RNS Number:0537M
South Downs Limited
24 October 2001
South Downs Limited
Offer for Brockhampton - pt2
NOT FOR RELEASE, PUBLICATION OR
DISTRIBUTION INTO THE UNITED STATES, CANADA, AUSTRALIA OR
JAPAN
FOR IMMEDIATE RELEASE 24 October 2001
BROCKHAMPTON HOLDINGS plc
Part Two
Recommended Cash Offers by South Downs Limited for
Brockhampton Holdings plc
1. Introduction
The Independent Directors of Brockhampton and the board
of South Downs announce the terms of recommended cash
offers, to be made by Rothschild on behalf of South
Downs, to acquire the entire issued and to be issued
share capital of Brockhampton.
2. The Offers
The Offers, which will be on the terms and subject to
the conditions set out below and in Appendix I to this
announcement and the further terms and conditions to be
set out in the Offer Document and the Forms of
Acceptance, will be made on the basis set out below:
The Ordinary Offer:
for each Brockhampton Ordinary Share 319p in cash
The "A" Share Offer:
for each Brockhampton "A" Share 128p in cash
The Offers, which will be wholly in cash, value the
entire existing issued share capital of Brockhampton at
approximately #70.8 million, and represent an enterprise
value of #76.9 million based on net debt of #6.1 million
at 31 March 2001.
The Offers represent premia of approximately 25.1 per
cent. to the Closing Price of 255.0 pence per
Brockhampton Ordinary Share and 23.7 per cent. to the
Closing Price of 103.5 pence per Brockhampton "A" Share
on 23 October 2001, the day prior to this announcement.
The Offers represent a premium of 9.9 per cent. to
Brockhampton's Underlying Regulated Capital Value as at
31 March 2001, of #70 million.
Brockhampton Shareholders, other than certain overseas
shareholders, who validly accept the Offers may elect to
receive Loan Notes to be issued by South Downs instead
of some or all of the cash consideration to which they
would otherwise be entitled under the Offers. Further
information concerning the Loan Notes is set out in
paragraph 12 of this announcement.
3. Recommendation from the Independent Directors
In view of the involvement in South Downs Capital and
South Downs of Mr Nicholas Roadnight (Managing Director
of Brockhampton) and Mr Neville Smith (Finance Director
of Brockhampton), the Independent Directors, being Mr
Martin Copp, Mr Hugh Pringle and Mr John King (who do
not and will not have any interest in South Downs
Capital or South Downs and will resign from the boards
of Brockhampton and Portsmouth Water upon the Offers
becoming or being declared unconditional in all
respects), have taken responsibility for considering the
Offers on behalf of Brockhampton.
Mr John Batty (Chairman of Brockhampton) is not included
as an Independent Director owing to his role as a
Trustee of the Brockhampton Pension Scheme, a
significant Brockhampton Shareholder.
The Independent Directors of Brockhampton, who have been
so advised by Close Brothers, consider the terms of the
Offers to be fair and reasonable and have unanimously
agreed to recommend Brockhampton Shareholders to accept
the Offers, as they have irrevocably undertaken to do in
respect of their own beneficial shareholdings. In
providing advice to the Independent Directors, Close
Brothers has taken into account the commercial
assessments of the Independent Directors.
4. Irrevocable undertakings
South Downs has received irrevocable undertakings from
the directors of Brockhampton to accept the Offers in
respect of 5,346 Brockhampton Ordinary Shares and
116,729 Brockhampton "A" Shares, representing
approximately 0.13 per cent. of the issued ordinary
voting share capital and 0.26 per cent. of the issued
"A" ordinary non-voting share capital of Brockhampton.
South Downs has also received irrevocable undertakings
from the Brockhampton Pension Scheme, the ESOT, The
Special Utilities Investment Trust Plc and East Surrey
Holdings Plc to accept the Offers in respect of, in
aggregate, 3,663,630 Brockhampton Ordinary Shares and
22,957,645 Brockhampton "A" Shares, representing
approximately 85.9 per cent. and 51.4 per cent. of the
Brockhampton Ordinary Shares and the Brockhampton "A"
Shares, respectively.
