22nd Sep 2006 07:00
MFI Furniture Group PLC22 September 2006 For immediate release 22 September 2006 Proposed disposal of the retail business ("Retail") of MFI Furniture Group Plc ("MFI") and change of name MFI Furniture Group Plc Summary • The Board of MFI Furniture Group Plc today announces that it has reached an agreement with MEP Mayflower Limited ("the Purchaser") for the disposal of Retail ("the Disposal"). MEP Mayflower Limited is a company controlled by Merchant Equity Partners LLP ("MEP"). • Under the terms of the Disposal, the Purchaser will acquire Retail for the nominal consideration of £1. The shareholders in the Purchaser have severally agreed to invest a total of approximately £50 million in the Purchaser on Completion and may invest up to a further £12.0 million in April 2008. In addition, the Purchaser has undertaken to arrange not less than £40.0 million of working capital facilities by 31 March 2007. • The Continuing Group will make a payment of £53.1 million into the Purchaser's Group on 3 September 2007 and, subject to the Purchaser's shareholders investing an equal amount, will make a further payment of up to £12.0 million in April 2008. • The Continuing Group will pay the Purchaser's Group an estimated £60.6 million on Completion including an estimated £51.9 million in respect of customer deposits, being payments made by Retail customers in advance of delivery of their orders. • The Group has also agreed the terms of certain supply and transitional service arrangements with the Purchaser. • The Continuing Group will focus on the growth potential of Howden Joinery ("Howdens") and its Supply operations, which will become more closely aligned to meeting Howdens' requirements. Howdens' growth in the past two years has been restricted by the issues faced by the retail business. The Board believes there is scope to grow the current portfolio of 362 Howdens depots to over 500 depots in the UK by opening 60 depots next year, and thereafter at least 40 per annum. The business can further exploit growth opportunities through expanding the range of products it sells to its current customers and through broadening its customer base to include architects and other industry professionals. Following the expiry of supply arrangements with the Purchaser and Hygena Cuisines, it is expected that Howdens will become the sole customer of the Supply Business. • The proposed disposal of Retail will provide management with the opportunity to focus on accelerating Howdens' roll out plan, while over time realising the cost and scale benefits of an exclusive supply chain provided though the Supply Business. • The Disposal constitutes a Class 1 transaction, and as such is conditional upon the approval of Shareholders. There will be an extraordinary general meeting of the Company which is expected to be held on or about 16 October 2006. If Shareholders vote in favour of the Disposal, Completion will take place by 23 October 2006. A further extraordinary general meeting to approve the change of name of the Company to Galiform Plc is expected to take place on or about 23 October 2006. • Commenting on the Disposal, Matthew Ingle, Chief Executive of MFI Furniture Group Plc said: "Over a number of months, the Board of MFI has considered various options forthe retail business, and has concluded that the disposal of Retail on the termsagreed is in the best interests of Shareholders. We believe that a restructuringof Retail within the Group would have considerable operational and financialrisks. Exiting Retail will allow us to focus on the growth potential of thehighly profitable Howden Joinery business and make cost savings and efficiencygains in the Supply Business. The new owners have agreed to invest significantsums in Retail and their senior management team are highly experiencedretailers. We wish them well in making a success of Retail." This summary should be read in conjunction with the full text of the followingannouncement and the Appendices. Enquiries Investor Relations Gary Rawlinson MFI Furniture Group +44 (0) 20 7404 5959 (on 22 September) +44 (0) 20 7535 1127 +44 (0) 79 8939 7527 Media Susan Gilchrist Brunswick +44 (0) 20 7404 5959Fiona LaffanAnna Jones Notes for Editors +-----------------------------+-----------+-----------+-----------+|MEP Mayflower Limited Funding| MEP | MFI | TOTAL |+-----------------------------+-----------+-----------+-----------+|MEP Funding - Sept 06 | £50m | | |+-----------------------------+-----------+-----------+-----------+|MFI Funding - Sept 07 | | £53m | |+-----------------------------+-----------+-----------+-----------+|Funding on Completion | | £9m | |+-----------------------------+-----------+-----------+-----------+| | | | |+-----------------------------+-----------+-----------+-----------+|Contingent Funding | | | || | | | |+-----------------------------+-----------+-----------+-----------+|MEP Funding - April 08 | £12m | | |+-----------------------------+-----------+-----------+-----------+|MFI Funding - April 08 | | £12m | |+-----------------------------+-----------+-----------+-----------+| | | | |+-----------------------------+-----------+-----------+-----------+|Total Funding provided by MEP| £62m | £74m | £136m ||and MFI | | | |+-----------------------------+-----------+-----------+-----------+| | | | |+-----------------------------+-----------+-----------+-----------+|Working Capital Facility (1) | | | £40m |+-----------------------------+-----------+-----------+-----------+|Total (up to) | | | £176m |+-----------------------------+-----------+-----------+-----------+ (1) Not less than £40 million to be arranged by the Purchaser by 31 March 2007 Customer deposits to be remitted to the Purchaser's Group are estimated at £52million All figures in the table above have been rounded to the nearest million Retail operates a national network of over 200 showrooms. Kitchens and bedroomsrepresented more than 80 per cent of sales in 2005. For immediate release 22 September 2006 Proposed disposal of the retail business of MFI Furniture Group Plc ("MFI") and change of name MFI Furniture Group Plc 1. Introduction On 17 August 2006 the Board of MFI announced that it was in discussions withMerchant Equity Partners LLP ("MEP") concerning the possible disposal of MFI'sretail business. The Board today announces that it has agreed terms for the disposal of Retail toMEP Mayflower Limited (the "Purchaser"), a company controlled by MEP. Following the Disposal and subject to Shareholder approval, the Company will bere-named Galiform Plc. Under the terms of the Disposal, the Purchaser will