Acquisition, Regulatory Approval, Notice of GM
4 November 2015
THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE UNITED STATES OF AMERICA, CANADA, JAPAN, THE REPUBLIC OF SOUTH AFRICA, AUSTRALIA OR ANY OTHER JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION MAY CONTRAVENE LOCAL SECURITIES LAWS OR REGULATIONS.
Gresham House plc (AIM: GHE)
Proposed Acquisition of Aitchesse Limited, Admission of the Enlarged Share Capital and Shareholder Warrants to trading on AIM, approval of Incentive Arrangements and Notice of General Meeting
Gresham House plc ("Gresham House" or "the Company"), the specialist asset manager focused on alternative investment strategies and illiquid asset classes, today announces that its wholly owned subsidiary, Gresham House Holdings Limited ("GHHL"), has agreed to acquire 100% of Aitchesse Limited ("Aitchesse"), one of the leading managers of UK commercial forestry, for a maximum consideration of £7.7m. The acquisition is a significant milestone for Gresham House and marks the launch of the Gresham House Real Assets division.
Highlights:
· Proposed acquisition of one of the leading asset managers of UK commercial forestry for a maximum consideration of £7.7m funded from a combination of cash, loan notes and Gresham House shares.
- Aitchesse has assets under management of circa £193m across a mix of managed accounts on behalf of endowments, family offices and private individuals.
· Transaction
- GHHL will acquire 100% of Aitchesse for a maximum consideration of £7.7m. On completion, the Company will pay approximately £4.0m made up of £1.8m of cash, £0.7m of short term loan notes and £1.5m in Gresham House shares at 298.5p, based on last reported NAV at 30 June 2015.
- The remaining £3.7m, made up of up to £1.5m of cash and £2.2m of shares, will be paid based on Aitchesse successfully delivering against performance targets for the period 1 July 2015 to 28 February 2018.
· The Acquisition constitutes a reverse takeover under the AIM Rules for Companies and is conditional on Gresham House Shareholders' approval which will be sought at a General Meeting to be held at 2:30 p.m. on 20 November 2015.
· On completion of the Acquisition, Gresham House will become a trading company and consequently it will cease to be subject to those AIM Rules that relate to Investing Companies.
· Gresham House also is seeking Shareholder approval to implement a long term incentive plan to align the interests of Shareholders and management in the long-term success of the Company.
Other developments:
· The Company has received notification from the FCA that it is minded to authorise Gresham House Asset Management, subject to completion of certain administrative steps that are within the control of the Company and that are expected to be completed by the end of November 2015.
· The Company is currently in negotiation with two banks regarding a new bank facility and has received a credit committee approved letter of offer from both. The proposal offers are for bank facilities of approximately £7m with an interest rate of approximately 5.25 per cent. per annum. Whilst there is no guarantee that a facility will be entered into, the Company intends to use the loan facility to (i) repay the loan notes to be issued to the sellers of Aitchesse; (ii) replace the Co-operative Bank facility; and (iii) deploy the balance of the loan to fund future investment opportunities.
Anthony Dalwood, CEO of Gresham House said:
"Following the recent award of our first advisory mandate in our Strategic Equity Division for Gresham House Strategic plc, the acquisition of Aitchesse will generate the first business platform in our Real Assets Division.
"This deal represents another significant achievement for Gresham House as we continue to develop organically and through acquisitions. This value enhancing acquisition supports our objective of increasing shareholder value through building AUM to create long term sustainable profits."
Rupert Robinson, Managing Director of Gresham House Asset Management said:
"I am excited about working with Aitchesse to establish new funds and co-investment opportunities. We will also invest in Aitchesse's infrastructure and asset management resources. Our aim is to deliver attractive returns for our investors and make this asset class more accessible to institutional, family office and high-net-worth investors.
"The attraction of investing in trees is that they grow irrespective of whether financial markets are rising or falling. They grow not only in volume but also become more valuable as they mature. The IPD UK Annual Forestry index has outperformed both equities and bonds over the last 20 years.
"Forestry offers investors a unique combination of long term superior risk adjusted returns and the opportunity for individuals to pass on wealth from one generation to another free of inheritance tax."
Digby Guy, Founder and Chairman of Aitchesse said:
"When I founded Aitchesse in 2002 one of my objectives was to develop a client proposition that would be attractive to long term investors because I felt strongly that forestry was such a good fit for institutions and families. Now with an experienced team and proven track record we are ready to take the next step. We believe strongly in the long term investment opportunity in UK forestry and in Gresham House we have a partner who will enable us to capitalise on the team's expertise in forestry management while increasing awareness and accessibility to this attractive asset class."
