acquisition will be cleared by theOFT without a reference to the Competition Commission. The OFT may howeverrequire Punch to undertake to divest a limited number of additional pubs fromthe Punch estate and/or the Spirit estate within six months of Completion as acondition to clearing the Acquisition without a reference to the CompetitionCommission. The Acquisition is not conditional upon completion of the On-Salenor upon regulatory clearance. Punch intends to use the proceeds of the On-Sale for repayment of bank borrowingobtained to fund the Acquisition and/or further investment in the business. Other A Circular providing further detail of the Acquisition and convening anExtraordinary General Meeting will be posted to Shareholders shortly. It isanticipated that Completion will take place at the end of December 2005. The Directors will be seeking approval from the Shareholders for the borrowingsunder the Facility Agreement and the Convertible to exceed the borrowing limitcontained in Article 101 of the Company's articles of association. TheDirectors believe that this increase in borrowing will not result in the PunchGroup incurring excessive indebtedness. Punch is being advised on the Acquisition by Morgan Stanley. Morgan Stanley isalso acting as broker on the Acquisition. ENQUIRIES: Punch Taverns plc Today: 020 7457 2020 Thereafter: 020 7868 8903Giles Thorley, Chief ExecutiveRobert McDonald, Finance Director Financial Adviser to PunchMorgan Stanley 0207 425 5555Brian Magnus 020 7425 9446Henry Stewart 020 7425 3431 Advisers on Placing and Convertible 0207 425 5555 Morgan StanleyTim Pratelli 020 7677 4053Shyam Parekh 020 7677 7902 Citigroup 020 7986 4000Darrell Uden 020 7986 0410Chris Zeal 020 7986 0518 College Hill 020 7457 2020Justine WarrenMatthew Smallwood Morgan Stanley is acting for Punch in connection with the Acquisition, thePlacing and the placement of the Bonds and no one else and will not beresponsible to anyone other than Punch for providing the protections afforded toclients of Morgan Stanley nor for providing advice in relation to the mattersreferred to herein. Citigroup Global Markets Limited and Citigroup Global U.K. Equities Limited(together "Citigroup") are acting for Punch in connection with the Placing andthe placement of the Bonds and no one else and will not be responsible to anyoneother than Punch for providing the protections afforded to clients of Citigroupnor for providing advice in relation to the matters referred to herein. The Royal Bank of Scotland PCL is acting for Punch in connection with theplacement of the Bonds and no one else and will not be responsible to anyoneother than Punch for providing the protections afforded to clients of The RoyalBank of Scotland PLC nor for providing advice in relation to the mattersreferred to herein. This announcement does not constitute an invitation to underwrite, subscribe foror otherwise acquire or dispose of any securities of the Company. Pastperformance is no guide to future performance and persons needing advice shouldconsult an independent financial adviser. This announcement is not for publication or distribution, directly orindirectly, in or into the United States, Australia, Canada, Japan, or SouthAfrica or any jurisdiction in which such publication or distribution isunlawful.. This announcement is for information only and does not constitute anoffer or invitation to acquire or dispose of securities in the United States,Australia, Canada, Japan or South Africa or any jurisdiction in which such offeror solicitation is unlawful.. Neither the Bonds, the Placing Shares, the SaleShares nor the shares to be issued on conversion of the Bonds, have been or willbe registered under the U.S. Securities Act of 1933, as amended, and may not beoffered or sold in the United States unless they are registered or exempt fromregistration. There will be no public offer of securities in the United States,the United Kingdom or elsewhere. This announcement is directed only at persons who (i) are outside the UnitedKingdom or (ii) have professional experience in matters relating to investmentsor to whom this announcement may otherwise be directed without contravention ofsection 21 of the Financial Services and Markets Act 2000 (all such personstogether being referred to as "Relevant Persons"). This announcement isdirected only at Relevant Persons and must not be acted on or relied on bypersons who are not Relevant Persons. Any investment or investment activity towhich this announcement relates is available only to Relevant Persons and willbe engaged only with Relevant Persons. This announcement and any offer if made subsequently is only addressed to anddirected at persons in member states of the European Economic Area ("EEA") whoare "qualified investors" within the meaning of Article 2(1)(e) of theProspectus Directive (Directive 2003/71/EC) ("Qualified Investors"). Any personin the EEA who initially acquires any securities in the expected offering or towhom any offer of securities is made will be deemed to have acknowledged andagreed that they are such a Qualified Investor. This announcement may be an advertisement for the purposes of the ProspectiveDirective (2003/71/EC) and does not constitute or form part of any offer orinvitation to sell or issue, or any solicitation of any offer to purchase orsubscribe for, any of the securities. It is intended that copies of theprospectus to be issued in connection with the issue of the Bonds, when approvedand published, will be available at the registered offices of Punch. The priceand value of securities may go up as well as down. Persons needing advice shouldcontact a professional adviser. In the case of any securities being offered to a financial intermediary as thatterm is used in Article 3(2) of the Prospectus Directive, such financialintermediary will also be deemed to have represented, acknowledged and agreedthat the securities acquired by it in such offering have not been acquired on anon-discretionary basis on behalf of, nor have they have been acquired with aview to their offer or resale to, persons in circumstances which may give riseto an offer of securities to the public other than their offer or resale in arelevant member state to Qualified Investors or in circumstances in which theprior consent of the Managers has been obtained to each such proposed offer orresale. The Company and the Managers and their respective affiliates, will rely upon thetruth and accuracy of the foregoing representation, acknowledgement andagreement. No representation or warranty, express or implied, is or will be made as to, orin relation to, and no responsibility or liability is or will be accepted by theManagers or by any of their affiliates or agents as to or in relation to theaccuracy or completeness of this announcement, or any other written or oralinformation made available to or publicly available to any interested party orits advisers and any liability therefore is hereby expressly disclaimed. Any investment decision to buy securities in the offerings must be made solelyon the basis of publicly available information, which has not been independentlyverified by the Managers. The distribution of this announcement and the offering or sale of the securitiesin certain jurisdictions may be restricted by law. No action has been taken byPunch or the Managers or any of their respective affiliates that would permit anoffering of the securities or possession or distribution of this announcement orany other offering or publicity material relating to such Placing Shares in anyjurisdiction where action for that purpose is required. Persons into whosepossession this announcement comes are required by Punch and the Managers toinform themselves about and to observe any such restrictions. Appendix I Summary of the terms and conditions of the AcquisitionAgreement and Facility Agreement Acquisition Agreement The Acquisition Agreement is between the Buyer, the Target, Punch andshareholders who in aggregate hold more than 67 per cent. of the shares ofTarget. The principal sellers are funds managed by Texas Pacific Group