acquire Retail for thenominal consideration of £1. The shareholders in the Purchaser have severallyagreed to invest a total of £49.6 million in the Purchaser on Completion and mayinvest up to a further £12.0 million in April 2008. The Purchaser has alsoundertaken to arrange bank facilities of not less than £40.0 million by 31 March2007. The Continuing Group will pay the Purchaser's Group the sum of £8.7 million onCompletion, reflecting that the date at which the Purchaser will acquireeconomic control of Retail is 5 August 2006. In addition, the Continuing Groupwill then make a £53.1 million payment into the Purchaser's Group on 3 September2007 and, subject to the Purchaser's shareholders having made a furtherinvestment of at least an equal amount, a further payment of up to a maximum of£12.0 million on 2 April 2008. On Completion, the Continuing Group will remit to the Purchaser's Group anamount (estimated to be £51.9 million) in respect of customer deposits, beingpayments made to the Group by customers of Retail in advance of delivery oftheir orders. Cash in respect of such payments is not held by Retail, as allcash balances are held at group level. The Group has also agreed terms of certain supply and transitional servicesarrangements with the Purchaser as further described below. In view of the size of the Disposal, the Disposal constitutes a Class 1transaction for the purposes of the Listing Rules. Completion is thereforeconditional upon the approval of Shareholders, which is to be sought at anextraordinary general meeting of the Company to be held on or about 16 October2006. 2. Background to and reasons for the Disposal The Group's core competence is in kitchens and bedrooms in the UK. Historically,the business of MFI served retail customers, principally through largeout-of-town stores, which were substantially cheaper to operate than their highstreet competition. Customers were satisfied with a relatively narrow range ofgood value merchandise usually in ''flat pack'' form produced in the Group's ownfactories. Most kitchens and bedrooms were collected from stock at the store andfitted by customers themselves. Over the years and in particular the last decade, the UK market for kitchens hasbecome significantly more sophisticated and the ''Done for You'' (''DFY'')market, in which customers expect products to be designed, delivered andinstalled for them, has become increasingly important. In response to thistrend, the Group has developed its highly successful Howden Joinery tradebusiness serving principally small builders, whose own customers represent asignificant proportion of the DFY market, without the need for the Group toprovide an extensive home delivery infrastructure or showroom network itself. Inthe year ended 24 December 2005, the Group reported sales in respect of Howdensof £617.8m. In parallel with the successful development of Howdens, MFI's retail propositionhas become broader and more complicated to execute, encompassing a wider rangeof kitchens and options, home delivery and a fitting service. In 1999-2000, MFI's retail business moved to a home delivery model, removingstock from its store network, which was expected to reduce distribution costs asa percentage of sales. MFI's retail strategy (''Every room in the house'') wasto increase its penetration of the UK furniture market, outside its core kitchenand bedroom categories, principally in sofas, bathrooms, office and diningfurniture. The retail business targeted substantial rises in sales throughintroducing new product categories, increasing new product development inexisting categories, improving customer service and reformatting stores (in partto accommodate the new product categories). Significant sums were invested toimplement this strategy, funded in part by sale and lease backs of Groupproperties. At the same time the Group also introduced a new supply chain systemto replace existing systems, which had not been designed to accommodate thecomplex requirements of the home delivery model or the range of products sold aspart of the ''Every room in the house'' strategy. In practice there have been significant difficulties with the new supply chainsystem, as a result of which considerable further expense has been incurred onremedial measures in order to try to improve the performance of the system andto meet required service levels. The broadening of the retail product range alsodid not redress the falling net margins in the core kitchen and bedroomcategories. The costs of operating showrooms, especially rent and rates, haverisen and the retail furniture market has experienced difficult marketconditions. Retail's property costs rose from £71.8 million in 2003 to £95.8million in 2005. These factors, together with a supply and home deliveryinfrastructure scaled for a larger business, led to a substantial decline in thefinancial performance of the retail business between 2003 and 2005: 2003 2004 2005 All £ millionSales 853.5 768.5 741.9Gross Profit 445.3 370.3 351.3Total costs (374.1) (376.3) (400.3)Operating Profit before exceptional 71.2 (6.0) (49.0)itemsGross Profit as percentage of Sales 52.2% 48.2% 47.4%Total costs as percentage of Sales 43.8% 49.0% 54.0%Property costs included in total £71.8m £86.5m £95.8mcosts During this period, the centralised Group structure operated by the Group led toa build up of central and other costs for which the business lines were notdirectly responsible and which obscured the financial and operationalperformance of the business lines, particularly of the retail business. Since the appointment of Matthew Ingle as Group Chief Executive in October 2005,the management and strategy of the retail business have been changed andfollowing the Reorganisation, it is now separately run, managed and accountedfor. This provides clarity and direct responsibility for its revenues and allattributable costs. The measures announced in February concerning the retailproduct offering and in-store service have been implemented and to date, thebusiness is delivering sales and gross margins in line with managementexpectations. However, notwithstanding these measures, the Board believes the currentfinancial performance of the retail business is unacceptable and no costeffective solution to address Retail's property and logistics costs has beenidentified. The task of redressing this within the context of the Group remainsextremely challenging in terms of cost, timing, returns and execution risk. It would also be an extended distraction from the opportunity the Group has toroll out the proven and successful Howdens model and could adversely