In aggregate, therefore, South Downs has received
irrevocable undertakings to accept the Offers in respect
of 3,668,976 Brockhampton Ordinary Shares and 23,074,374
Brockhampton "A" Shares, representing approximately 86.0
per cent. and 51.6 per cent. of the Brockhampton
Ordinary Shares and Brockhampton "A" Shares,
respectively.
All undertakings described in this paragraph 4 will
remain binding notwithstanding any competing offer.
5. Background to and reasons for the Offers
Portsmouth Water, the regulated water supply subsidiary
of Brockhampton, is acknowledged by Ofwat to be one of
the most efficient companies in the sector. Customers
enjoy the lowest average water supply bill in England
and Wales and the Company's quality of service is ranked
above the average of Ofwat performance standards in
almost all categories of inspection.
The last periodic review by Ofwat in November 1999
imposed upon Portsmouth Water an average price reduction
of 1.4% per annum compounded annually in real terms for
the period to 31 March 2005. In setting this price
determination, Ofwat assumed further cost reductions and
efficiencies in relation to operating expenditure,
capital maintenance expenditure and capital enhancement
expenditure, notwithstanding the outperformance achieved
by the Company against previous Ofwat targets. These
operating assumptions, together with Ofwat's assumptions
in relation to cost of capital when setting the price
determination, restrict the scope for increasing
shareholder value in the Brockhampton Group's regulated
business.
Accordingly, Brockhampton has in recent years sought to
develop non-regulated income to provide growth in
earnings and enhance shareholder value. While these
activities have contributed to turnover they have, in
the main, yet to achieve profitable operation and are
unlikely to contribute significantly to profits for some
time.
Brockhampton has also explored options for a financial
restructuring to provide a sustainable low cost of
capital and a simplified shareholder structure. However,
the Board considered that improving the efficiency of
the capital structure by increasing indebtedness could
well further diminish investor appetite for what is
already a small quoted company with limited trading
liquidity in its shares.
In summary, although Brockhampton is rated as a highly
efficient operator which has been prudently and
successfully managed for many years, these limitations
on the ability of the Company to create value for
shareholders have resulted in Brockhampton being valued
by the stock market at a discount to Regulated Capital
Value. The Independent Directors do not anticipate this
changing for the foreseeable future while, in contrast,
the Offers value the Company at a premium to its
Underlying Regulated Capital Value. In view of this the
Independent Directors consider that the Offers are fair
and reasonable and should be recommended to
shareholders.
6. Information on the Brockhampton Group
Brockhampton's principal activity is the supply of water
to some 287,000 domestic and commercial customers. This
is carried out by its subsidiary Portsmouth Water within
an area of 868 square kilometres in Hampshire and West
Sussex.
Brockhampton has four other smaller businesses: Seven
Springs Limited, which supplies and services water
coolers in the South of England (it currently has some
1,500 units in operation); R.H. Lillywhite Limited, a
plumbing and heating company acquired in June 2000;
Brockhampton Property Investments Limited, which manages
the Brockhampton Group's land resources; and Blakedew
236 Limited, which was established to acquire rights to
certain leakage detection equipment for the water
sector.
For the year to March 2001, the Brockhampton Group
reported a turnover of #29.0 million (2000: #28.8
million) and profit before taxation of #8.1 million
(2000: #9.0 million). As at 31 March 2001, the group
had net assets of #51.6 million (2000: #47.4 million)
and net debt of #6.1 million (2000: #8.4 million).
The Regulated Capital Value of Portsmouth Water at 31
March 2001, as determined by Ofwat, was #82.2 million.
Management's estimate of the Underlying Regulated
Capital Value as at 31 March 2001 is #70 million. The
adjustments to the Regulated Capital Value to arrive at
the Underlying Regulated Capital Value comprise
Management's estimates of #8.1 million for the net
effect of capital efficiencies to 31 March 2000
identified by Ofwat which will be deducted from
Regulated Capital Value by 31 March 2005, and #4.1
million of capital expenditure allowed in the last
determination by Ofwat for the year to 31 March 2001
which has been deferred to later years within the
current review period.
7. Information on South Downs Capital, South Downs and
arrangements with Management
South Downs is a newly-formed company established for
the purpose of making the Offers. South Downs has not
traded or entered into any material obligation other
than in connection with the Offers and their financing.