andBlackstone Group. The obligations of the Buyer are guaranteed by Punch.Completion is conditional upon the approval of the Shareholders at theExtraordinary General Meeting. In the event that Shareholders do not approve theAcquisition by 31 January 2006, the Buyer has agreed to pay Spirit the sum of£19.5 million (inclusive of VAT, except to the extent such VAT is recoverable)The aggregate consideration payable in cash in respect of all of the Targetshares (including those shares which will be compulsorily acquired by the Buyerpursuant to the "drag along" provisions contained in the articles of associationof Target) is expected at Completion to be £422.5 million, of which £25 millionwill be placed in an escrow account for a period of eight weeks to enable Punchto satisfy itself as to certain matters. If Spirit disposes of certain pubsbefore Completion and the disposal price, net of tax and costs of disposal,exceeds a specified base figure, the excess will be paid to the Targetshareholders as additional consideration. The Buyer is obliged to procure that,at Completion, Spirit redeems all of the current Spirit shareholder loan notes(which will at Completion have a redemption value of approximately £293.2milion). The Buyer will also procure that, at Completion, all outstandingoptions over Spirit shares will be satisfied in cash, the aggregate amount ofwhich is expected to be approximately £33.8 million will procure that the Targetpays an aggregate of approximately £16.9 million to certain of its advisers inrespect of the costs of the transaction. Facility Agreement The Facility Agreement was entered into between, amongst others, the Company andCitigroup, Morgan Stanley and The Royal Bank of Scotland PLC under which theborrowers obtained a bridge facility of £1,200 million and a revolving creditfacility of £50 million (together the "Facility") from a group of lenders tofinance the Acquisition. The revolving credit facility may also be used forgeneral corporate purposes. The Facility is secured and contains customaryrepresentations, warranties and covenants in favour of the lenders. Interestpayable under the Facility is LIBOR plus two per cent, with scheduledamortisation of £600 million at the end of year one and £400 million at the endof year two. Appendix II Risk Factors This Appendix II addresses the existing and future material risks to thebusiness of the Enlarged Punch Group. The risks below are not the only ones thatthe Enlarged Punch Group will face. Some risks are not yet known and some thatare not currently deemed material could later turn out to be material. All ofthese risks could materially affect the Enlarged Punch Group, its turnover,operating profits, earnings, net assets, liquidity and capital resources. Insuch a case, the market price of the Ordinary Shares may decline and investorsmay lose all or part of their investment. Shareholders should consider carefully all the information in this announcement,including, in particular, the risks described below. Conversion and integration of the acquired pubs and realisation of the benefitsof the Acquisition The Acquisition involves the conversion and integration of a significant numberof pubs that have previously been operated under the managed house model. Thereis a risk that the Enlarged Punch Group will encounter difficulties inconverting and integrating these pubs effectively. Although detailed plans forachieving the operating benefits of the Acquisition are being prepared, thesecannot be implemented until Completion and there are execution risks associatedwith these plans. The conversion and integration process may also take up a substantial amount ofmanagerial resources which in turn may adversely impact the performance of theEnlarged Punch Group's business. Exposure to economic downturn in the UK The Enlarged Punch Group is exposed to the risks of an economic downturn in theUK. A downturn in the UK economy could result in lower consumer expenditurewhich in turn could result in lower revenues and net income for the EnlargedPunch Group. Varying consumer perceptions and public attitudes In the UK, consumption of alcoholic beverages has become the subject ofconsiderable social and political attention in recent years due to increasingpublic concern over alcohol-related social problems including drink driving,underage drinking and adverse health consequences associated with the misuse ofalcohol. The Government in January 2005 published for consultation a report entitled "Drinking Responsibility" setting out further proposals building on the newpowers that will exist pursuant to licensing reforms. New measures aimed atthose who abuse the licensing laws include 24-hour bans for premises thatrepeatedly sell to underage drinkers, fixed penalty notices and banning ordersfor individual drinkers who behave in an anti-social manner and measures (fordesignated areas) aimed at recovering costs of policing, hospital treatment andstreet cleaning. Premises deemed to be contributing to anti-social drinkingproblems would be identified, given a period of time to tackle the problem,failing which they would be charged a contribution of the associated costs.Currently, a bill giving effect to this proposal is before Parliament which, ifenacted in its current form, could have an adverse effect on the Enlarged PunchGroup's cost base and profits. Changing consumer tastes and requirements Changes in consumer tastes in both food and drink and demographic trends overtime may affect the appeal of the Enlarged Punch Group's pubs to consumers. Seasonality and weather Attendance levels, and hence turnover, at the Enlarged Punch Group's pubs may beadversely affected by persistent rain or other inclement weather, especiallyduring the summer months or over the Christmas period (which are peak tradingtimes). Additionally, hot weather may have an adverse impact on food sales. Operating costs The Enlarged Punch Group's pubs utilise a range of labour and services which areessential to their operation such as staff, utilities, rates and maintenance.These costs can amount to a significant proportion of a pub's turnover and theremay be only a limited ability to mitigate significant increases caused by marketor regulatory factors. Significant future costs in items such as rates orutilities could therefore have a major impact on the Enlarged Punch Group'sfinancial performance. Declining sales of beer in pubs and increased competition A significant portion of the Enlarged Punch Group's turnover is derived from thesale of beer. In recent years, sales of all beer (by volume) in pubs in the UKhave decreased, principally as a result of pub customers showing increaseddemand for non-beer products such as wine and other alcoholic beverages, andincreased expenditure on food along with a decline in the number/proportion ofmale pub visitors. Growing health and drink-driving concerns, as well as theability to purchase canned or bottled beer at lower prices in many competitorssuch as off-licences and supermarkets, have also contributed to the downwardtrend in beer sales at pubs. Ability to attract and retain high quality tenants The Enlarged Punch Group's financial performance will be dependent on theability to identify and retain high quality tenants. If the Enlarged Punch Groupis unsuccessful in convincing both existing and prospective tenants that theoverall combination of its properties, services and contractual terms are morefavourable than those of its competitors, this may adversely impact the EnlargedPunch Group financial performance. Competition for high quality managers All of the Enlarged Punch Group's managed pubs will be operated by EnlargedPunch Group employees as managers. The Enlarged Punch Group will compete withother managed pub companies to attract high quality managers and some of thesecompanies may have greater financial and other resources than the Enlarged PunchGroup. If the Enlarged Punch Group is unsuccessful in convincing both existingand prospective employees that the overall combination of its properties,services and employment terms is more favourable