affect theGroup's ability to do this. It would also mean potentially foregoing anopportunity to eliminate or reduce supply overheads and central costs incurredby the Group, which are necessary to support the retail operations. The Boardbelieves that, following the expiry of the supply contract summarised below,such overheads and central costs could be reduced by some £12 million per annumand that the Group's continuing capital expenditure requirements can also bereduced. It also believes that there is increasing evidence that the businessmodels of Retail and Howdens are diverging. In its unaudited interim results for the 24 weeks to 10 June 2006, the Groupannounced sales for its retail business of £311.8 million, representing a 25.1per cent fall on the comparable period in the prior year and an operating lossof £14.2 million (2005: loss of £0.3 million). For the same period the Groupannounced an operating loss of £25.0 million in its Supply Business (2005:operating loss £17.4 million), which supplies products to Retail and Howdens. The Board has evaluated the proposed Disposal in the context of the value, costsand risks of other options for Retail (together with the timetable forimplementing them) which have been under consideration since the initial resultsof the Group's strategic review were announced in February 2006. The Board hasconcluded that the sale of Retail on the terms of the Disposal is in the bestinterests of Shareholders. 3. Information on Retail Retail comprises the Group's UK retailing operations (other than the ExcludedAssets and Sofa Workshop which do not form part of the Disposal). Prior to 8 July 2006, the Group's UK retailing operations were legally situatedin MFI UK. On 28 February 2006, the Group announced to the market that theGroup's UK operations would be reorganised into three businesses (retail,Howdens and supply), which would be separately run, managed and accounted for,providing clarity and direct responsibility for all revenues and associatedcosts of the Group. This reorganisation was carried out on 8 July 2006 and,among other things, the Group's UK retailing operations were legally transferredto a separate legal sub group of subsidiaries of MFI. Retail is one of the UK's largest furniture retailers with a leading share ofthe UK furniture and floorcoverings market. It operates a national network of over 200 showrooms and sells across the wholerange of home furniture, although kitchens and bedrooms represented more than 80per cent of Retail's sales in the year ended 24 December 2005. Retail historically achieved strong sales and profitability within the UKfurniture market. However, between 2003 and 2005, a combination of (in differingdegrees) deteriorating market conditions, increased price competition, supplychain issues, rises in property costs and Retail's own strategy (which impactedgross margin and operating costs) led to a substantial decline in profitability.In 2005, Retail's sales totalled £741.9 million and Retail made an operatingloss of £49.0 million and a loss after exceptional items of £132.2 million. Theunaudited gross assets of Retail as at 10 June 2006 were £152.1 million. 4. Information on the Purchaser MEP Mayflower Limited is a new company which has been formed by Merchant EquityPartners LLP (''MEP''), a private investment firm which focuses on turningaround retail businesses in the UK and Continental Europe. MEP was establishedby Henry Jackson, a former Managing Director and Head of the European Consumerand Retail Group at Deutsche Bank AG, David Hamid, a former CEO of HalfordsGroup plc and director of Dixons Group plc, and John von Sprecklesen, a formerExecutive Chairman of Somerfield plc. MEP's strategy involves taking controllingpositions in underperforming businesses within the retail sector andcontributing experienced management expertise to generate profit in theseacquired businesses. The key personnel who will be involved in running Retailfollowing the Disposal are David Hamid as Chairman and Gary Favell as ChiefExecutive Officer, who was formerly CEO of Wyevale Garden Centres plc and MagnetLtd. MEP is funded by a number of significant institutional investors. 5. Principal terms of the Disposal The Disposal is conditional only upon the approval of Shareholders. The DisposalAgreement will automatically terminate if such condition is not satisfied on orbefore 19 October 2006. Conditional upon Completion of the Disposal Agreement, the Purchaser has agreedto acquire economic control of Retail from 5 August 2006 (the ''EffectiveDate''). The total purchase price payable by the Purchaser for all the shares inMFI Retail Holdings will be the nominal amount of £1. For this, it has beenagreed that the Purchaser will receive no less than £109.3 million of nettangible assets. This amount will not be subject to adjustment followingCompletion. The shareholders in the Purchaser have severally agreed to invest a total of£49.6 million in the Purchaser at Completion and may invest up to a further£12.0 million in April 2008. The Purchaser has also undertaken to arrangeworking capital facilities of not less than £40.0 million by 31 March 2007. The Continuing Group will pay the Purchaser's Group £8.7 million on Completion,reflecting that the date at which the Purchaser will acquire economic control ofRetail is 5 August 2006. The Continuing Group will then make a deferred paymentof £53.1 million into the Purchaser's Group on 3 September 2007 provided that(i) the then directors of Retail Limited (the operating company of Retail andsubsidiary of MFI Retail Holdings) confirm that they have concluded that, atthat time, it is in the best interests of Retail Limited and the creditors ofRetail Limited to continue trading and (ii) the entire £49.6 million invested bythe shareholders of the Purchaser on Completion is still invested in thePurchaser at the time of payment. This amount, if paid, will not be repayable bythe Purchaser or Retail and will be payable prior to 3 September 2007 in theevent that there is a change of control of the Continuing Group or certain otherevents occur in relation to the Continuing Group including a recapitalisation oron an event of default under the Continuing Group's banking facilities. The Continuing Group will also make a further deferred payment of up to £12.0million to the Purchaser's Group on 2 April 2008 provided that (i) the thendirectors of Retail Limited (the operating company of Retail and subsidiary ofMFI Retail Holdings) confirm that they have concluded that, at that time, it isin the best interests of Retail Limited and the creditors of Retail