The entire issued share capital of South Downs is owned
by South Downs Capital. Following the Offers becoming
or being declared unconditional in all respects, the
ordinary share capital of South Downs Capital will be
owned as to 15 per cent. by Management, 40 per cent. by
The South Downs Employee Benefit Trust (a trust formed
for the benefit of employees) and 45 per cent. by
Drummond Capital, through RBIL, both wholly-owned
indirect subsidiaries of RBSG.
It is intended that, subject to certain performance
criteria being achieved, Drummond Capital's interest,
which will attract a dividend, will be redeemed over a
period of years, and that the equity interests in South
Downs Capital held by Management and The South Downs
Employee Benefit Trust will be increased as a result.
The shares held by Management and The South Downs
Employee Benefit Trust will not attract any dividends
until Drummond Capital's interest has been redeemed in
full and in any event not until 2008, but will benefit
from any inherent gains as Drummond Capital's interest
is redeemed.
Mr Rory Cullinan, Chairman of Drummond Capital, is Non-
Executive Chairman of South Downs Capital and South
Downs. Mr Nicholas Roadnight and Mr Neville Smith,
currently Managing Director and Finance Director
respectively of Brockhampton, will hold the same
positions in South Downs Capital and South Downs.
Subsequent to the Offers becoming or being declared
unconditional in all respects, South Downs intends to
optimise the capital structure of Brockhampton, which is
likely to involve raising finance from debt capital
markets.
Through direct and indirect participation in the equity
share capital of South Downs Capital, Management and
employees will be incentivised to continue to deliver a
high quality, low cost service to customers and to
continue to achieve operational and capital efficiencies
consistent with Portsmouth Water's regulatory targets.
Further details of the arrangements with Management will
be described in the Offer Document.
8. Information on Drummond Capital, RBIL and RBSG
Drummond Capital is a recently incorporated, wholly-
owned, indirect subsidiary of RBSG with its registered
office at Waterhouse Square, 138-142 Holborn, London,
EC1 N2TH. Since its incorporation in October 2001, it
has not traded or entered into any material obligation
other than in connection with the Offers and their
financing. It will operate as the manager of the RBS
Group's investment in South Downs Capital. RBIL, through
which the RBS Group will invest in South Downs Capital,
is a wholly-owned, indirect subsidiary of RBSG and has
its registered office at 42 St Andrew Square, Edinburgh,
EH2 2YE.
RBSG is the parent company of the RBS Group, which is a
diversified financial services group engaged in a wide
range of banking, financial and finance-related
activities in the UK and internationally. The RBS
Group's operations are principally centred in the UK.
For the 15 months ended 31 December 2000, the RBS Group
reported total income of #12.1 billion (year ended 30
September 1999: #4.1 billion) and profit before taxation
and after exceptional items of #3.4 billion (year ended
30 September 1999: #1.2 billion). As at 31 December
2000, the total assets and net assets of the RBS Group
were #320.0 billion and #23.1 billion respectively. For
the six months ended 30 June 2001, the RBS Group
reported total income of #6.8 billion (six months ended
30 June 2000: #4.7 billion) and profit before taxation
and after exceptional items of #2.1 billion (six months
ended 30 June 2000: #1.2 billion). As at 30 June 2001,
the total assets and net assets of the RBS Group were
#340.9 billion and #24.7 billion respectively.
9. Brockhampton management and employees
South Downs has confirmed that the existing employment
rights, including accrued pension entitlements, of the
management and employees of Brockhampton will be fully
safeguarded.
The Independent Directors have agreed to resign from the
boards of Brockhampton and Portsmouth Water upon the
Offers becoming or being declared unconditional in all
respects.
Mr John Batty has agreed to resign as a director of
Brockhampton upon the Offers becoming or being declared
unconditional in all respects. He will remain as a non-
executive director of Portsmouth Water.
It is the intention of South Downs to appoint further
non-executive directors to the board of Portsmouth Water
in due course.
10. Brockhampton Share Option Scheme
The Offers will extend to any Brockhampton Ordinary
Shares and Brockhampton "A" Shares which are
unconditionally allotted or issued while the Offers
remain open for acceptance (or such earlier period as
South Downs may, subject to the Code, decide), including
any Brockhampton Ordinary Shares and Brockhampton "A"
Shares which are allotted or issued as a result of the
exercise of options granted under the Brockhampton Share
Option Scheme.