than that of its competitors,existing managers may choose not to remain employed by the Enlarged Punch groupand prospective employees may choose to work for other companies. Late or non-payment of rental and/or other payments There is a general risk that rental and other payments owed to the EnlargedPunch Group (including for example for the supply of beer and other products tothe tenants and for receipts from AWP machines) will not be paid on the due dateor will not be paid at all. A sufficient aggregation of such late ornon-payments would affect the profitability and financial performance of theEnlarged Punch Group. Debt, liquidity and revenue risks The Enlarged Punch Group's debt structure carries a number of restrictivecovenants. Financial covenants establish minimum net worth and debt servicelevels within the securitised elements of the business and restrict payments toShareholders such as dividends if specified debt service levels are notsatisfied. Non-financial covenants include restrictions on the disposal ofmortgaged properties and related matters, the disposal of assets other thanmortgaged properties, the acquisition and substitution of permitted businesses,capital expenditure, estate management transactions and further positive andnegative covenants. Breach of these covenants by the relevant securitisedelements of the Enlarged Punch Group would constitute "loan events of default",which could result in the Enlarged Punch Group's borrowings becoming immediatelyrepayable. If there were a significant deterioration in the Enlarged Punch Group's tradingactivities or cash generation, the Enlarged Punch Group would have to serviceits debt in priority to its equity and there is a risk that it would not be ableto make dividend payments. Defined benefit pension schemes The Spirit Group operates various defined benefit pension schemes: The SpiritGroup Pension Scheme (the "SGPS"), the Spirit Group Retail Pension Plan (the "SGRPP") and the Spirit Group Retail Retirement Savings Plan (the "SGRRSP") (adefined contribution pension scheme which has a defined benefit underpin)(collectively, the "Pension Schemes"). The primary liability for funding the Pension Schemes rests with theparticipating employer companies. By virtue of the Pensions Act 2004, there willbe risks for the whole of the Punch Group arising from the operation of thePension Schemes. In summary, the main risk factors are: (a) The Pensions Act 2004 will allow the Pensions Regulator to impose a schemefunding target and employer contribution rate if those matters cannot be agreedbetween the scheme trustees and the employers. This is currently scheduled tocome into force from December 2005. (b) The trustees of each Pension Scheme have the power to wind up the relevantscheme in certain circumstances. The Pensions Regulator also has a statutorypower to order a pension scheme to be wound up. As a result of recent changes inlegislation, winding-up the Pension Schemes would result in a statutoryobligation on the various participating employers to fund the schemes byreference to a "buy-out basis". Approximate funding calculations identify that,if the Pension Schemes were to wind up as at the date of the calculations (being31 May 2005 in the case of both the SGPS the SGRPP), aggregate contributions onthis basis would have been required of around £77 million in the case of theSGPS and £125 million in the case of the SGRPP (although these figures should betaken only as a guide as no quotations have been obtained from insurancecompanies). Since it is not intended to wind up the pension schemes, a morenormal amount of deficit would be on an FRS 17 basis and this was £26 millionand £37 million for SGPS and SGRPP respectively as at 20 August 2005. (c) The Pensions Act 2004 gives new powers to the Pensions Regulator torequire funding or funding guarantees for defined benefit pension schemes fromany company in the same group as the participating employers (which may includecompanies in the Pine Group). This applies regardless of whether the companiessought to be made liable have any employees in the pension schemes concerned. (d) The trustees of each Pension Scheme have control over the investment ofthe relevant scheme's assets and could (having taken appropriate investmentadvice and consulted with the employers) alter the investment profile of thePension Schemes. For example, they could exchange equity investments for bonds,which would typically increase the employer funding obligations in relation tothe Pension Schemes because of the lower rate of return expected from lower riskbonds. Please note that there are other defined benefit pension schemes operated in thePunch Group, being the Pubmaster Pension Scheme and the InnSpired Group PensionScheme. As such, the powers of the Regulator described in (c) above could beused to impose liability for these pension schemes on companies within theGroup. As at 20 August 2005, under the UK accounting standard FinancialReporting Standard 17 (FRS17), the Pubmaster Pension Scheme had net liabilitiesof £2.2 million and the InnSpired Group Pension Scheme had net liabilities of£3.1 million. Risks associated with fiscal-related matters The Enlarged Punch Group's activities will be affected by a number offiscal-related matters. These matters include duty on alcoholic beverages,property rates, value added tax, other business taxes and the availability ofduty harmonisation to travellers between European Union countries. Changes in legislation which affect all or any of these matters may adverselyaffect the financial performance of the Enlarged Punch Group. Leasehold interests in pubs The interest held in 1,157 pubs in the Enlarged Punch Group is comprised eitherwholly or partly under a leasehold title. Where the interest held in a pub is comprised either wholly or partly under aleasehold title and that pub is damaged or destroyed such that the businesscannot be operated from that pub until rebuilding or repair work is undertaken,there is a risk that the landlord may have a right to break the lease where theproperty cannot be rebuilt within a certain period. There is also a risk, forboth freehold and leasehold pubs, that the property cannot be rebuilt within acertain specified period and that an operational tenant will cease to operateits business either because it is not viable to wait for rebuilding or repair,because it wishes to continue to operate from an alternative site and it thenchooses not to return or because it loses its licence to operate. Such damage ordestruction could deprive the Enlarged Punch Group of capital value in therelevant leasehold pub and/or ongoing income from the relevant operationaltenant. 46 leases are missing, and so it has not been possible to identify whether anyof the risk factors described in the preceding paragraphs apply to those pubs. In relation to 6 of the leasehold pubs the contractual term of the relevantlease has expired. In relation to a further 310 leases the term will expireprior to the end of 2030, and in relation to 323 leases the term will expireprior to the end of 2040. There can be no guarantee that the Enlarged PunchGroup will be successful in negotiating a new lease of each such pub or, if itis successful, as to what terms will then apply. The capital value of each suchpub will reflect the risk of renewal, but the termination of any lease withoutrenewal will deprive the Enlarged Punch Group of any ongoing income from therelevant pub. Complaints or litigation from customers, tenants and/or third parties The Enlarged Punch Group could be the subject of complaints or litigation fromindividuals or groups of pub customers and/or tenants and/or class actionsalleging illness or injury (e.g. passive smoking or alcohol abuse) or raisingother health or operational concerns, and from other third parties in nuisanceand negligence. It may also incur additional liabilities as a freehold propertyowner (including environmental liability). If the Enlarged Punch Group were tobe found liable in respect of any complaint or litigation, this could adverselyaffect the Enlarged Punch