Limited tocontinue trading and (ii) the shareholders of the Purchaser have invested anamount (up to £12.0 million) at least equal to the amount to be paid by theContinuing Group. Any amount paid by the Continuing Group will not be repayableby the Purchaser or Retail. In respect of liabilities for customer deposits outstanding at the EffectiveDate, the Company will ensure that the Purchaser's Group receives a payment onCompletion equivalent to the aggregate amount of the liabilities of Retail inrespect of such deposits (estimated to be £51.9 million). From Completion, thePurchaser undertakes to procure the fulfilment of orders in respect of suchdeposits and agrees to indemnify the Company in respect of this obligation. Tothe extent a customer order is cancelled, then either Retail prior toCompletion, or the Purchaser from Completion, will refund the relevant cashdeposit to the customer. The Group and the Purchaser have agreed that the Purchaser will, followingCompletion and for varying periods of up to five years, sub-let from theContinuing Group the seven Home Delivery Centres operated by Retail. TheContinuing Group is also retaining 25 properties which have been vacated by theGroup, but for which MFI Properties currently remains head lessee. The Continuing Group will be entitled to a minimum of five per cent of any saleproceeds in excess of £300 million where Retail is sold during a five yearperiod after Completion. The percentage participation rises in steps to 25 percent of the excess when the gross proceeds exceed £482 million. Where there isan IPO of Retail during this period, the Continuing Group will have the right tosubscribe for new equity on equivalent value terms to those on a sale. If thePurchaser extracts or returns cash from Retail during this period (for example,under a refinancing or return of capital), any such amounts will reduce the £300million threshold referred to above. The Company has given certain warranties and indemnities to the Purchaser inrelation to Retail. Certain indemnities relating, inter alia, to pensions,employee transfers, property and property liabilities, and the part of theReorganisation in relation to Retail are unlimited in amount. The Company has agreed to certain restrictions on the operation of itsbusinesses following Completion. These are related to offering employment toemployees of Retail and the Company departing from its business plan which isnot to target retail customers in the UK over the period of the supply agreementdescribed in paragraph 7 below. 6. Break Fee As an inducement to the Purchaser's agreement to undertake due diligence and tocommit resources to the proposed transaction, the Company has agreed, interalia, that it will pay the Purchaser a total of up to £5 million if certainevents occur which would result in the Disposal not being completed. Theseevents include the Disposal not being approved by Shareholders. 7. Supply Agreement The Group and the Purchaser have agreed the terms of a supply agreement wherebythe Continuing Group will supply certain kitchen, bedroom and related applianceproducts at the same prices as those charged or allocated on an intra Groupbasis to the retail business at the beginning of 2006. The agreement is inrespect of orders made by the Purchaser in the period to 31 March 2008. Furtherdetails of these supply arrangements, and other ancillary arrangements, will beset out in the Shareholder Circular. 8. Transitional Services The Group and the Purchaser have agreed terms for the provision of certain ITand financial services for a period of two years from Completion and for theprovision of logistics services for the period from Completion to 31 March 2008.The Purchaser will pay for these services on a costs-only basis. In addition,the Group and the Purchaser have agreed terms for the provision of warrantyclaims management services by MFI Financial Services to Howden Joinery. Furtherdetails regarding these arrangements will be set out in the ShareholderCircular. 9. Financial effects of the Disposal An unaudited pro forma statement of the profit and loss account of theContinuing Group for the year ended 24 December 2005 is set out, forillustrative purposes only, in Appendix A of this announcement. For that yearthe Group reported (under UK GAAP) an operating profit before exceptional itemsof £7.8 million (£96.2 million operating loss after exceptional and otheritems). The illustrative operating profit of the Continuing Group for year ended24 December 2005, on a pro forma basis and adjusted to reflect the Disposal asif Completion had occurred on 25 December 2004, was £40.2 million preexceptionals. This is after charging £14.9 million of cost under-recoveries andprimary stock losses which were associated with the supply of products to Retailin that year to the Continuing Group. The Continuing Group will retain existing obligations for past service benefitsin respect of Retail employees. In the year ended 24 December 2005, the totalGroup FRS17 pension finance charge was £8.8 million. The Group expects, in relation to the Disposal, to incur a net exceptional losson disposal of approximately £180 million on an IFRS basis in the currentfinancial year, representing the value of net assets of Retail to be transferredto the Purchaser, as adjusted for the terms of the Disposal; adjustments inrespect of the adoption by the Group of IFRS; estimated balance sheet movementsbetween the Effective Date and Completion; and retained dilapidation provisionsand fixtures and fittings in respect of Excluded Assets. An unaudited pro forma statement of net assets of the Continuing Group as at 10June 2006 is set out, for illustrative purposes only, in Appendix A of thisannouncement. At that date, the Group had consolidated net assets of £40.6million. As shown in that statement, the illustrative consolidated net assets ofthe Continuing Group as at 10 June 2006, on a pro forma basis and adjusted toreflect the Disposal as if Completion had occurred at that date, would have beena liability of £130.5 million. The balance sheet of Retail includes liabilities in respect of customer deposits(payments made by customers in advance of delivery of their orders) but not thecash associated with such orders or the stock necessary to fulfil them. TheContinuing Group will remit to the Purchaser's Group a cash amount in respect ofsuch customer deposits (as at 5 August 2006). As at 5 August 2006, the value ofsuch customer deposits is estimated at £51.9 million (compared with £65.3million as at 10 June 2006). From the cash received in respect of customerdeposits, Retail will pay the Continuing Group (or third parties) for the stockrequired to fulfil such orders. 