The Gresham House Real Assets Division aims to offer investors access to investment strategies that have distinct return drivers and are backed by physical assets. Strategies are typically characterised by a low correlation with traditional asset classes and a positive link to inflation.
Forestry's superior investment returns are generated from biological growth, long term increases in land and timber prices, and through exploiting other development opportunities such as wind farms, hydroelectric power and telecoms infrastructure. The asset class also benefits from significant tax advantages:
§ All income from UK timber sales is free of income and corporation tax
§ Growing timber is exempt from capital gains tax
§ After two years of ownership commercial forestry qualifies for 100% business property relief making it IHT exempt
The Acquisition constitutes a reverse takeover under Rule 14 of the AIM Rules for Companies and is therefore conditional, inter alia, on approval by Shareholders which will be sought at a general meeting of the Company to be held on 20 November 2015 at 2.30 p.m. at the offices of Travers Smith LLP, 10 Snow Hill, London EC1A 2AL, notice of which will be set out at the end of the Admission Document which will be posted to Shareholders and Warrantholders today and will be available on the Company's website: www.greshamhouse.com.
Enquiries:
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Gresham House plc |
0203 837 6278 |
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Tony Dalwood, Chief Executive Officer |
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Rupert Robinson, MD Gresham House Asset Management |
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Montfort Communications, PR Adviser |
greshamhouse@montfort.london |
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Gay Collins |
07798 626282 |
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Rory King |
07917 086227 |
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Liberum Capital Limited, Nomad and Broker |
020 3100 2000 |
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Neil Elliot |
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Jill Li |
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This announcement is for information purposes only and is not intended to and does not constitute or form part of an offer to sell or subscribe for or any invitation to purchase or subscribe for any securities or the solicitation of an offer to buy any securities, pursuant to the Proposals or otherwise. The Proposals will be implemented solely by means of the Admission Document which will contain the full terms and conditions of the Proposals, including details of how to vote in respect of the Resolutions.
The distribution of this announcement in or into jurisdictions other than the United Kingdom may be restricted by law and therefore any persons who are subject to the laws of any jurisdiction other than the United Kingdom should inform themselves about, and observe, such restrictions. Any failure to comply with the applicable restrictions may constitute a violation of the securities laws of any such jurisdiction. Subject to certain exceptions, this announcement is not for release, publication or distribution, directly or indirectly, in or into the United States, Australia, Canada, the Republic of South Africa, Japan or any jurisdiction where to do so might constitute a violation of local securities laws or regulations.
Liberum Capital Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting as nominated adviser and broker to Gresham House plc and is acting for no-one else in connection with the contents of this announcement, and will not be responsible to anyone other than Gresham House plc for providing the protections afforded to clients of Liberum Capital Limited nor for providing advice in connection with the contents of this announcement or any other matter referred to herein. Liberum Capital Limited is not responsible for the contents of this announcement. This does not exclude or limit the responsibilities, if any, which Liberum Capital Limited may have under the Financial Services and Markets Act 2000 or the regulatory regime established thereunder.
Forward-looking Statements
This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology.
These forward-looking statements include matters that are not facts. They appear in a number of places throughout this announcement and include statements regarding the Directors' intentions, beliefs or current expectations concerning, amongst other things, the Enlarged Group's results of operations, financial condition, liquidity, prospects, growth, strategies and the industries in which the Enlarged Group operates. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation: ability to find appropriate investments in which to invest and to realise investments held by the Enlarged Group; conditions in the public markets; the market position of the Enlarged Group; the earnings, financial position, cash flows, return on capital and operating margins of the Enlarged Group; the anticipated investments and capital expenditures of the Enlarged Group; changing business or other market conditions; and general economic conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described herein. Forward-looking statements contained in this announcement based on past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Subject to any requirement under the Prospectus Rules, the Disclosure and Transparency Rules, the AIM Rules for Companies or other applicable legislation or regulation, neither the Company nor Liberum undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should not place undue reliance on forward-looking statements, which speak only as of the date of this announcement.
Proposed Acquisition of Aitchesse Limited, Admission of the Enlarged Share Capital and Shareholder Warrants to trading on AIM, approval of Incentive Arrangements and Notice of General Meeting
1. Introduction
The Company is pleased to announce that Gresham House Holdings Limited (a wholly owned subsidiary of the Company) had agreed to acquire the entire issued and to be issued share capital of Aitchesse, an asset management company based in Scotland that focuses on managing forestry and timber assets.