In the event that the Offers become or are declared
unconditional in all respects, South Downs will write to
participants in the Brockhampton Share Option Scheme to
inform them of the effect of the Offers on their rights
under the Brockhampton Share Option Scheme and to make
appropriate proposals to them.
11. Compulsory acquisition, de-listing and cancellation of
trading
If South Downs receives acceptances under the Offers in
respect of, or otherwise acquires, 90 per cent. or more
of the Brockhampton Ordinary Shares and/or the
Brockhampton "A" Shares to which the Offers relate,
South Downs intends to exercise its rights pursuant to
the provisions of sections 428 to 430F of the Act
compulsorily to acquire the remaining Brockhampton
Ordinary Shares and/or (as the case may be) Brockhampton
"A" Shares.
Furthermore, once the Offers become or are declared
unconditional in all respects, South Downs intends to
procure that Brockhampton makes an application to the
UKLA for the cancellation of the listing of Brockhampton
Shares on the Official List and to the London Stock
Exchange for the cancellation of trading in Brockhampton
Shares. It is expected that such cancellations will
take effect no earlier than 20 business days after the
date on which the Offers become or are declared
unconditional in all respects.
12. Loan Note Alternative
The Loan Note Alternative will be made available on the
following basis:
for every #1 of cash consideration, #1 nominal of Loan Notes.
The issue of the Loan Notes will be conditional on the
Offers becoming or being declared unconditional in all
respects and valid elections having been received by
such time for at least #3 million in nominal value of
Loan Notes.
A maximum of #7.5 million in nominal value of Loan Notes
will be available to be issued under the Loan Note
Alternative and to satisfy elections for Loan Notes
following the implementation of the provisions relating
to the compulsory acquisition of Brockhampton contained
in Sections 428 to 430F of the Act. To the extent that
valid elections for Loan Notes exceed the maximum
available, such elections shall be scaled back pro rata
to the amounts respectively applied for so that the #7.5
million limit is not exceeded. The balance of the
consideration due under the Offers will be paid in cash.
The payment by South Downs in respect of principal under
the Loan Notes will be guaranteed by RBS.
The holders of the Loan Notes will be entitled to
require South Downs to repay all or any part (being #100
in nominal amount or any integral multiple of it) of
their holdings of Loan Notes at par, together with
accrued interest up to (but excluding) the date of
repayment, on the first interest payment date falling at
least six months after the date of issue of the relevant
Loan Notes and on subsequent interest payment dates.
The Loan Notes will bear interest, payable in arrear, up
to but excluding the date of payment (less any
applicable tax) every six months on 31 March and 30
September in each year, at a rate per annum, calculated
by South Downs, equal to 1 per cent. below LIBOR for six-
month sterling deposits. The first payment will be made
on the date which is the first 31 March or 30 September
to fall on or after the first date of issue of any of
the Loan Notes in respect of the period from and
including the date of issue of the Loan Notes up to but
excluding the relevant payment date. If at any time
after twelve months from the date of first issue of the
Loan Notes, the principal amount of all Loan Notes
outstanding is equal to or less than #500,000, South
Downs shall have the right, on giving to the remaining
holders of Loan Notes not less than 30 days' notice in
writing, to redeem all (but not part only) of the
outstanding Loan Notes by payment of their nominal
amount together with accrued interest (after deduction
of tax) up to but excluding the date of redemption. Any
Loan Notes not previously redeemed or purchased will be
redeemed at their principal amount, together with
accrued interest (after deduction of tax) up to but
excluding the date of redemption, on the date falling
three years and one month after the first interest
payment date.
Rothschild has advised that, based on market conditions
on 23 October 2001 (the day prior to the date of this
announcement), in its opinion, if the Loan Notes had
been in issue on that date the estimated value of the
Loan Notes would have been not less than 98.5 pence per
#1 in nominal value.
13. Financing of the Offers
Full acceptance of the Offers (assuming no valid
elections for the Loan Note Alternative are made and all
outstanding options over Brockhampton Shares are
exercised while the Offers remain open for acceptance)
would require a cash payment of approximately #72.3
million by South Downs.