10. Current trends in trading and prospects Retail Trading results in Retail since the interim announcement continue to reflect theweaker market conditions referred to at that time, with gross margin continuingto perform to management expectations. The Continuing Group With regard to the Continuing Group, Howden Joinery continues to make goodprogress in line with management expectations. Supply is also performing asexpected. There has, however, been some upward pressure on central costs. Inaddition, the Continuing Group will this year include in its 2006 results a 53rdweek of trading, being the week ending 30 December 2006. The Continuing Groupwould normally expect to record a modest trading loss during this period. Overall, the Directors expect the beneficial impact of selling Retail on the2006 reported results of the Continuing Group to be broadly offset by modestlosses in Sofa Workshop and by the increase in central costs and expectedtrading loss for the 53rd week referred to above. 11. Dividends Following the Disposal, and taking into account the associated financialcommitments, the Directors intend to resume the payment of dividends toShareholders as soon as the Continuing Group's financial performance and cashflows permit. 12. The Continuing Group Following the Disposal, the core business of the Continuing Group will beHowdens which principally serves small builders, whose own customers represent asignificant proportion of the DFY market. Its strategy is founded upon providinga value-added product that requires skilled installation and which is availablefor immediate collection from the depot. Howdens' staff develop strong local andpersonal relationships with their regular customers who benefit from tradeaccounts and confidential discounts. This strategy has proved highly successful. Since foundation in 1995, Howdenshas developed into a business with more than 360 depots, supplying around 30kitchen ranges, bedrooms and joinery products to a core customer base whichnumbered around 175,000 customer accounts by 2005. Historically, Howden depotshave shown substantial year on year growth in sales for a number of years fromopening and depots are targeted to be profitable from the second year ofoperation and recoup depot opening costs within four years. Net operatingmargins benefit from a substantially lower level of property costs than retailoperations. In addition, Howdens does not need to operate an extensive homedelivery structure, with its associated cost. In its interim results announcement for the 24 weeks to 10 June 2006, the Groupreported sales in respect of Howdens of £272.9 million and an operating profitof £50.9 million. Following the Disposal the Continuing Group will be able tofocus its resources more efficiently in order to capitalise on the growthpotential of Howdens. The Directors believe there is significant scope to expand the current Howdensdepot network to at least 500 depots and expand the customer base. MFI plans toopen around 60 depots in 2007 and at least 40 per annum thereafter. These newdepots would either be located in areas where presence is lacking or would addcapacity and coverage at existing depot locations. The Directors also expect tocontinue the current trialling of depots in France. At the same time, Howdens plans to increase sales to its existing customer baseby management of the product portfolio and adding new products whereappropriate. The broadening of the customer proposition beyond the ''smallbuilder'' will aim to attract a wider spectrum of the building market, includingmore specialised and higher end customers e.g. architects and other buildingprofessionals. The Supply Business has established itself as, and will continue to be, aneffective manufacturing and sourcing operation, with strong supplierrelationships. In the short term, Supply will continue to provide manufacturedand sourced products to Retail and Hygena Cuisines. However, once these interimcontracts come to an end, Howdens will become the sole customer of the SupplyBusiness. The Board believes that this will allow Supply to realise scale benefits andcost savings through its supply chain by supplying a single customer with fewerproduct ranges but higher volumes, and that this in time will provide Howdenswith a key competitive advantage. 13. Change of name Pursuant to the terms of the Disposal Agreement, the Company has undertaken thatfollowing Completion, and subject to Shareholders approving the Disposal, thename of the Company will be changed to Galiform Plc. Completion is notconditional on this change of name but if Shareholders do not approve the changeof name at the extraordinary general meeting to be convened for this purpose,the Company will be required to convene an extraordinary general meeting everytwo months, at which a change of name is proposed, until the resolution iscarried. 14. Extraordinary General Meetings A circular will be sent to MFI shareholders as soon as practicable setting outfurther details of the Disposal and the change of MFI's name and conveningextraordinary general meetings to approve the Disposal and the change of MFI'sname. The extraordinary general meeting to approve the Disposal is expected tobe convened for on or about 16 October 2006 and the meeting to approve thechange of name is expected to be convened for on or about 23 October 2006. The Company has agreed with the Purchaser to hold two extraordinary generalmeetings instead of dealing with approval of the Disposal and the approval ofthe associated change of name in one meeting. The Purchaser has requested twomeetings to ensure, given the notice periods required for the necessaryresolutions (14 days in respect of the resolution to approve the Disposal and 21days in respect of the resolution to approve the change of name), that approvalof the Disposal and therefore Completion of the Disposal happens as soon aspracticable after the first extraordinary general meeting and, in any event, nolater than 23 October 2006. Enquiries: MFIMark Robson, Chief Financial Officer +44 (0) 20 7535 1110Gary Rawlinson, Investor Relations +44 (0) 20 7535 1127 +44 (0) 79 8939 7527 Brunswick, public relations advisers to MFISusan Gilchrist +44 (0) 20 7404 5959Fiona LaffanAnna Jones Dresdner Kleinwort, financial advisers to MFIDavid Barclay +44 (0) 20 7475 9253 MEPHenry Jackson +44 (0) 20 7647 7300 Rothschild, financial advisers to MEPRichard Page +44 (0) 20 7280 5000 Bell Pottinger, public relations advisers to MEPStephen Benzikie +44 (0) 20 7861 3879 The Company