The consideration for the acquisition comprises initial consideration of £4.02 million and, subject to achieving an EBITDA target, up to £3.47 million of additional consideration. The initial consideration is to be satisfied by the payment of £1.84 million in cash (of which £0.37 million shall be used to repay to Aitchesse amounts owing by certain of the Sellers), £0.67 million by the issue of the Short Term Loan Notes to the Sellers and £1.5 million by the issue of 507,522 Ordinary Shares (based on a price of 298.5p per Ordinary Share (being the NAV at 30 June 2015)). The initial cash consideration will be satisfied out of the Group's existing cash resources. Subject to achieving an EBITDA target during the period to 28 February 2018, the additional consideration is to be satisfied by the payment of up to £1.50 million in cash and up to £2.20 million by the issue of up to 736,074 Ordinary Shares to the Sellers (based on a price of 298.5p per Ordinary Share).
The Acquisition constitutes a reverse takeover under the AIM Rules for Companies and is therefore conditional, inter alia, upon the approval of Gresham House Shareholders at the General Meeting of the Company to be held at Travers Smith LLP, 10 Snow Hill, London EC1A 2AL at 2.30 p.m. on 20 November 2015 and Admission taking place.
The Acquisition, if completed, will result in Gresham House becoming a trading company instead of an investing company and consequently it will cease to be subject to those AIM Rules that relate to Investing Companies.
As initially highlighted in the admission document issued by the Company on 8 October 2014, the Company is now also seeking the approval of Gresham House Shareholders at the General Meeting to implement a long term incentive plan and a bonus share matching plan for its directors and employees. The purpose of these plans is to align the interests of Shareholders and management in the long-term success of the Company and to attract and retain key talent for execution of the Company's strategy. Further details of the Incentive Arrangements are set out in section 6 below.
2. Background on Gresham House
Gresham House was incorporated in 1857 and from 1950 to 2014 its Ordinary Shares were listed on the Official List. From 1966 until 2014, Gresham House operated as an Authorised Investment Trust.
On 8 October 2014, the Company announced the final terms of a new strategic direction including the appointment of certain new directors namely, Anthony Townsend, Tony Dalwood, Michael Phillips, Peter Moon and Duncan Abbot and the retirement of Antony Ebel, Brian Hallett and John Lorimer as directors of the Company, a placing to raise gross proceeds of £11.46 million, the issue of the Warrants and the adoption of a new investing policy. In order to facilitate the placing and having regard to the likely future size of the Company, the prospective investor base and the proposed new investing policy, the Company cancelled its listing of Ordinary Shares on the premium segment of the Official List, removed such Ordinary Shares from trading on the Main Market, and successfully applied for the admission of the Ordinary Shares and the Shareholder Warrants to trading on AIM as an investing company on 1 December 2014.
Since 1 December 2014, the Directors have been pursuing a strategy to:
· develop the Company as a quoted platform principally for investment in, and the investment management of, relatively differentiated, specialist or illiquid assets in order to generate superior risk adjusted returns for Shareholders of the Company over the longer term;
· develop an asset management business organically or through one or more acquisitions; and
· manage and develop an appropriate strategy for each of the Company's legacy assets (including its property assets) so as to maximise the value of the assets over the medium term, in order to recycle the capital into areas the Directors believe will generate superior returns.
In continuance of the strategy described above, the Company has begun to focus on investment management of relatively differentiated, specialist or illiquid assets, through the asset management mandate with Gresham House Strategic (described below), and also is seeking out new investment fund opportunities.
In line with the Directors' strategy to develop the Company as a quoted platform for investment in, and the investment management of, relatively differentiated, specialist or illiquid assets, the Company established its strategic equity investment team. The team is led by Graham Bird and Tony Dalwood, and has a mandate to target superior long-term investment returns through applying private equity techniques to investing in public markets. On 21 July 2015, GHAM (a subsidiary of Gresham House) entered into its first asset management mandate with SPARK Ventures plc (now called Gresham House Strategic plc) to be led by the strategic equity investment team and, at the same time, Gresham House agreed to invest £5 million in SPARK and swapped its entire 10.6 per cent. shareholding in SpaceandPeople plc for new shares in SPARK. The appointment and associated fundraising by SPARK was approved by its shareholders on 6 August 2015. On 28 October 2015, SPARK's name was changed from SPARK Ventures plc to Gresham House Strategic plc.
