12th Jul 2005 17:45
Gleeson(M J)Group PLC12 July 2005 M J GLEESON GROUP PLC ("M J GLEESON" OR THE "COMPANY") PROPOSED MANAGEMENT BUY-OUT OF THE GLEESON BUILDING DIVISION 12 July 2005 1. Introduction M J Gleeson today announces that its subsidiary Gleeson Construction ServicesLimited ("GCSL") has today entered into a business purchase agreement (the"Business Purchase Agreement") with CHOQS 448 Limited ("MBOCo"), a companyincorporated for the purposes of a management buy-out of M J Gleeson's buildingcontracting operations (the "Gleeson Building Division") pursuant to which theGleeson Group (defined as M J Gleeson and its subsidiaries) has agreed, subjectto shareholder approval, to transfer certain assets and liabilities of theGleeson Building Division to MBOCo (the "Transaction"). The Gleeson Group hasalso agreed to make a debt and equity investment in MBOCo. MBOCo is currently wholly owned by Martin Smout and Peter Stone, two of thesenior managers of the Gleeson Building Division. Since they have in the 12months prior to the date of the Transaction been directors of GCSL, under thelisting rules of the UK Listing Authority (the "Listing Rules") MBOCo is arelated party of the Gleeson Group and the Transaction is a related partytransaction. Accordingly, the Transaction is conditional upon shareholder approval at anextraordinary general meeting to be held at 10 a.m. on 29 July 2005 (the"Extraordinary General Meeting). Subject to such approval being obtained, it isexpected that completion of the Transaction will take place on 1 August 2005. A circular containing details of the Transaction and a notice of theExtraordinary General Meeting will be posted to M J Gleeson shareholders today. 2. Background to and reasons for the Transaction As reported in the Company's interim statement dated 22 March 2005 and thepre-close statement dated 1 July 2005, in the course of 2004 the Gleeson Groupsustained significant losses in its building contracting activities andinstituted a review of this activity. As a result, the Board concluded that thelow margins available in building contracting did not justify the significantassociated risks and decided to withdraw from this sector. The Gleeson Group'sother operations focus on areas which the Board believes are more attractivegiven the higher margins and/or lower risk profile of the work undertaken. The Board has reviewed a number of exit options for the Gleeson BuildingDivision. No market appetite for either a trade sale or a standard managementbuy-out structure employing third party funding was found. The Board alsoreviewed the option of closing the operation but considered this unattractivegiven the risk of further escalation in project overrun costs and the level ofretained divisional overhead required to manage through the ongoing contracts.Therefore, the Board has concluded that the most appropriate option for reducingthe Gleeson Group's exposure to building risk over a period of time is totransfer the operations to a management buy-out vehicle with sufficientfinancial resources to enable it to complete the ongoing contracts and todevelop a portfolio of new contracts independently from the Gleeson Group. Inthe absence of third party funding, MBOCo is being funded by the Gleeson Groupalongside the directors of MBOCo. However, as explained further in Section 5below, the Gleeson Group will retain liability for all retained contracts. Inaddition, the Gleeson Group will retain the ultimate legal liability to theemployer for ongoing contracts which are not novated to MBOCo (although,pursuant to the Business Purchase Agreement, MBOCo will assume certain of theseliabilities). 3. Information on the Gleeson Building Division The Gleeson Group's building activities operate from offices in Cheam,Northampton, Sheffield, Stockport and Newcastle. Over the years, the GleesonBuilding Division has worked on the construction of a large number ofprestigious buildings including the Lloyds of London building, the CrucibleTheatre in Sheffield and the Crystal Palace Athletics Stadium in South London. Since 2001, volumes of trade have increased significantly. However, this growthhas been accompanied in the last two years by substantial losses. Based on unaudited analysis, which has been extracted from the consolidatedaccounts of the Gleeson Group for the year ended 30 June 2004, the GleesonBuilding Division contributed £308 million of turnover and incurred losses of £6million. As reported in the unaudited interim statement a loss of £16.6 millionwas incurred in the six months to 31 December 2004 and, as announced in thepre-close statement dated 1 July 2005, in the second half of the year furthersubstantial potential losses were identified on a number of recently completedcontracts. As noted below, the Board believes that the Gleeson Building Divisionlosses for the year to 2005 will be treated as discontinued. 4. Principal terms and conditions of the Transaction The tangible assets, employees and certain liabilities of the Gleeson BuildingDivision will transfer to MBOCo. In addition, it is anticipated that certainlease obligations, for example motor vehicles, will be assigned or novated toMBOCo. The right to continue the trade of the Gleeson Building Division goingforward will also be acquired by MBOCo. The treatment of the current portfolio of construction contracts will depend onwhether the building phase has been completed: • The ongoing contracts will be, so far as is possible, novated or assigned to MBOCo but to the extent this is not possible will be performed by MBOCo on behalf of the Gleeson Group. In respect of each of the ongoing contracts, there is an agreed apportionment as at 30 June 2005 of the estimated working capital balances and margin to such date, based on projected figures. A payment of £14.7 million will be made by GCSL on completion in respect of the estimated net working capital liabilities being transferred to MBOCo (calculated on a pound for pound basis). This represents debtors and amounts recoverable on contracts of £16.0 million offset by liabilities of £30.7 million in relation to payments on account and amounts due to sub-contractors which will, following the Transaction, be dischargeable by MBOCo. Within 70 days of completion the estimated net working capital liabilities of £14.7 million will be adjusted to reflect the actual position at 30 June 2005. • The retained contracts will remain with the Gleeson Group. MBOCo has agreed to perform various services in relation to these contracts (including, but not limited to, rectification of defects and agreement of sub-contractors' accounts and final accounts), with MBOCo receiving certain payments in respect of these services. At completion the Gleeson Group will: • invest £1.1 million by way of equity in MBOCo; and • provide a loan of £2.5 million to MBOCo at an interest rate of 24% per annum. The Gleeson Group will hold 20% of the voting shares (on a fully diluted basis)and will also hold non-voting shares and non-voting partly paid shares in MBOCo.The unpaid amounts on these partly paid shares may in certain circumstances becalled by MBOCo so that the Gleeson Group would be required to pay up anadditional £3.5 million in subscription monies in order to make further workingcapital available to MBOCo. During the period up to 30 June 2006, GCSL will pay MBOCo a quarterly managementcharge of £413,750 (£1.7 million in total) in respect of its assistance tomanage and administer the retained contracts. The Gleeson Group will alsoprovide certain administrative services to MBOCo in the 12 months followingcompletion (for example, accounting, IT and human resources) for which noseparate charge will be made. In the event that MBOCo makes a profit beforetaxation in the accounting period to 30 June 2006, then MBOCo will pay to theGleeson Group an amount equal to 50% of such profit, subject to a maximumpayment of £2 million. Furthermore, the Gleeson Group may be required to make annual payments to MBOCoup to a maximum of £500,000 in aggregate over five years in relation to a supplyagreement with a subsidiary of Speedy Hire Plc. 5. Financial effects of the Transaction The Board believes that the results of the Gleeson Building Division will beclassified as a discontinued activity in the Gleeson Group accounts for the yearended 30 June 2005 and, as such, will be reported separately from the GleesonGroup's continuing operations. In summary, the Gleeson Group has committed to make the following payments inrelation to the Transaction: • a maximum of £7.1 million to MBOCo by way of debt and equity investment, being £3.6 million in cash at completion and £3.5 million in respect of potential future payments under the partly paid shares; • a £14.7 million cash payment to MBOCo relating to the transfer of net current liabilities at completion subject to adjustment as noted in Section 4 above; • a management charge of £1.7 million to MBOCo, split into four quarterly payments starting on 30 September 2005; • a maximum payment of £0.5 million over five years relating to a supply agreement with a subsidiary of Speedy Hire Plc; and • a maximum payment of £2.9 million to MBOCo in relation to particular ongoing contracts. Furthermore, the Gleeson Group also retains liability as follows: • for all aspects of retained contracts; • for work undertaken on ongoing contracts prior to 30 June 2005 (or 1 January 2005 for some more recent contracts); and • in respect of certain employment matters covered by warranties and indemnities in the Business Purchase Agreement. Based on past experience, the Board believes that the potential exposure of theGleeson Group under the retained contracts is not likely to be material. 6. Significant change Save as set out below there has been no significant change in the financial ortrading position of the Gleeson Group since 31 December 2004, the date to whichthe unaudited interim financial statements of M J Gleeson for the six monthsended on that date were prepared. Trading performance in Gleeson Group's core operations - housebuilding, civilengineering and property - remained strong in the second half of the year to 30June 2005. In the interim statement of 22 March 2005, it was reported that the losses inthe Gleeson Building Division for the first half of the year were £16.6 million.However, as announced on 1 July 2005 in a pre-close statement, furthersubstantial potential losses have been identified on a number of recentlycompleted contracts for which the final accounts have not been settled. Thedivision's losses are now expected to exceed £34 million and will be providedfor in the Gleeson Group results for the year to 30 June 2005. Gleeson Group profit, excluding losses attributable to the Gleeson BuildingDivision, is expected to be well ahead of market expectations, but the inclusionof these losses and the related restructuring and transaction costs is likely toresult in a loss for the year ended 30 June 2005 of between £5 million and £10million. 7. Circular and Extraordinary General Meeting A circular is being posted to shareholders today including further details ofthe Transaction and a notice convening the Extraordinary General Meeting of theCompany to be held at 10 a.m. on 29 July 2005 at Haredon House, London Road,North Cheam, Sutton, Surrey SM3 9BS. ENQUIRIES:M J Gleeson Group plc 020 8644 4321Dermot Gleeson (Chairman)Terry Massingham (Chief Executive)Colin McLellan (Finance Director) Close Brothers 020 7655 3100Peter AlcarazGareth Davies Bankside Consultants Limited 020 7367 8851Charles Ponsonby Close Brothers Corporate Finance Limited which is regulated in the UnitedKingdom for the conduct of investment business by the Financial ServicesAuthority, is acting for M J Gleeson as financial adviser in connection with thematters described herein and no-one else and will not be responsible to anyoneother than M J Gleeson for providing the protections afforded to customers ofClose Brothers Corporate Finance Limited, nor for providing advice in relationto the matters described herein. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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