will be having discussions with analysts and investors concerningthe contents of this announcement. To assist in this process the Company may usepresentation materials which are available on the Company's website at http://www.mfigroup.co.uk. This announcement is for information purposes only and does not constitute anoffer or an invitation to acquire or dispose of any securities or investmentadvice in any jurisdiction. Dresdner Kleinwort Limited, which is authorised and regulated by the FinancialServices Authority, is acting for MFI and for no one else in connection with theDisposal or the contents of this announcement and will not be responsible toanyone other than MFI for providing the protections afforded to clients ofDresdner Kleinwort Limited, or for affording advice in relation to the Disposalor the contents of this announcement. N M Rothschild & Sons Limited, which is authorised and regulated by theFinancial Services Authority in the United Kingdom, is acting for MEP and no oneelse in relation to the Disposal or the contents of this announcement and willnot be responsible to anyone other than MEP for providing the protectionsafforded to clients of N M Rothschild & Sons Limited nor for providing advice inrelation to the proposed transaction. It is possible that this announcement could or may contain forward-lookingstatements that are based on current expectations or beliefs, as well asassumptions about future events. These forward-looking statements can beidentified by the fact that they do not relate only to historical or currentfacts. Forward-looking statements often use words such as anticipate, target,expect, estimate, intend, plan, goal, believe, will, may, should, would, couldor other words of similar meaning. Reliance should not be placed on any suchstatements because, by their very nature, they are subject to known and unknownrisks and uncertainties and can be affected by other factors that could causeactual results, performance or events, and MFI's plans and objectives, to differmaterially from those expressed or implied in the forward-looking statements. There are several factors which could cause actual results to differ materiallyfrom those expressed or implied in forward-looking statements. Among the factorsthat could cause actual results to differ materially from those described in theforward-looking statements are delays in obtaining, or adverse conditionscontained in, regulatory approvals, changes in economic conditions, competitionand industry restructuring, changes in interest or tax rates, changes in energymarket prices, changes in laws, regulations or regulatory policies, developmentsin legal or public policy doctrines, currency fluctuations, technologicaldevelopments, the failure to retain key management, or the availability, keytiming and success of future acquisition opportunities. Each forward-lookingstatement speaks only as of the date of the particular statement. MFI undertakes no obligation to revise or update any forward-looking statementcontained within this announcement, regardless of whether those statements areaffected as a result of new information, future events or otherwise, save asrequired by the Listing Rules, the rules of the London Stock Exchange or by law. APPENDIX A FINANCIAL INFORMATION ON RETAIL 1. NATURE OF FINANCIAL INFORMATION The following financial information has been extracted without materialadjustment from the consolidation schedules which support the consolidatedaudited accounts of MFI for the years ended 27 December 2003, 25 December 2004and 24 December 2005 and the consolidated unaudited financial statements of theGroup for the 24 weeks ended 10 June 2006. The group adopted International Financial Reporting Standards (''IFRS'') for thefirst time in its reporting for the 24 weeks ended 10 June 2006. This involvedthe restatement of comparative amounts for the year ended 24 December 2005. Theprofit and loss information in paragraph 2 of Appendix A is presented under UKGAAP. The balance sheet information in paragraph 3 of Appendix A is presented inaccordance with IFRS as at 10 June 2006 and UK GAAP as at 24 December 2005. The financial information contained in paragraphs 2 and 3 of this Appendix Adoes not constitute statutory accounts for any company within the meaning ofSection 240 of the Act. The statutory accounts for the Group in respect of eachof the last three financial years have been delivered to the Registrar ofCompanies. The auditors' reports in respect of those statutory accounts for thethree years were unqualified and did not contain statements under Section 237(2)or (3) of the Act. Deloitte & Touche LLP were the auditors of MFI in respect ofthe three years ended 24 December 2005. 2. PROFIT & LOSS ACCOUNTS FOR THE THREE YEARS ENDED24 DECEMBER 2005 The profit and loss accounts for Retail under UK GAAP, prepared on the basis setout above and the notes below, were as follows: 2003 (3) 2004 2005 All £ millionSales 853.5 768.5 741.9Cost of Sales (408.2) (398.2) (390.6)Gross profit 445.3 370.3 351.3Selling and Distribution costs (344.4) (347.3) (363.0)Administration costs (7.7) (6.0) (11.3)Depreciation (22.0) (23.0) (26.0)Total costs (374.1) (376.3) (400.3)Operating Profit/loss before exceptional items 71.2 (6.0) (49.0)Exceptional items (2) - (18.5) (83.2)Operating profit after exceptional items (1) 71.2 (24.5) (132.2) Notes: (1) The group operates a central treasury function and corporate taxes arecalculated on a statutory basis. Consequently a meaningful allocation of costssuch as interest and taxes cannot be made to Retail. (2) Exceptional items comprised the following: 2003 (3) 2004 2005 All £ millionSupply chain disruption and restructuring costs - (16.3) (4.7)Redundancies - (2.2) (0.4)Structural guarantee dispute settlement - - (35.7)UK stores impairment - - (42.4) - (18.5) (83.2) (3) 2003 is not restated for FRS17, which was adopted by the Group in 2005. (4) Prior to the Reorganisation, certain corporate headquarter costs and supplyoverheads were charged to Retail and were therefore reflected in its results.Since the Reorganisation these are no longer charged to Retail and therefore arenot reflected in the profit and loss accounts for Retail in respect of the threeyears ended 24 December 2005 presented in this paragraph. These costs arepresented here for information purposes only and were as follows: 2003 (3) 2004 2005 All £ millionCorporate headquarter costs 12.5 12.5 12.5Supply overheads 12.8 6.2 19.2 25.3 18.7 31.7 (5) The profit and loss accounts for Retail comprise the financial results of asub-group of subsidiaries of MFI Group including MFI Retail Holdings, RetailLimited, MFI Properties and MFI Financial Services including the ExcludedAssets. The Continuing Group will be retaining the Excluded Assets following theDisposal and accordingly, as set out in Note 3(ii) of paragraph 5 of Appendix Aof this document, the Continuing Group will retain the corresponding net rentalobligation. (6) Operating profit/loss is after charging net property costs comprising rentalpayments and rates in each of three years as follows: 2003 (3) 2004 2005 All £ millionNet property rentals 53.2 60.4 67.2 *Rates and other costs 18.6 26.1 28.6 71.8 86.5 95.8 *In the year ended 24 December 2005, net rentals payable by Retail includes£15.8 million in respect of leases for which the Company has guaranteed theperformance of MFI Properties as tenant. 