The Company is currently in the process of applying for GHAM, to be authorised by the Financial Conduct Authority so that in the future, GHAM can act as the investment management vehicle for the Group's operations. The Company has received notification from the FCA that it is minded to authorise GHAM subject to completion of certain administrative steps that are within the control of the Company and that are expected to be completed by the end of November 2015.
Since 1 December 2014, the Directors have developed a strategy for each of the Group's material legacy assets. In particular:
· on 21 July 2015, the Company swapped its entire 10.6 per cent. shareholding in SpaceandPeople plc for 151,250 new shares in Gresham House Strategic;
· on 22 September 2015, the sale of 25.8 acres gross of the site at Newton-le-Willows to Persimmon was completed in accordance with the sale and purchase contract that was exchanged in April 2014, for a total consideration of £7.25 million (excluding overage payments). The Directors are now considering the sale of the remaining five acres of the site; and
· the property at Speke (as described in further detail below) is now virtually fully let and the Directors are now working with James Lang LaSalle to sell the property at Speke.
In line with its strategy to develop an asset management business, the Company announces that GHHL had agreed to acquire the entire issued share capital of Aitchesse, an asset management business based in Scotland that focuses on managing forestry and timber assets.
3. Strategy of the Enlarged Group
The Acquisition, if completed, will result in Gresham House being an operating company instead of an investing company. The Company will cease to be subject to the AIM Rules that relate to Investing Companies and therefore will no longer be required to have an investing policy. Instead, the Directors intend to pursue a strategy to develop an asset management business focusing on the management of relatively differentiated, specialist or illiquid assets. It is expected that the strategy of the Enlarged Group will initially focus on strategic equity, real asset management and the continued realisation of the Group's legacy assets:
Strategic equity
The strategic public equity investment strategy includes applying a private equity approach to making influential "block" stake investments in smaller quoted companies. Central to this strategy is constructive engagement with management and shareholders of investee companies in support of a clear equity value creation plan, which combined with the adoption of private equity techniques, including an investment committee and advisory group, aims for a significant de-risking of an investment.
The Directors believe the private equity approach described above can lead to superior investment returns as it targets inefficiencies in certain segments of the public markets. There are over 1,200 companies in the FTSE Small Cap index and on AIM: the Directors believe that these companies typically have limited research coverage and may often have limited access to growth capital often leading to valuation opportunities being overlooked by the wider market.
The Company has created an investment team, led by Graham Bird and Tony Dalwood, to focus on these opportunities. In line with its plans for this core element of the business, on 21 July 2015 GHAM was awarded its first investment advisory mandate to manage Gresham House Strategic using the strategic equity investment strategy. As at 2 November 2015 (being the latest available weekly net asset value update released by Gresham House Strategic prior to the publication of this announcement), Gresham House Strategic had assets under management of approximately £36.6 million. As at 2 November 2015, Gresham House Strategic held four investments which together represent 53.7 per cent. of AUM. The largest investment is its holding in AIM-listed IMImobile plc, which was valued at approximately £15.6 million as at 2 November 2015.
Gresham House Strategic will focus mainly on cash generative companies where there is scope through management engagement to identify opportunities to implement either strategic, management or operational changes to create shareholder value in the business and to generate improved equity returns.
Under the Gresham House Strategic Investment Management Agreement, GHAM has been appointed as investment adviser to Gresham House Strategic, for which GHAM receives a fee of 0.125 per cent. per month of the net asset value of the Gresham House Strategic portfolio. In addition, GHAM is entitled to a performance fee of 15 per cent. of the increase in net asset value per share of Gresham House Strategic over a 7 per cent. hurdle. Sapia Partners LLP has agreed to act as investment manager of Gresham House Strategic until GHAM has received its FCA authorisation (which is expected to happen by the end of November 2015), at which point GHAM will become the investment manager of Gresham House Strategic.
As part of the transaction, the Company made an investment of £5 million in Gresham House Strategic and swapped its entire 10.6 per cent. shareholding in SpaceandPeople plc for new shares in Gresham House Strategic. The Company now holds 19.2 per cent. of Gresham House Strategic's issued share capital.
The Company also plans to launch a limited partnership for those investors who prefer to invest alongside Gresham House Strategic in a limited partnership vehicle. The Directors believe there to be a demand for this from ultra-highnet- worth individuals, family offices and smaller institutional investors. The Company intends to grow its strategic equity division and will continue to seek out new mandates to achieve this goal.