Rothschild is satisfied that sufficient resources are
available for South Downs to satisfy full acceptance of
the Offers.
14. Inducement fee
RBS and Brockhampton have entered into an arrangement
under which Brockhampton has agreed to pay to RBS a fee
of #708,000 if: (i) the Independent Directors of
Brockhampton either (a) decline to recommend the Offers
to the Brockhampton Shareholders or (b) withdraw or
materially amend such recommendation and (in the case of
(a)) the Offers are not made or (in the case of (b)) the
Offers subsequently lapse or are withdrawn; or (ii) an
announcement is made by a third party which is not
acting in concert with RBS in relation to the Offers of
an intention to make an offer (whether or not the
subject of pre-conditions) for Brockhampton conforming
with or pursuant to Rules 2.4 or 2.5 of the Code or of
any other proposal to Brockhampton or the Brockhampton
Shareholders which involves, in either case, a change of
control of Brockhampton and, as a consequence, the
Offers are not made or subsequently lapse or are
withdrawn.
15. General
The Offer Document will be posted to Brockhampton
Shareholders and (for information only) to participants
in the Brockhampton Share Option Scheme as soon as
practicable. A summary of the conditions and certain
further terms of the Offers is set out in Appendix I of
this announcement. The definitions of certain
expressions used in this announcement are contained in
Appendix II.
Mr Nicholas Roadnight and Mr Neville Smith, who are
acting in concert with South Downs, hold, together with
their connected persons, an aggregate of 39,463
Brockhampton "A" Shares and, pursuant to the terms of
the Brockhampton Share Option Scheme, options over 1,472
Brockhampton Ordinary Shares and options over 28,765
Brockhampton "A" Shares. Save for these holdings and
options and for the irrevocable undertakings summarised
in paragraph 4 above, neither South Downs nor any person
acting in concert with it owns or controls any
Brockhampton Shares or any securities convertible or
exchangeable into Brockhampton Shares or any rights to
subscribe for or purchase, or options (including traded
options) in respect of, or derivatives referenced to,
any such shares ("Relevant Brockhampton Securities") nor
does any such person have any arrangement in relation to
Relevant Brockhampton Securities. For these purposes,
"arrangement" includes any indemnity or option
arrangement, any agreement or understanding, formal or
informal, of whatever nature, relating to Relevant
Brockhampton Securities which may be an inducement to
deal or refrain from dealing in such securities.
Enquiries
South Downs:
Rory Cullinan Tel: 020 7360 4900
Nicholas Roadnight Tel: 020 7360 4900
Rothschild:
Richard Noble Tel: 020 7280 5000
Ed Welsh Tel: 020 7280 5000
Brockhampton:
Martin Copp Tel: 01425 474 241
Close Brothers:
Peter Alcaraz Tel: 020 7655 3100
David Bezem Tel: 020 7655 3100
Smithfield Financial:
John Antcliffe Tel: 020 7360 4900
Rothschild, which is regulated in the United Kingdom by The
Securities and Futures Authority Limited, is acting
exclusively for RBS and South Downs and no one else in
connection with the Offers and will not be responsible to
anyone other than RBS and South Downs for providing the
protections afforded to its customers or for providing
advice in relation to the Offers.
Close Brothers, which is regulated in the United Kingdom by
The Securities and Futures Authority Limited, is acting
exclusively for Brockhampton and no one else in connection
with the Offers and will not be responsible to anyone other
than Brockhampton for providing the protections afforded to
its customers or for providing advice in relation to the
Offers.
The Offers (including the Loan Note Alternative) are not
being made, directly or indirectly, in or into, or by use of
the mails, or by any means or instrumentality (including,
without limitation, facsimile or electronic transmission,
telex and telephone) of interstate or foreign commerce, or
of any facility of a national securities exchange of, the
USA, Canada, Australia or Japan and the Offers cannot be
accepted by any such use, means, instrumentality or facility
or from within the USA, Canada, Australia or Japan.
The Loan Notes have not been, and will not be, registered
under the Securities Act nor under the securities laws of
any state of the USA nor the applicable securities laws of
Canada, Australia or Japan. The Loan Notes may not be
offered, sold or delivered (directly or indirectly) in or
into the USA, Canada, Australia or Japan.
MORE TO FOLLOW
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