3. STATEMENTS OF NET ASSETS AS AT 24 DECEMBER 2005 AND 10 JUNE 2006 The combined net assets of Retail, prepared under IFRS at 10 June 2006 and UKGAAP at 24 December 2005 on the basis set out above and the notes below, were asfollows: As at As at 24 December 10 June 2005 2006 All £ million All £ millionASSETSNon-Current AssetsTangible assets 89.7 83.4 89.7 83.4Current AssetsStocks 36.3 38.4Debtors 21.2 30.3 57.5 68.7Total assets 147.2 152.1 LIABILITIESCurrent LiabilitiesTrade creditors (14.9) (11.5)Other tax and social security - -Other creditors (2.6) (2.9)Deferred income - customer deposits (17.6) (65.3)Accruals and other deferred income (51.1) (72.0) (86.2) (151.7)Non-Current LiabilitiesLong term provisions (1.2) (1.3) (1.2) (1.3)Total Liabilities (87.4) (153.0)Net Assets/ Liabilities 59.8 (0.9) Notes: (1) Retail net assets exclude any liability in respect of the Group FRS17pension deficit as the pension deficit is only recognised in the consolidatedaccounts of MFI Furniture Group Plc. (2) The Group operates a central treasury function and corporate taxes arecalculated on a statutory entity basis. Consequently a meaningful allocation ofcosts such as interest and taxes cannot be made to Retail. (3) The combined net assets of Retail comprise the assets of a sub-group ofsubsidiaries of MFI Group including MFI Retail Holdings, Retail Limited, MFIProperties and MFI Financial Services including the Excluded Assets. TheContinuing Group will be retaining the Excluded Assets following the Disposal,and accordingly, as set out in Note 3(i) of paragraph 6 of Appendix A of thisdocument, the Continuing Group will retain the tangible assets associated withthe Excluded Assets. (4) The accruals and deferred income balance at 10 June 2006 includes accrualsfor property lease incentives and stepped rent in accordance with IFRS. Theimpact of adopting IFRS resulted in an increase in accruals and deferred incomein respect of property costs of £15.8m at 10 June 2006, compared to theequivalent treatment under UK GAAP. The adoption of IFRS also reduces the valueof long leaseholds by £3.2 million. PRO FORMA FINANCIAL INFORMATION FOR THE CONTINUING GROUP 4. PRO FORMA FINANCIAL INFORMATION The pro forma financial information for the Continuing Group set out below hasbeen prepared to illustrate the effect on the profit and loss account andunaudited statement of consolidated net assets of the Group of the Disposal ifit had occurred on 25 December 2004 (in the case of the profit and loss account)and the unaudited 10 June 2006 (in the case of the unaudited net assetsstatement). The pro forma financial information is for illustrative purposesonly and because of its nature, it addresses a hypothetical situation and doesnot, therefore, represent the Continuing Group's actual financial position orresults. The pro forma financial information has been prepared on the basis setout in the notes below. 5. PRO FORMA PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED24 DECEMBER 2005 The pro forma profit and loss account for the Continuing Group under UK GAAP,prepared on the basis set out above and the notes below is as follows: Pro forma Retail(2) Disposal(3) Continuing Group(1) Adjustments Adjustments Group All £ millionSales 1,418.9 (741.9) - 677.0Cost of Sales (706.4) 390.6 (14.9)(i) (330.7) Gross profit 712.5 (351.3) (14.9) 346.3Selling & Distribution costs (629.6) 389.0 (1.7)(ii) (242.3)Administrative costs (75.1) 11.3 - (63.8) Total Costs (704.7) 400.3 (1.7) (306.1) Operating Profit 7.8 49.0 (16.6) 40.2Share of operating loss of joint venture (1.5) - - (1.5)Discontinued operations 4.2 - - 4.2Exceptional items (106.7) 83.2 - (23.5) Operating Profit after Discontinued operations,Exceptional items and Share ofoperating loss of joint venture (96.2) 132.2 (16.6) 19.4 Notes: (1) The consolidated profit and loss account information of the Group for theyear ended 24 December 2005 has been extracted, without material adjustment,from the audited financial statements of the Group for that year prepared underUK GAAP. (2) The profit and loss account for Retail for the year ended 24 December 2005has been extracted, without any material adjustment, from the profit and lossaccounts for Retail as set out in paragraph 2 of Appendix A of this document. (3) Disposal adjustments represent adjustments that in the reasonable opinion ofthe Directors would have had a continuing impact on the Continuing Group if theDisposal had been effective on 25 December 2004, including: (i) Under-recoveries in costs and primary stock losses totalling £14.9 millionin respect of products supplied to Retail which were previously recognised inRetail but are now charged to the Continuing Group. In 2003 and 2004 these costswere £10.3 million and £12.6 million respectively. (ii) Net rent payable in respect of the Excluded Assets as described in Note 5in paragraph 2 of Appendix A of this document, and that will be retained by theContinuing Group. (4) No adjustment has been made to the unaudited proforma statement to reflectthe trading results of the Group or Retail since 24 December 2005, nor any otherevent or transaction since that date including any costs in respect ofrestructuring which may be incurred. (5) No adjustment to the pro forma profit and loss statement above has been madefor estimated costs of the transaction borne by the Continuing Group of £10.5million or for the onerous lease provision of £12.0 million which is included inthe net asset decrease of the £12.9 million as described in note 3(v) ofparagraph 6 of Appendix A also borne by the Continuing Group relating to theHDCs which from part of the Excluded Assets. 