Group's results of operations, and also adverselyaffect Group's reputation or that of its brands. Regulation (a) General The pub industry in the UK is highly regulated at both national and local levelsand pub operations require licences, permits and approvals. Delays and failuresto obtain required licences or permits could negatively affect the operations ofthe Enlarged Punch Group. They could also adversely affect results ofoperations, particularly through higher costs. These laws and regulations impose a significant administrative burden on eachpub of the Enlarged Punch Group and additional or more stringent requirementscould be imposed in the future. Some examples of the regulatory changes which may affect the Enlarged PunchGroup include: • additional EU or UK employment legislation, in particular, (i) the levelof the National Minimum Wage, which is under annual review by the Law PayCommission and (ii) the maximum number of hours an employee may be permitted towork and the extent to which they may voluntarily opt out; • competition, consumer protection and environmental law changes whichcould adversely affect the Enlarged Group's operations; and • implementation of the Disability Discrimination Act 1995, which mayrequire changes to certain of the Enlarged Punch Group's properties (b) Licensing The Licensing Act 2003 is currently being introduced, and the new licensingregime has come into effect from effect from 24 November 2005. Responsibilityfor the administration of licensing will from this date rest with localauthorities, rather than magistrates. Pub operators wishing to change the hoursof opening of their premises must apply to the local authority for permission,submitting an operating plan. Local residents, the police and other relevantagencies may object to the application on certain defined grounds, followingwhich the local authority must hold a hearing and reach a determination. There is a risk that some applications may not succeed and therefore changes toexisting hours will not be permitted. This may mean that the Enlarged PunchGroup might not be able to take advantage of longer trading hours in certain ofits premises and, as a result, lose customers to competitor businesses which mayhave successfully obtained longer opening hours. During the transitional periodbetween the two licensing regimes, the Enlarged Punch Group will also incur oneoff additional costs related to the licence applications and associated legaland property fees. Fees for licence applications are determined by theGovernment and were increased in January 2005 from the levels previouslyexpected. If the fee levels were increased further, this would increase thecosts that will be incurred by the Enlarged Punch Group. (c) Gambling Regulation A new regime, the Gambling Act 2005, will come into full effect from 1 September2007 when the current gaming legislation will be repealed. This regime willinclude changes to the operation of AWP machines in pubs. There is a risk thatthe legislation may not effectively safeguard pubs and tenpin bowls in retainingtheir existing rights in relation to the number of AWPs they are licensed for.However, the Government has confirmed that it is its intention that pubs andtenpin bowls will retain their existing rights. These new gaming laws couldnevertheless reduce the Enlarged Group's income from AWPs and reduce the numberof customers using the Enlarged Group's outlets. (d) Smoking Legislation The Government introduced the Health Improvement Bill in Parliament on 27October 2005. Under the Health Improvement Bill, the Government intends tointroduce an outright ban on smoking in restaurants and pubs serving food (otherthan snacks such as crisps). However, pubs and bars not serving food will not besubject to the outright ban and owners/tenants of non food serving pubs will beable to choose whether to permit smoking on their premises. These new smokinglaws could discourage customers from going to pubs and restaurants and maytherefore have an adverse effect on trading in the Enlarged Punch Group'sestate. Subject to debate in Parliament, the proposals under the HealthImprovement Bill could be implemented by 2007. There is currently a Public Places Charter on smoking in public places, such asrestaurants and pubs, which has been agreed between the Department of Health andleading hospitality industry groups. This Charter, although not law, issupported by the Government which asked the licensed leisure industry to ensurethat 50 per cent. of licensed premises were compliant with it by December 2002,and that 35 per cent. of those have either no smoking areas or adequatemechanical ventilation. (e) Drink Driving Legislation The Government has carried out a consultation exercise concerning the legalblood alcohol limit for drivers. If the Government reduces the permitted legalblood alcohol limit, it could discourage customers from driving to pubs andrestaurants. This change could in particular adversely affect trading in theEnlarged Punch Group's rural and suburban pubs and thereby financialperformance. (f) EU Noise Directive The EU Physical Agents Directive 2001 is currently under discussion in theretail industry relating to the regulation of noise in the workplace. TheGovernment will introduce regulations in response to the directive within thenext three years. These regulations may discourage certain customers frompatronizing those pubs whose current attraction is music or a less quietenvironment. This could lead to a reduction in sales at some pubs and reduce theincome received by the Enlarged Punch Group. Insurance Management believes that the properties owned or used by the Enlarged PunchGroup are adequately covered by insurance placed with reputable insurers andwith commercially reasonable deductibles and limits. Insurance policies held ormaintained by the Enlarged Punch Group cover such risks as material damage,business interruption, loss of rent and third party liability. However, certaintypes of risk are not insured fully either because such insurance is notavailable or because Management believes that the premium costs aredisproportionate to the risks in question (such as full terrorism cover andenvironmental impairment liability cover). Litigation Other than as set out below, so far as Punch is aware, neither Spirit nor anymember of the Spirit Group is or has been engaged in nor has pending orthreatened any governmental, legal or arbitration proceedings which may have orhave had in the recent past (covering the 12 months immediately preceding thedate of this announcement) a significant effect on the Spirit Group's financialposition or profitability: • Potential criminal proceedings for the use of illegal decoders tobroadcast Premiership football games at certain pubs in the Spirit estate andpotential civil proceedings for copyright infringement may be brought by BSkyB/FACT against Spirit. No further details (including potential quantum of theclaim) have been provided to Punch at this stage; and • Spirit is currently defending a claim from Red Bull in relation to "passing off" for sales of Red Rooster in Spirit pubs when customers ask for RedBull. Proceedings have been issued but the parties have agreed to mediationwhich is due to take place in mid December 2005. No further details (includingpotential quantum of the claim) have been provided to Punch. Appendix III Placing of Convertible Bond and Placing Shares The issue of convertible bonds (the "Bonds") is intended to raise approximately£275 million and will be convertible into approximately 10% of Punch's issuedshare capital. The final terms of the Bonds, including the coupon, conversionprice and yield to maturity, will be announced as soon as practicable after theclose of an accelerated bookbuilding process The Company is intending to issue new ordinary shares (the "Placing Shares")representing approximately 4% of Punch's issued share capital (the "Placing")to raise up to £75 million. The number of Placing Shares and the issue pricewill be announced as soon as practicable after the close of an acceleratedbookbuilding process. Neither