Real asset management business
The Directors believe that there is an increasing demand for long-term superior returns from illiquid and alternative asset management strategies. Institutions, family offices and ultra-high-net-worth individuals are increasing allocation to alternative strategies and private equity. Real assets can offer attractive benefits to investors, including superior investment returns which are typically uncorrelated to equities, funds and UK commercial property. The increase in asset allocation towards this area has been significant over the last 20 years and is ongoing, reflected by the fact that pension funds, who had a zero per cent. allocation on average to "alternatives" (ex-property) in 1995, are now allocating approximately 9 per cent. of their assets under management to this asset class (Source: UBS Pension Fund Indicative 2015. "Alternatives" are defined as non-real estate including hedge funds, private equity, real assets and infrastructure).
The Company intends to build on its specialist asset management group which will incorporate various illiquid or differentiated asset strategies. The Acquisition forms part of this plan. Aitchesse (described more fully below) is a specialist asset manager of forests and timber. It has a strong financial record and the Directors believe the business to be a successful model on which it can build. The specialist knowledge of the management team at Aitchesse and the experience of the Company will be a successful combination: Aitchesse will be able to provide the expert forest management skills required to manage the commercial forest element of the assets. The Company's experience will assist in the growth and institutionalisation of Aitchesse's business and the Enlarged Group will use its network of contacts to introduce potential investors in forestry assets to Aitchesse.
The Company will also seek to grow this business unit organically and, should further opportunities arise, through the acquisition of differentiated specialist asset managers. Specialisms may include infrastructure, renewables, forestry and real estate, amongst others. The common theme tying the specialisms together is that they involve the acquisition of tangible assets and should create long-term, intrinsic value growth. The team is focused on creating shareholder value through assets under management and resultant earnings growth, including carried interest and performance fees from third party assets under management.
Legacy assets
The Company has been pursuing an orderly realisation of the Group's assets and property to redeploy the sale proceeds in pursuit of its plans for the real asset division and strategic equity division (as described above):
On 29 April 2014, contracts were exchanged with Persimmon for the sale of 25.8 acres gross of the site at Newton-le-Willows to Persimmon. On 22 September 2015, the sale was completed. The Company is currently considering its options for the sale of the remaining 5 acres of the site.
On 7 August 2015, the Company swapped its entire 10.6 per cent. shareholding in SpaceandPeople plc (a public company whose shares are traded on AIM) for new shares in Gresham House Strategic.
The property at Speke (as described in further detail below) is now virtually fully let. The Company is currently considering the sale of the property and has instructed Jones Lang La Salle to advise.
The Company will continue to appraise its assets and any opportunities for sale or realisation in furtherance of its development (as was the case with the share swap of its SpaceandPeople holding). Specific strategies for each of the Company's existing property and assets is discussed further in section 5 below.
The proceeds from the sale of legacy assets will be utilised by the Enlarged Group to implement its strategy of building a specialist asset management business, through additional acquisitions of asset management businesses, through the seeding of new funds which the Company may wish to promote or the recruitment of talented individuals with asset management experience.
In the longer term, the strategy of the Enlarged Group will also include:
Niche strategies
The Company is considering developing an investment strategy which focuses on areas that are likely to be less scaleable than those in Gresham House's other divisions. Despite their lack of scalability, these investments are capable of attractive returns because they come with other advantages such as tax benefits. Examples of niche investments which the Company may consider include venture capital or tax efficient strategies. In addition, the Company may look at engaging with emerging brands or at investing alongside private equity firms, pooling its assets with theirs so as to make investments collectively.
Distribution and marketing platform
The Company is aiming to develop its relationships with distribution specialists. The Company intends to work with specialist distribution teams who will introduce potential investors to the Group's funds and asset management services. The Directors would like to develop these connections and work with the specialists to effectively assess what investors are looking for and develop appropriate products.
Co-Investment
The Company is developing a platform for structured discretionary co-investment and intends to launch various vehicle structures to suit investment client requirements. The Company believes there to be significant demand from family offices for managed, structured co-investment with opportunities presented on a "deal by deal" basis. This would mean such investors would gain exposure to investment opportunities that a fund identifies and can invest alongside the fund.
In order to fund the strategy described above, the Company may issue further Ordinary Shares to investors in the future for the purpose of raising money or as consideration for the acquisition of an asset management business. Save in relation to the Acquisition and the Incentive Arrangements, at present there are no firm intentions to issue any Ordinary Shares. The Company is actively considering other acquisition opportunities.