6. PRO FORMA NET ASSETS STATEMENT AS AT 10 JUNE 2006 The unaudited pro forma net assets of the Continuing Group, prepared under IFRSat 10 June 2006 and on the basis set out above and the notes below, are asfollows: Group Retail Disposal Pro-forma Adjustments Adjustments Continuing Group All £ millionASSETSNon-Current AssetsOther intangible assets 3.6 - - 3.6Tangible assets 178.0 (83.4) 1.6(i) 96.2Investments 9.1 - - 9.1Deferred tax 94.6 - - 94.6 285.3 (83.4) 1.6 203.5Current AssetsStocks 147.1 (38.4) - 108.7Debtors 150.0 (30.3) - 119.7Investments 3.8 - - 3.8Cash 139.7 - (74.0)(ii) 65.7 440.6 (68.7) (74.0) 297.9Assets held for sale 14.7 - - 14.7Total Assets 740.6 (152.1) (72.4) 516.1LIABILITIESCurrent LiabilitiesTrade creditors (96.9) 11.5 - (85.4)Corporation tax (3.9) - - (3.9)Other tax and social security (36.0) - - (36.0)Other creditors (14.4) 2.9 (63.6)(iii) (75.1)Deferred income - customer deposits (65.3) 65.3 - -Accruals and other deferred income (122.6) 72.0 (11.1)(iv) (61.7) (339.1) 151.7 (74.7) (262.1)Non-Current LiabilitiesBank Loans (52.1) - - (52.1)Long term provisions (2.6) 1.3 (12.9)(v) (14.2)Deferred tax (7.0) - - (7.0)Other creditors - - (12.0)(vi) (12.0)Gross pension liability (295.6) - - (295.6) (357.3) 1.3 (24.9) (380.9)Liabilities directly associated withassets classifiedas held for sale (3.6) - - (3.6)Total Liabilities (700.0) 153.0 (99.6) (646.6)Net Assets/ Liabilities 40.6 0.9 (172.0) (130.5)Net Assets before gross pensions liability 336.2 0.9 (172.0) 165.1 Notes: (1) The consolidated net assets of the Group as at 10 June 2006 have beenextracted, without material adjustment, from the unaudited interim resultsstatement, dated 20 July 2006. (2) The net assets of Retail as at 10 June 2006 have been extracted withoutmaterial adjustment, from the statement of net assets for Retail as at 10 June2006 as set out in Paragraph 3 of Appendix A of this document. (3) Disposal adjustments reflect the effect of the Disposal pursuant to theDisposal Agreement as if completion had taken place on that day. (i) Tangible assets have increased by £1.6 million being the amount of fixturesand fittings associated with the Excluded Assets, and accordingly, as set out inNote 3 of paragraph 3 of Appendix A, will be retained by the Continuing Group. (ii) Cash has been reduced by £74.0 million being £65.3 million of customerdeposits (excluding VAT) as at 10 June 2006 and a cash payment of £8.7 millionto the Purchaser, payable on Completion. (iii) Current liabilities have been increased by (£63.6 million) representingthe net amount which is contracted to be payable to Retail on 3 September 2007(£53.1 million) and the estimated costs of the transaction borne by theContinuing Group (£10.5 million). (iv) Net assets have decreased by £11.1 million as the Continuing Group willretain the liability for deferred rent reviews yet to be settled in respect ofproperties occupied by Retail (£8.6 million) and will retain dilapidationprovisions relating to the Excluded Assets (£2.5 million). (v) Net assets have decreased by £12.9 million in respect of onerous leaseprovisions relating to the Excluded Assets. (vi) Non current liabilities have been increased by £12 million representing theamount which is contracted to be payable to Retail in April 2008. (4) No adjustment has been made to the unaudited pro forma statement to reflectthe trading results of the Group or Retail since the balance sheet date, nor anyother event or transaction since that date, including any provisions in respectof restructuring costs which may be incurred. APPENDIX B DEFINITIONS The following definitions apply throughout this announcement, unless the contextrequires otherwise: Act the Companies Act 1985, as amendedBoard or Directors the board of directors of MFICompletion the completion of the Disposal in accordance with the Disposal AgreementContinuing Group MFI and its subsidiary undertakings (as defined in the Act), excluding RetailDisposal the proposed disposal by MFI of Retail pursuant to the Disposal AgreementDisposal Agreement the agreement relating to the sale by MFI of RetailDresdner Kleinwort Dresdner Kleinwort LimitedEffective Date 5 August 2006Excluded Assets 25 properties which have been vacated by the Group but for which MFI Properties remains head lessee, and seven Home Delivery Centres which are currently occupied by the Group and for which MFI Properties remains head lessee. These 32 properties do not form part of the Disposal. The seven Home Delivery Centres are to be sub-let for varying periods of up to five years to the PurchaserFRS 17 Financial Reporting Standard 17 - Retirement BenefitsFSMA Financial Services and Markets Act 2000Howdens or Howden Joinery Howden Joinery Limited, a subsidiary of MFIHygena Cuisines Hygena Cuisines S.A.IAS 19 International Accounting Standard 19 - Employee BenefitsIFRS International Financial Reporting StandardsListing Rules the listing rules made by the Financial Services Authority in exercise of its functions as competent authority pursuant to Part VI of the FSMALondon Stock Exchange London Stock Exchange PlcMFI Financial Services MFI Financial Services Limited, a company which is part of RetailMFI Group or the Group MFI and its subsidiary undertakings (as defined in the Act), including RetailMFI or the Company MFI Furniture Group PlcMFI Properties MFI Properties Limited, a company which is part of RetailMFI Retail Holdings MFI Retail (Holdings) Limited, a company which is part of RetailMFI UK MFI UK Limited, a subsidiary of MFIOrdinary Shares the ordinary shares of 10p each in the capital of the CompanyProspectus Rules the prospectus rules made by the Financial Services Authority in exercise of its functions as competent authority pursuant to Part VI of the FSMAPurchaser MEP Mayflower LimitedPurchaser's Group the Purchaser, its subsidiary undertakings and parent undertaking (each as defined in the Act) from time to timeReorganisation the intra Group reorganisation carried out on or around 8 July 2006 pursuant to which MFI reorganised its three core businesses into separate legal sub groups. Retail a sub group of subsidiaries of MFI including MFI Retail Holdings, Retail Limited, MFI Properties and MFI Financial Services and their businesses and assets (including the MFI HYGENA and SCHREIBER brands) but excluding the Excluded AssetsRetail Limited MFI Retail Limited, a company which is part of RetailShareholders the holders of Ordinary Shares and "Shareholder" shall be construed accordinglyShareholder Circular the Class 1 circular to Shareholders to contain details on the Disposal and change of nameSupply Business or Supply the manufacturing and supply business of MFIUK GAAP UK Generally Accepted Accounting Principles This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Howden Joinery