Inchcape - Shareholder Letter

Inchcape PLC
5 March 2001

Inchcape - Shareholder Letter

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Inchcape plc
33 Cavendish Square
London W1G 0PW

Directors:
Sir John Egan (Chairman)*
Peter Johnson (Chief Executive)
Alan Ferguson (Finance Director)
Trevor Taylor*
Simon Robertson*
Tony Alexander*
Dr Raymond Ch'ien*
Hugh Norton*

*Non-executive

5 March 2001

To the holders of ordinary shares and, for information only, to holders of
share options

Dear Shareholder

On 15 February I received an open letter from the Chairman of Guinness Peat
Group plc ('GPG') making a number of suggestions in relation to the management
and strategy of Inchcape plc ('Inchcape' or 'the Group'). In essence two
points are made. Firstly, that we should return £1 per share to shareholders
immediately and secondly, that Inchcape should conduct a break-up of the
Group.

I am writing to you today to emphasise why the Board considers GPG's
suggestions are inappropriate and to explain the principal elements of our
strategy which, we believe, will deliver greater value for the shareholders of
Inchcape than a break-up of the Group.

Returning value to shareholders

Your Board has already demonstrated an active approach to the question of
returning surplus capital to shareholders as evidenced by the special dividend
of £529.3m paid in early July 1999, following the disposal of our non-motors
businesses. The motors disposal programme that we have undertaken since then
has further transformed the financial position of the Group with pro forma net
debt falling from £195.9m as at June 1999 to £69.1m at 2000 year end. Since
the year end we have announced the disposals of Mazda France, an import and
distribution business, and IRB, a Brunei financial services subsidiary, which
would have had the effect of making the Group cash positive at the year end.
We expect to make further disposals in due course in areas that do not form
part of our growth strategy and where we see an opportunity to realise further
value in this way.

The Board has concluded that, in the light of this progress on its disposal
programme, it would expect to return up to £45.0m (equivalent to approximately
50p per share) to shareholders in coming months as conditions allow. If
available funds arising from either operational cashflow or disposals are not
applied for investment purposes, the Board will make additional returns of
capital to shareholders. The Board already has powers to purchase up to 10% of
Inchcape's capital and we intend to extend that authority to 14.99% at the
forthcoming Annual General Meeting.

The permanent repatriation of funds from Holland, to which the Chairman of GPG
refers in his letter, was an act of prudent treasury management, which had no
bearing on the overall net cash position of the Group. To suggest that this
should be the basis for an immediate return of capital of £1 per share is,
therefore, simplistic and inappropriate.

Operating structure of the Group

Inchcape today is in a strong position in the global automotive retail and
distribution sector, with a range of high quality, long-standing relationships
with a number of leading manufacturers across its six core markets. As the
automotive industry operates on a global basis, it is seeking partners of
substance to provide solutions to the marketing and sales of its products
across a range of markets. Such is the importance of these relationships that
any move that destabilises them, such as a forced break-up, would, in the
Board's view, destroy significant shareholder value.

Ferrari (the Maranello franchise) is a prime example of the opportunity to
leverage a high quality, long standing relationship across a range of markets
to grow value over time. As a result of our performance for Ferrari in the UK
we are now their distributor in Belgium and are also developing this
relationship in the Middle East. Additionally, we were asked to add the
Maserati franchise to our highly successful business.

Contrary to the suggestion made within the GPG letter, the sale of our UK
Toyota franchise back to the manufacturer was a well planned and executed
strategy to provide value to shareholders. We successfully anticipated the
increasing trend for manufacturers to capture a greater share of the value
chain in certain very large markets, such as the UK. Our agreement with Toyota
to take back the UK franchise was originally signed in 1989, with a gradual
transfer of ownership through to 2007. During 2000 we agreed with Toyota that
an acceleration of this process was in both groups' interests and our
remaining 49% interest in Toyota GB was sold for £42.1m(net asset value
£28.1m).

In import and distribution the opportunity for Inchcape now lies in those
markets which manufacturers do not consider of sufficient global importance to
merit their own operations, but where they nevertheless look for long-term
relationships based on experience and mutual trust to promote their business,
especially in markets where distribution is integrated with retail.

Strategy for our UK business

In the year ended 31 December 2000 we reported a fall in UK operating profits
from £25.0m to £0.7m. The reductions were primarily due to residual value
write-downs depressing our leasing business (£10.5m), an increased investment
in Autobytel (£6.5m), and a deterioration in our pre-delivery inspection
business (£3.2m). The underlying operating profit in the UK is, therefore,
substantially higher, showing the continued attractiveness and importance of
this market to the Group. Operating profits will rebound in the UK business in
2001.

The UK market is extremely competitive and faces structural change as
manufacturers further consolidate their retail networks and the existing Block
Exemption legislation changes in 2002. It is our view that such changes will
neither detract from the inherent brand strength of specialist manufacturers,
nor alter the high levels of customer expectation. Our specialist dealerships
deliver high customer satisfaction and produce better financial returns than
volume dealerships.