the Bond offering nor the Placing are conditional upon the completion ofthe Acquisition. Payment for and settlement of the Placing Shares is expected to occur on oraround 8 December 2005. Payment for and settlement of the Bonds is expected to occur on or around 14December 2005. Morgan Stanley and Citigroup are acting as Joint Bookrunners and Joint LeadManagers (the "Managers") for the issue and sale of the Bonds and the PlacingShares. The Royal Bank of Scotland PLC is a Joint Lead Manager for the issue ofthe Bonds. The proposed issue of the Bonds and Placing Shares, subject to thesatisfaction of certain conditions, will take place at prices establishedthrough an accelerated bookbuilding process (the "Bookbuilding Process"). Thebooks will open with immediate effect. It is expected that the books will closetoday. The number of Placing Shares and the placing price in respect of thePlacing Shares (the "Placing Price") and the conversion price, coupon and yieldto maturity of the Bonds will be determined by Punch and the Managers at theclose of the Bookbuilding Process. The timing of the closing of the books,pricing and allocations may be accelerated at the absolute discretion of theManagers following agreement with Punch. Details of the number of Placing Shares and the Placing Price and the conversionprice, coupon and yield to maturity of the Bonds will be announced as soon aspracticable after the close of the Bookbuilding Process. In connection with the issue and sale of the Bonds and the Placing Shares, theManagers may in addition solicit indications of interest from potentialinvestors in the Bonds for sales of ordinary shares (any such shares being "SaleShares") including for the purpose of establishing short positions in theordinary shares of the Company (and together with the Placing, the "EquityPlacings"). Subject to demand, the Managers will seek purchasers under theBookbuilding Process also for such Sale Shares at the Placing Price. The Placing and any sale of Sale Shares will take place in accordance with theterms and conditions set out in the Appendix to this announcement. The PlacingShares will be credited as fully paid and will rank equally in all respects withthe existing ordinary shares of 0.04786 pence each in the share capital ofPunch, including the right to receive all dividends and other distributionsdeclared, made or paid after the date of issue of the Placing Shares. Application will be made to the Financial Services Authority (the "FSA") forboth the Placing Shares and the Bonds to be admitted to the official listmaintained by the FSA (the "Official List") and to trading by the London StockExchange plc (the "Exchange") on its market for listed securities. The SaleShares will be existing listed ordinary shares of 0.04786 pence each in theshare capital of Punch and will rank pari passu in all respects with the otherissued ordinary shares of the Company. The ordinary shares of the Company are listed on the Official List and trade onthe Exchange's market for listed securities under the symbol PUB. The Managers, and any of their affiliates acting as investors for their ownaccounts may purchase Bonds, Placing Shares and Sale Shares and, in thatcapacity, may retain, purchase, sell, offer to sell or otherwise deal for theirown accounts in such securities, any other securities of the Company or otherrelated investments in connection with the offering of the Bonds, the EquityPlacing or otherwise. Accordingly, references in this announcement to the Bonds,Placing Shares or sale Shares being offered or otherwise dealt with should beread as including any offer to purchase or dealing by the Managers and any oftheir affiliates acting as investors for their own accounts. The Managers do notintend to disclose the extent of any such investment or transaction otherwisethan in accordance with any legal or regulatory obligation to do so. IMPORTANT INFORMATION ON THE EQUITY PLACINGS FOR PLACEES ONLY MEMBERS OF THE PUBLIC ARE NOT ELIGIBLE TO TAKE PART IN THE EQUITY PLACINGS. THISAPPENDIX AND THE TERMS AND CONDITIONS SET OUT HEREIN ARE DIRECTED ONLY TOPERSONS WHO (I) ARE OUTSIDE THE UNITED KINGDOM OR (II) HAVE PROFESSIONALEXPERIENCE IN MATTERS RELATING TO INVESTMENTS FALLING WITHIN ARTICLE 19(1) OFTHE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005 (ASAMENDED) (THE "ORDER") OR (III) ARE PERSONS FALLING WITHIN ARTICLE 49(2)(A) TO(D) ("HIGH NET WORTH COMPANIES, UNINCORPORATED ASSOCIATIONS ETC.") OF THE ORDEROR TO WHOM IT MAY OTHERWISE LAWFULLY BE COMMUNICATED (ALL SUCH PERSONS TOGETHERBEING REFERRED TO AS "RELEVANT PERSONS"). THIS APPENDIX AND THE TERMS ANDCONDITIONS SET OUT HEREIN MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARENOT RELEVANT PERSONS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THISAPPENDIX AND THE TERMS AND CONDITIONS SET OUT HEREIN RELATES IS AVAILABLE ONLYTO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS. THISAPPENDIX DOES NOT IN ITSELF CONSTITUTE AN OFFER FOR SALE OR SUBSCRIPTION OF ANYSECURITIES IN THE COMPANY. In this Appendix, unless the context otherwise requires, Placee means a relevantperson (including individuals, funds or others) by whom or on whose behalf acommitment to subscribe for or purchase Placing Shares and/or Sale Shares hasbeen given ("Relevant Person"). This announcement and any offer if made subsequently is only addressed to anddirected at persons in member states of the European Economic Area who are"qualified investors" within the meaning of Article 2(1)(e) of the ProspectusDirective (Directive 2003/71/EC) ("Qualified Investors"). Relevant Persons who choose to participate in the Equity Placings will be deemedto have read and understood this announcement in its entirety and to beparticipating on the terms and conditions contained herein, and to be providingthe representations, warranties, agreements, acknowledgements and undertakings,in each case as contained in this Appendix. In particular, Placees represent, warrant and acknowledge that they arequalified investors (as defined in section 86(7) of the Financial Services andMarkets Act 2000 ("FSMA")) and undertake that they will acquire, hold, manage ordispose of any Placing Shares and/or Sale Shares that are allocated to them forthe purpose of their business. In the case of any shares being offered to afinancial intermediary as that term is used in Article 3(2) of the ProspectusDirective, such financial intermediary will also be deemed to have represented,acknowledged and agreed that the shares acquired by it in such offering have notbeen acquired on a non-discretionary basis on behalf of, nor have they have beenacquired with a view to their offer or resale to, persons in circumstances whichmay give rise to an offer of shares to the public other than their offer orresale in a relevant member state to qualified investors as so defined or incircumstances in which the prior consent of the Managers has been obtained toeach such proposed offer or resale. This announcement does not and these materials do not constitute an offer tosell or issue or the solicitation of an offer to buy or subscribe for ordinaryshares in the Company in Australia, Canada, Japan, South Africa and the UnitedStates or in any jurisdiction in which such offer or solicitation is unlawfuland the information contained herein is not for publication or distribution,directly or indirectly, in or into Australia, Canada, Japan, South Africa andthe United States or any jurisdiction in which such publication or distributionis unlawful. The Placing Shares and the Sale Shares referred to in this announcement have notbeen and will not be registered under the United States Securities Act of 1933,as amended (the "Securities Act") or qualified under any applicable statestatutes and may not be offered, sold or transferred within the United States(including its territories and possessions). The Placing Shares and the SaleShares are being offered and sold outside the United States in reliance onRegulation S under the Securities Act. The distribution of this announcement and the Equity Placings and/or issue and/or sale of ordinary