4. Aitchesse
Background on Aitchesse
Aitchesse was founded in Scotland in 2002 by its current chairman, Digby Guy. Its primary activity is that of an asset manager focusing on forestry and timber assets based predominantly in Scotland. Aitchesse's experience in forestry operations and marketing has enabled it to build up assets under management worth £192.7 million as at 30 June 2015 (based on the latest available (or agreed) valuations for its clients' portfolios). As well as managing forestry assets, Aitchesse also advises clients (including clients with assets under management) on the sale and purchase of forest assets. Aitchesse currently employs 11 people.
The forestry industry
The total area of all types of woodland in the UK is estimated to be 3.15 million hectares as at 31 March 2015. Of the total woodland area 72 per cent. is owned by the private sector and 28 per cent. by the state. (Source: Forestry Commission Report: Forestry Statistics and Forestry Facts and Figures 2015 (published 24 September 2015).)
Of the total 3.15 million hectares, 1.6 million hectares may be deemed to be "commercial" forest (with 870,000 hectares being privately owned and 740,000 hectares owned by the state). Commercial forests are predominately coniferous plantation forests. (Source: Forestry Commission Report: Forestry Statistics and Forestry Facts and Figures 2015 (published 24 September 2015).)
The private sector is fragmented, with a large number of small investors and only a relatively small number of larger investors. Investors can be broken down into four distinct types: private individuals, family offices, endowments and pension funds.
The annual traded market of commercial forests in the UK is estimated to be £100 million, predominantly in the private sector. It is estimated that 5 per cent. of the total monetary value of the private sector is traded annually. (Source: Information provided by Aitchesse.)
Investing in commercial UK forestry
Real assets in the form of timberland, can offer many attractive benefits to investors, including superior investment returns compared to equities, funds and UK commercial property, portfolio diversification from traditional asset classes, an attractive risk/return profile, substantial cash flow contribution and tax benefits. Given its renewable nature and carbon sequestration, the opportunity to provide ecological services (water and landscape improvements) and to improve habitats and biodiversity, woodland investment is attractive to those investors who place socially responsible investment and climate change mitigation high on their agenda. Investors may also benefit from the generation of income from additional ground rent opportunities.
UK commercial forestry has a long term track record of producing strong performance both in absolute terms and relative to more mainstream asset classes such as equities, bonds and UK commercial real estate.
Over the past 10 years to 31 December 2014, UK forestry has shown an annualised return of +18.8 per cent., with no years of negative returns. This return compares favourably with annualised returns from UK equities of +6.8 per cent., UK bonds +6.3 per cent., and Commercial UK Property +6.2 per cent.
Over the longer term, UK forestry has produced an annualised return over the 22 years to 31 December 2014 of +8.9 per cent. versus UK equities +7.4 per cent., UK bonds +7.3 per cent. and Commercial UK Property +9.3 per cent. (Source: IPD UK Annual Forestry Index.)
Multiple drivers of forestry returns
Biological growth: Commercial forests in the UK are managed so as to achieve a sustainable production of timber over time, with harvested areas being replanted (this being a legal requirement) rather than trees mined as a finite resource. The rate of sustainable timber production is dependent on a number of factors such as site attributes (altitude and exposure, soil types, moisture and nutrient regimes), species choice and management regimes, but the rate can be modelled and is measurable.
The organic growth of a forestry crop is normally expressed as a figure in metres cubed (m3) per hectare planted. This represents the number of cubic metres of added timber per hectare per year on average through the lifecycle of the crop. Once this figure (called the 'Yield Class') is established, it can be used to forecast when and how much timber can be harvested from any area of a forest, and it can also be used to estimate the contribution of organic growth to forecast returns.
There is long term research and data produced on Sitka (the type of timber which Aitchesse manages) spruce growth rates in the UK. In summary, the higher the Yield Class the greater the volume of timber produced over time. As trees grow in size, they not only grow in volume, they also turn into higher value products such as sawn wood. Biological growth of timber provides investors with a unique source of return, as growth occurs regardless of macro-economic conditions or financial market performance.
UK supply and demand for timber: The key factor underpinning any commercial forestry investment (and therefore capital value of the forest assets) is the standing timber value. This is because timber is the main (but not only) forest output. Over the medium term, the Directors believe that there will be a strengthening demand from the housing sector and other end users (e.g. panel products, biomass) and in the long term (15-30 years) the market share occupied by home grown timber is set to fall because of reducing supply-side availability. The Directors believe that both factors should be supportive of timber prices in real terms.