We have embarked, therefore, on a significant expansion of our specialist
retail businesses focused on our key manufacturer partners: Toyota, Lexus, the
Premier Automotive Group (Jaguar, Land Rover, Volvo) and BMW. We will also
leverage off our existing scale geographic clusters and we plan to double the
size of our specialist business. Until the resolution of the Block Exemption
debate, we will not be investing further in volume franchises or Centralised
Market Areas ('CMAs') referred to in the GPG letter, which have yet to show
any significant margin enhancement for the retailer.

Our investment of £12.3m in the development of Autobytel has created the UK's
leading automotive internet brand with 5 million unique visitors since launch.
Autobytel now transacts directly with its customers and is supported by our
existing UK infrastructure. Investment levels in Autobytel will be much
reduced in 2001.

A key component supporting the development of new channels and products is the
provision of business services in areas of sourcing, logistics, vehicle
management and refurbishment. With the acquisition of 49% of Eurofleet, the
Group is well placed to build a significant presence in this growth segment of
the market, particularly if Block Exemption changes encourage new entrants
into car retailing. We intend to invest further in this area over the next two
years and anticipate it will make a major contribution to our UK profits. 

Singapore

It is a matter of public record that Guinness Peat Group (Australia) Pty
Limited has made an unsolicited approach to the Board of Inchcape Motors Ltd
('IML'), our publicly listed Singapore subsidiary. Its proposed offer was
subject to a number of conditions, including acceptance by the Board of
Inchcape. The Board of Inchcape has no intention of accepting an offer in
relation to one of its key subsidiaries which it considers wholly inadequate
and which fails to recognise the strategic value of the IML businesses to
Inchcape and their importance to the overall Toyota relationship.

Singapore is one of our six core markets where we have created a strong market
position with a market share of 21.5%. It is also one of the cornerstones of
our global relationship with Toyota, the single most important and highly
valued manufacturer relationship of the Group, which we have no intention of
disrupting.

Following the recently announced sale of IRB, the Board will be discussing
with the IML Board the most appropriate strategy and structure for this
business going forward.

Central costs

Central costs were £16.3m in 2000, down from £17.8m in 1999. Costs for 2000
included a one-off charge of £3.0m relating to the research and development of
new products and alternative channels to market. 1999 included £3.5m one-off
costs arising from the non-motors divestment programme.

We have ensured that costs incurred in managing the Group do add value and we
will keep the organisation as lean as possible. As our business becomes more
focused, we will continue to take cost out.

It is also worth noting that the significant disposal programme, which put
your Company in such a strong financial position, has been driven by Head
Office staff.

Results for 2000

We have today issued our results for the year ended 31 December 2000, which
are in excess of market expectations. The key messages are:

- Continuing operating profit up 3.9% at £83.5m (1999 - £80.4m). 

- Strong performance in key overseas markets, with operating profits from Asia
  up 65.2%. Non-UK operations account for 67.2% of continuing turnover.

- UK Retail operating profits up 4.4% before Rover restructuring costs;       
  overall UK performance impacted by market turbulence, continued investment  
  in E-commerce business and other non-recurring factors.

- Dividend for the year 22.0p up 4.8%.

- Prospects - operating performance in the UK will rebound in the current year
  and the outlook for our other markets remains good. The Group's interest    
  charge will also be lower, reflecting our much lower debt position (before  
  the effect of any return of capital to shareholders).

Conclusion

Your Board is firmly of the view that shareholders as a whole will enjoy
greater value through the implementation of its strategy, than through a
complex and lengthy break-up of the Group with substantial execution risk. Our
strategy comprises the following elements:

- Development of our existing strong relationships with core partners to      
  ensure the generation of sustainable and long-term cash flows. Any move that
  damages these relationships will, in your Board's view, destroy significant 
  value for shareholders.

- Focus on those key geographic markets where we have scale, the capacity to  
  grow earnings and where we can add value for our manufacturer partners.

- Leveraging our international strength, broad business infrastructure and    
  strong manufacturer relationships thereby taking advantage of opportunities 
  as they arise in the UK market.

- Divesting non-core activities which lack scale or where we cannot add value 
  as an independent distributor.

- Maintenance of an effective capital structure where surplus capital is      
  returned to shareholders on an orderly basis.

As we have stated, we see many exciting opportunities for investment going
forward and we will continue to apply demanding hurdle rates for return on
future investments.

The Board, which has received financial advice from UBS Warburg Ltd. ('UBS
Warburg'), believes that GPG's suggestions are inappropriate in the context of
the Board's strategy for the future development of the Company. In providing
its advice, UBS Warburg has relied on the commercial assessments of the
Directors of Inchcape.

In my short time with the Company I have been impressed with the way the
management has created a focused international automotive group, with
excellent manufacturer relationships, a quality infrastructure and an
extremely strong balance sheet.

Your Board will ensure that in pursuing the planned strategic initiatives we
adopt a shareholder value driven approach, balancing short-term cash
considerations with long-term investment opportunities.

Yours sincerely

Sir John Egan
Chairman


UBS Warburg, which is regulated in the United Kingdom by The Securities and
Futures Authority Limited, is acting for Inchcape plc and no one else in
connection with the financial advice provided and will not be responsible to
anyone other than Inchcape plc for providing the protections afforded to
customers of UBS Warburg, nor for providing advice in relation to the response
to the letter sent by GPG.

UBS Warburg has given and not withdrawn its written consent to the issue of
this document with the inclusion of the references to its name in the form and
context in which it appears.