shares in the Company in certain jurisdictions may berestricted by law. No action has been taken by the Company or the Managers thatwould permit an offer of such ordinary shares or possession or distribution ofthis announcement or any other offering or publicity material relating to suchordinary shares in any jurisdiction where action for that purpose is required.Persons into whose possession this announcement comes are required by theCompany and the Managers to inform themselves about and to observe any suchrestrictions. Details of the Placing Agreement, the Placing Shares and the Sale Shares The Managers have entered into a placing agreement (the "Placing Agreement")with the Company whereby the Managers have, subject to the conditions set outtherein, undertaken to use their reasonable endeavours as agent of the Companyto procure Placees to subscribe for the Placing Shares. The Placing Shares will be credited as fully paid and will rank equally in allrespects with the existing issued ordinary shares of 0.04786 pence each in thecapital of the Company including the right to receive all dividends and otherdistributions declared, made or paid in respect of such ordinary shares afterthe date of issue of the Placing Shares. In addition, in connection with the issue and sale of the Bonds and the PlacingShares, the Managers may solicit indications of interest from potentialinvestors in the Bonds for sales of Sale Shares, including for the purpose ofestablishing short positions in the ordinary shares. Subject to demand, theManagers will seek purchasers under the Bookbuilding Process also for such SaleShares at the Placing Price. The Sale Shares will be existing listed ordinary shares of 0.04786 pence each inthe share capital of the Company and will rank pari passu in all respects withthe other issued ordinary shares of the Company. The placing of the Sale Shares is not subject to the conditions set out in thePlacing Agreement. Application for Listing and Admission to Trading of the Placing Shares Application will be made to the FSA for admission of the Placing Shares to theOfficial List and to the Exchange for admission to trading of the Placing Shareson the Exchange's market for listed securities ("Admission"). It is expectedthat Admission will take place and dealings in the Placing Shares will commenceon or around 8 December 2005. The Sale Shares are already admitted to the Official List and to trading on theExchange. Bookbuild Commencing today each of the Managers will be conducting an acceleratedbookbuilding process (the "Bookbuilding Process") for participation in theEquity Placings. This Appendix gives details of the terms and conditions of, andthe mechanics of participation in, the Bookbuilding Process. No commissions willbe paid to Placees or by Placees in respect of any Placing Shares or SaleShares. Principal terms of the Bookbuilding Process Each of Morgan Stanley and Citigroup is arranging the Equity Placings as anagent of the Company and the sellers of Sale Shares. Participation will only be available to persons invited to participate by eitherof the Managers. Each of the Managers is entitled to enter bids as principal inthe Bookbuilding Process. The Bookbuilding Process will establish a single price(the "Placing Price") payable by all Placees where bids are successful. ThePlacing Price will be agreed between the Managers and the Company followingcompletion of the Bookbuilding Process and any discount to the market price ofthe ordinary shares of the Company will be determined in accordance with theListing Rules and IPC guidelines. The Placing Price will be announced (the"Pricing Announcement") on a Regulatory Information Service following thecompletion of the Bookbuilding Process. To enter a bid into the Bookbuilding Process, you should communicate your bid bytelephone to your usual sales contact at Morgan Stanley or Citigroup. Your bidshould state the number of shares in the Company for which you wish to subscribeor purchase at either the Placing Price which is ultimately established by theCompany and the Managers or at prices up to a price limit specified in your bid. Each of the Managers reserves the right not to accept bids or to accept bids inpart rather than in whole. The acceptance of bids shall be at each of theManager's absolute discretion. The Bookbuilding Process is expected to close today, but may be closed earlierat the sole discretion of the Managers. Each of the Managers may, at its solediscretion, accept bids that are received after the Bookbuilding Process hasclosed. If successful, your allocation (constituting the number of Placing Shares and/orSale Shares allocated to you) will be confirmed to you orally following theclose of the Bookbuilding Process, and a conditional contract note in respect ofany Placing Shares and a contract note in respect of any Sale Shares will bedispatched as soon as possible thereafter. The relevant Manager's oralconfirmation to you, following completion of the Bookbuilding Process, willconstitute a legally binding commitment upon you to subscribe and/or purchasefor the number of Placing Shares and/or Sale Shares allocated to you on theterms and conditions set out in this Appendix and in accordance with theCompany's Memorandum and Articles of Association. The Managers will make a further announcement following the close of theBookbuilding Process detailing the number of such shares to be issued and theprice at which such shares have been placed. A bid in the Bookbuilding Process will be made on the terms and conditions inthis Appendix and will be legally binding on the Placee by which, or on behalfof which, it is made and will not be capable of variation or revocation afterthe close of the Bookbuilding Process. Conditions of the Equity Placings The Placing of the Placing Shares is conditional, inter alia, on admission ofthe Placing Shares to the Official List becoming effective and the admission ofthe Placing Shares to trading on the Exchange becoming effective and thecommencement of trading of the Placing Shares on such market following Admissionby 9 December 2005 (or such later time and/or date as the Company, MorganStanley and Citigroup may agree). If, (a) the conditions referred to above arenot satisfied or waived by both Managers within the stated time period or (b)the Placing Agreement is terminated in the circumstances specified below, thePlacing will lapse and your rights and obligations hereunder shall cease anddetermine at such time and no claim can be made by you in respect thereof. The placement of the Sale Shares is not subject to the terms mentioned above andwill be subject to the Exchange rules for on market dealings. Note also thatPlacees receiving Sale Shares will be required to account for any liability forstamp duty reserve tax arising in connection with the sale of the Sale Shares.Stamp duty will be payable by Placees at 0.5% of the aggregate Placing Price forthe Sale Shares allotted to Placees. By participating in the Bookbuilding Process you agree that your rights andobligations hereunder terminate only in the circumstances described above andwill not be capable of rescission or termination by you. The Managers reservethe right (with the agreement of the Company) to waive or to extend the time and/or date for fulfilment of any of the conditions in the Placing Agreement. Anysuch extension or waiver will not affect Placees' commitments. Neither of theManagers shall have any liability to any Placee (or to any other person whetheracting on behalf of a Placee or otherwise) in respect of any decision it maymake as to whether or not to waive or to extend the time and/or date for thesatisfaction of any condition in the Placing Agreement. Right to terminate under the Placing Agreement The Placing Agreement contains provisions entitling the Managers to terminatetheir obligations prior to Admission on the basis, inter alia, of a breach ofany of the warranties contained in the Placing Agreement at any time prior toAdmission or if the Company fails to comply with its material obligations underthe Placing Agreement which in