UK demand for forest ownership: Forest ownership demand is driven by a number of factors, including economic returns from timber as described above but also from the tax advantages of forest ownership, by the need for capital protection and by, in some cases, lifestyle choice. On the supply-side, forestry is not a finite resource in the UK, but creating new forests is a slow and complex process and land for planting is difficult to source. Therefore, demand for established forests currently outstrips availability, driving strong property prices. The ability to increase the supply of timberland can only happen over long investment cycles, typically 40 years.
Higher and better use (HBU): As well as the management of tree crops, forest asset management includes managing the landholding holistically, including pursuing opportunities for HBU. These include the development of renewable energy projects (for example, wind and small scale hydro) which in many cases are ideally suited to forested land, and the development of residential development opportunities. Other HBU activities contributing to returns may include mobile phone communications masts, wayleave compensation payments, coal mines, and activity outdoor centres.
Global trade: Timber is an internationally traded commodity both in its raw form and as an end product. The UK is a net importer of wood and wood products. Recent years have seen strong demand from North America (for end products) and developing economies like China and India for both end products and raw material. Whilst the UK is a net importer, export sales can yield significant returns. Biomass, especially wood pellets, is an increasingly important globally traded commodity and the rapidly expanding biomass market continues to underpin prices of the lower value small round wood. Whilst there are fluctuations in supply and demand, the UK currently imports 50 per cent. of its processed timber requirements.
Exchange rates: Exchange rates can influence levels of imports and the price of domestic timber. Owing to the internally traded nature of forest products outlined above, fluctuations in exchange rates have a direct impact on trade and therefore short term returns. Forestry activity, however, can be influenced, depending on cash flow requirements, to capitalise on movements in prices driven by exchange rates by slowing or stopping harvesting when market conditions are poor and accelerating them when they are advantageous.
Active management: Forestry management is key to maximising the returns from all the areas listed above. Site selection and careful appraisal is key to a good acquisition process. Correct management delivers well established crops that in turn deliver the desired end products, and the returns on these products are maximised through mechanisms negotiated with end users designed to consistently deliver prices in the upper quartile.
Timber prices
Timber prices (distinct from property value) have increased by 10.9 per cent. annualised over the past ten years to 31 December 2014, as measured by the Coniferous Standing Sales Price Index. Timber prices are forecast to rise further, but at a more modest pace in response to growth in the developed world and in the longer term as emerging markets, particularly China and India, increase consumption. As a population's wealth increases, so their consumption of timber related products increases.
The Food and Agriculture Organisation of the United Nations (FAO) forecast production and consumption of key wood products and wood energy are expected to rise from the present to 2030, largely following historical trends of 1-2 per cent. increases per annum. (Source: Share of World Forestry (2009) Global Demand for Wood Products.)
The main factors affecting long-term demand for wood products include:
· Demographic changes: the world's population is projected to increase from 7 billion today to 7.5 billion in 2020 and 8.2 billion in 2030.
· Continued economic growth: global GDP increased from about US$16 trillion in 1970 to US$58 trillion in 2009 and is projected to grow to almost US$100 trillion by 2030.
· Environmental policies and regulations: more forests will be excluded from wood production.
· Energy policies: the increase in biomass and biofuel legislation in Europe is forecast to put huge demand on wood resources.
· The World Wildlife Fund (WWF) report (published in 2010) stated that wood removals amounted to 3.4 billion cubic metres. Of the reported harvest, 1.5 billion cubic metres was used as industrial roundwood, and the rest for fuelwood. WWF projects annual wood removals in 2050 will be three to four times the volume reported for 2010, which represents an increase of over 3 per cent. per annum. (Source: Forests and Wood Products - Living Forest Report, Chapter 3.)
· Material substitution: increasingly legislation dictates a preference for low carbon building materials, criteria which timber satisfies. Further to this, the inclusion of carbon sequestration in harvested wood products within the Kyoto Protocol will allow governments to reduce national carbon amounts through the use of timber as a preferred building or manufacturing material.
Aitchesse's business
At present, Aitchesse manages the portfolios of four clients which together own over 30,000 hectares of forest, of which by value 89 per cent. is in Scotland with the remaining 11 per cent. in England and Wales. It receives two main types of revenue: management fees and transaction fees.