each case makes it impracticable or inadvisableto proceed with the offer, sale or delivery of the Placing Shares or if therehas been a material adverse change in the condition, financial or otherwise, orin the earnings or prospects of the Group taken as a whole since 21 August2004. In addition, the Placing Agreement entitles the Managers to terminate theirobligations prior to Admission in the event of force majeure. By participating in the Bookbuilding Process you agree with the Managers thatthe exercise by Morgan Stanley and Citigroup of any right or termination orother discretion under the Placing Agreement shall be within the absolutediscretion of Morgan Stanley and Citigroup and that the Managers need make noreference to you and shall have no liability to you whatsoever in connectionwith any such exercise. The placement of the Sale Shares is NOT, however subject to the conditions setout above and will be subject to the Exchange rules for on market dealings. Notealso that Placees receiving Sale Shares will be required to account for anyliability for stamp duty reserve tax arising in connection with the sale of theSale Shares. No Prospectus No prospectus has been or will be submitted to be approved by the FSA inrelation to the Placing Shares or the Sale Shares and the Placees' commitmentswill be made solely on the basis of the information contained in thisannouncement, the Pricing Announcement and any information publicly announced toa Regulatory Information Service by or on behalf of the Company prior to thedate of this announcement (the "Publicly Available Information"). Each Placee,by accepting a participation in the Equity Placings, agrees that it has neitherreceived nor relied on any other information, representation, warranty orstatement made by or on behalf of either of the Managers or the Company andneither of the Managers will be liable for any Placee's decision to accept thisinvitation to participate in the Equity Placings based on any other information,representation, warranty or statement. Each Placee acknowledges and agrees thatit has relied on its own investigation of the business, financial or otherposition of the Company in accepting a participation in the Equity Placings.Nothing in this paragraph shall exclude the liability of any person forfraudulent misrepresentation. Registration and Settlement Settlement of transactions in the Placing Shares following Admission and in theSale Shares will take place within the CREST system, subject to certainexceptions. In the event that it is impracticable for the Placing Shares to beadmitted to the CREST system, the Company and the Managers may agree that all orany of the Placing Shares shall be issued in certificated form. If you are allocated any Placing Shares in the Bookbuilding Process you will besent a conditional contract note or in the case of an allocation of Sale Shares,an unconditional contract note. Settlement will be on a T+5 basis. Interest ischargeable daily on payments to the extent that value is received after the duedate at the rate of 5 percentage points above prevailing LIBOR. If you do not comply with these obligations, the relevant Manager may sell yourPlacing Shares and/or Sale Shares on your behalf and retain from the proceeds,for its own account and benefit, an amount equal to the Placing Price plus anyinterest due. You will, however, remain liable for any shortfall below thePlacing Price and you may be required to bear any stamp duty or stamp dutyreserve tax (together with any interest or penalties) which may arise upon anytransaction in the Placing Shares on your behalf. If Placing Shares and/or Sale Shares are to be delivered to a custodian orsettlement agent, please ensure that the relevant contract note or notes arecopied and delivered immediately to the relevant person within thatorganization. Insofar as Placing Shares and/or Sale Shares are registered in your name or thatof your nominee or in the name of any person for whom you are contracting asagent or that of a nominee for such person, such Placing Shares will, subject asprovided below, be so registered free from any liability to UK stamp duty orstamp duty reserve tax. You will not be entitled to receive any fee orcommission in connection with the Equity Placings. Sales of Sale Shares will be subject to UK stamp duty or stamp duty reserve forwhich Placees will be liable. Representations and Warranties By participating in the Bookbuilding Process you (and any person acting on yourbehalf): 1. represent and warrant that you have read this announcement; 2. acknowledge that the content of this announcement, the PricingAnnouncement and any other Publicly Available Information is exclusively theresponsibility of the Company; 3. represent and warrant that the only information upon which you haverelied in committing yourself to subscribe and/or purchase for the PlacingShares and/or the Sale Shares is that contained in this announcement and thePublicly Available Information and confirm that you have neither received norrelied on any other information, representation, warranty or statement made byor on behalf of the Company or either of the Managers and acknowledge that theManagers will not be liable for your decision to commit to subscribe for and/orpurchase Placing Shares and /or Sale Shares based on any other information orwarranty.; 4. you represent and warrant that you are not, or at the time the PlacingShares and/or the Sale Shares are subscribed and purchased will not besubscribing or purchasing on behalf of a resident of Australia, Canada, Japan orSouth Africa; 5. acknowledge that the Placing Shares and/or the Sale Shares have notbeen and will not be registered under the securities legislation of Australia,Canada, Japan or South Africa and, subject to certain exceptions, may not beoffered, sold, taken up, renounced or delivered or transferred, directly orindirectly, within Australia, Canada, Japan or South Africa; 6. represent and warrant that you are entitled to subscribe for and/orpurchase Placing Shares and/or the Sale Shares under the laws of all relevantjurisdictions which apply to you and that you have fully observed such laws andobtained all such governmental and other guarantees and other consents which maybe required thereunder and complied with all necessary formalities; 7. acknowledge that the Placing Shares and/or the Sale Shares have notbeen and will not be registered under the Securities Act, or under thesecurities laws of any state of the United States, and are being offered andsold on behalf of the Company only outside the United States in accordance withRule 903 or Rule 904 of Regulation S under the Securities Act ("Regulation S"); 8. acknowledge that the Placing Shares and/or the Sale Shares have notbeen approved or disapproved by the United States Securities and ExchangeCommission, any state securities commission in the United States or any otherUnited States regulatory authority; 9. represent and warrant that you are not in the United States (within themeaning of Regulation S) and are subscribing for and/or purchasing the shares inan offshore transaction in accordance with Regulation S; 10. represent and warrant that the issue to you, or the person specified byyou for registration as holder, of Placing Shares and/or the Sale Shares willnot give rise to a liability under any of sections 67, 70, 93 or 96 of theFinance Act 1986 (depositary receipts and clearance services); 11. if you are in the UK, you represent and warrant that you have compliedwith your obligations in connection with money laundering and terroristfinancings under the Criminal Justice Act 1993, the Proceeds of Crime Act 2002the Money Laundering Regulations (2003) (the "Regulations") and, if you aremaking payment on behalf of a third party, that satisfactory evidence has beenobtained and recorded by you to verify the identity of the third party asrequired by the Regulations; 12. you fall within section 86(7) of FSMA, being a qualified investor and areotherwise a Relevant Person as defined in this Appendix; 13. if you are a financial intermediary, as that term is used in Article 3(2)of the EU Prospectus Directive 2003/71/EC, the Placing Shares and/or the SaleShares subscribed for and/or purchased by you in the Equity Placings have notbeen acquired on a non-discretionary basis on behalf of, nor have they beenacquired with a view to their offer or resale to, persons in a Member State ofthe European Economic Area which has implemented the Prospectus Directive otherthan qualified investors, or in circumstances in which the prior consent of theManagers has been given to the offer or resale; 14. you have not offered or sold and, prior to the expiry of a period of sixmonths from the commencement of trading of the Placing Shares and/or the SaleShares, will not offer or sell any Placing Shares and/or the Sale Shares topersons in the United Kingdom except to qualified investors (as defined insection 86(7) of FSMA) or otherwise in circumstances which have not resulted andwhich will not result in an offer of transferable securities to the public inthe United Kingdom within the meaning of section 85(1) of FSMA; 15. you have only communicated or caused to be communicated and will onlycommunicate or cause to be communicated any invitation or inducement to engagein investment activity (within the meaning of section 21 of FSMA) relating tothe Placing Shares and/or the Sale Shares in circumstances in which section 21(1) of FSMA does not require approval of the communication by an authorisedperson; 16. represent and warrant that you have complied and will comply with allapplicable provisions of FSMA with respect to anything done by you in relationto the Placing Shares and/or the Sale Shares in, from or otherwise involving theUnited Kingdom; 17. represent and warrant that you have all necessary capacity and haveobtained all necessary consents and authorities to enable you to commit to thisparticipation and to perform your obligations in relation thereto (including,without limitation, in the case of any person on whose behalf you are acting,all necessary consents and authorities to agree to the terms set out or referredto in this announcement); 18. undertake that you will pay for the Placing Shares and/or the Sale Sharesacquired by you in accordance with this announcement on the due time and dateset out herein, failing which the relevant Placing Shares and/or the Sale Sharesmay be placed with other subscribers at such price as each of the Managersdetermines; 19. acknowledge that participation in the Equity Placings is on the basisthat, for the purposes of the Equity Placings, you are not and will not beclients of either of the Managers and that neither of the Managers has duties orresponsibilities to you for providing the protections afforded to their clientsor for providing advice in relation to the Equity Placings nor in respect of anyrepresentations, warranties, undertakings or indemnities contained in thePlacing Agreement; 20. undertake that the person who you specify for registration as holder ofthe Placing Shares will be (i) the Placee or (ii) a nominee of the Placee, asthe case may be. Neither of the Managers nor the Company will be responsible forany liability to stamp duty or stamp duty reserve tax resulting from a failureto observe this requirement. Each Placee and any person acting on behalf of thePlacee agrees to subscribe on the basis that the Placing Shares will be allottedto the CREST stock account of either of the Managers who will hold them asnominee on behalf of the Placee until settlement in accordance with its standingsettlement instructions; and 21. acknowledge that any agreements entered into by the Placee pursuant tothese terms and conditions shall be governed by and construed in accordance withthe laws of England and you submit (on behalf of yourself and on behalf of anyPlacee on whose behalf you are acting) to the exclusive jurisdiction of theEnglish courts as regards any claim, dispute or matter arising out of any suchcontract. The Company, the Managers and others will rely upon the truth andaccuracy of the foregoing representations, warranties and acknowledgements. The agreement to settle your subscription (and/or the subscription of a personfor whom you are contracting as agent) of Placing Shares free of stamp duty andstamp duty reserve tax depends on the settlement relating only to a subscriptionby you and/or such person direct from the Company for the Placing Shares inquestion. Such agreement assumes that the Placing Shares are not being acquiredin connection with arrangements to issue depositary receipts or to issue ortransfer the Placing Shares into a clearance service. If there were any sucharrangements, or the settlement related to other dealing in the Placing Shares,stamp duty or stamp duty reserve tax may be payable, for which neither theCompany nor either of the Managers will be responsible. If this were the case,you should take your own advice and notify the relevant Manager accordingly. Placees of Sale Shares will be liable for any stamp duty or stamp duty reservetax payable in connection with the purchase of such shares. END Appendix IV DEFINITIONS The following expressions shall have the following meanings throughout thisannouncement unless the context otherwise requires: "Acquisition" the proposed acquisition by the Buyer of the Target on the terms and subject to the conditions set out in the Acquisition Agreement; "Acquisition Agreement" the share sale and purchase agreement dated 1 December 2005 and made between, amongst others, Buyer, Target and the Company; "Board" or "Directors" the directors of Punch; "Bonds" the £275 million 5% convertible bonds due 2010 issued by Jerseyco; "Bookbuilding Process" the accelerated bookbuilding process in relation to the Bonds and the Placing Shares "Business" the managed pub outlets comprising the Spirit estate; "Buyer" Punch Taverns (Redwood Bidco) Limited, an indirect wholly owned subsidiary of Punch; Citigroup Citigroup Global Markets Limited and Citigroup Global U.K. Equity Limited, as the context may require; "Company" or "Punch" Punch Taverns plc; "Completion" completion of the Acquisition, which is expected to take place on or around 30 December 2005; "Convertible bonds" means the issue by Jerseyco of £275 million 5% convertible bonds due 2010; "Enlarged Punch Group" the Punch Group as enlarged by the Acquisition; "Exchange" London Stock Exchange plc; "Facility" means the bridge facility of £1,200 million and the revolving credit facility of £50 million under the Facility Agreement; "Jerseyco" means a wholly-owned subsidiary of Punch which will shortly be incorporated in Jersey; "Managers" Morgan Stanley and Citigroup; "Morgan Stanley" Morgan Stanley & Co. Limited, or Morgan Stanley Securities Limited or Morgan Stanley & Co International Limited, as the context may require; "OFT" the Office of Fair Trading; "On-Sale" the proposed disposal of c. 190 pubs from the Punch estate to third party buyers to address possible competition concerns; "Ordinary Shares" ordinary shares of 0.04786 pence each in the capital of Punch; "Placing" the placing of up to £75 million of new Ordinary Shares in accordance with the terms of the Placing Agreement; "Placing Agreement" the Placing Agreement between the Company, Citigroup Global U.K. Equity Limited and Morgan Stanley Securities Limited dated on or about 1 December 2005; "Placing Price" the issue price of the Placing Shares as determined by Punch and the Managers at the close of the Bookbuilding Process; "Punch Group" Punch, its subsidiaries and its subsidiary undertakings; "Sale Shares" Ordinary Shares in respect of which the Managers have received indications of interest from potential investors in the Bonds; "Shareholders" holders of Ordinary Shares; "Spirit estate" the pubs which are currently owned by the Spirit Group; "Spirit" or "Spirit Group" Target, its subsidiaries and subsidiary undertakings; "Target" Spirit Group Holdings Limited, the holding company of the Spirit Group; This information is provided by RNS The company news service from the London Stock Exchange

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Punch Taverns PLC