Aitchesse typically charges a management fee based on the value of the forestry assets held by the client. In the 12 month period ended 30 June 2015, Aitchesse received management fees of £1.475 million, representing 65 per cent. of its revenue during that financial year.
The forestry management agreements require Aitchesse to manage the forest land to generate capital returns from the forests in the longer term as well as to generate income.
Aitchesse's role in the longer term maintenance of its clients' land includes:
· Overall forest management, including entering into contracts for felling and forest maintenance;
· Arranging timber sales;
· Preparing annual budgets;
· Inspecting and managing the properties;
· Cost-effectively and efficiently managing haulage and restocking; and
· Monitoring crop performance.
Aitchesse's role in the generation of income on its clients' land also includes:
· Identifying grant aid schemes and making grant submissions; and
· Identifying, appraising and implementing additional ground rent opportunities.
Aitchesse outsources all of its land management (such as felling and haulage) to suppliers rather than undertaking the work itself. The clients contract directly with these suppliers with Aitchesse managing the relationship on behalf of their clients. Aitchesse thus avoids conflicts of interest when managing client assets as these services are typically provided on a per unit basis.
Since 2007 until 30 June 2015, Aitchesse's assets under management have increased from £38.2 million to £192.7 million by using its expertise to increase its clients' portfolios (and therefore the value of those portfolios) by sourcing, appraising, acquiring and selling, developing and managing forestry assets on behalf of clients.
As well as managing forestry assets, Aitchesse takes advantage of its expertise and also advises its clients (including clients with assets under management) on the sale and purchase of forestry assets to which it typically receives a purchase/sale arrangement fee of between 2 per cent. and 2.5 per cent. of the transaction value. In the 12 month period ended 30 June 2015, Aitchesse received transaction fees of £0.75m, representing 33 per cent. of its revenue during that financial year. Aitchesse expect this type of income to reduce as a proportion of overall income as the team intends to focus on the development of management fees.
Historically, Aitchesse has sourced its clients by word of mouth recommendation and direct approaches to potential forest investors.
Aitchesse team
Aitchesse's success is due to the expertise and knowledge of the senior members of its team. Aitchesse's team of 11 employees has a wide variety of experience, with in-depth knowledge of both the forestry business and investment management. Digby Guy, the founder of Aitchesse, still takes an active role in the company and the managing director and the operations director have been with the company for eight years. The key employees and their roles are set out below:
Digby Coulson Guy (Chairman) (age 68)
Digby Guy is an experienced professional forester and founding shareholder of Aitchesse. He began his career in forestry, working for the Economic Forestry Group and Bidwells LLP, for whom he established their first Scottish office in 1986. He founded Aitchesse in 2002. He is responsible for business development and strategic direction. It is envisaged that Rupert Robinson will take on the role of Chairman on completion of the Acquisition but that Mr Guy will remain an employee of Aitchesse.
Jon Hilton Strickland (Managing Director) (age 64)
Jon Strickland is a Chartered Accountant. Post-graduation, he trained as a Chartered Accountant with KPMG after which he joined Scott-Moncrieff Chartered Accountants, a member of Moore Stephens International, becoming a partner in 1979. Mr. Strickland became a non-executive director of Aitchesse in 2007 and was subsequently appointed Managing Director in 2010, a position he has held since that date. His role involves compliance and governance, managing client funds and overseeing the financial accounting and reporting.
Graham John Carter (Operations Director) (age 53)
Graham Carter is an experienced professional forester, who specialises in land and forest diversification, power generation, land development and alternative land use. After graduating from Aberdeen University with a degree in forestry, he joined U A Forestry Ltd, becoming the company's managing director in 1997. In 2001 he founded his own forestry management company, Aspen Forestry Ltd, which was subsequently sold in 2007. Mr Carter is responsible for the investment management operations for all client funds.
Trevor Matthew Blackburn (Director) (age 47)
Trevor Blackburn is an asset manager and is responsible for three of Aitchesse's client funds. After graduating from the University of Central Lancashire with a degree in forestry, he worked as a forest manager focusing on bare land planting. In 2004, he began working for the Forestry Commission, becoming project manager on an IT project and representing the Forestry Commission on the SEARS (Scotland's Environmental & Rural Services) programme of organisational change. He joined Aitchesse in 2012 as an investment manager, becoming a director in 2014. Mr Blackburn manages the professional forestry staff, the supervision and control of in-forest activities including health and safety compliance.
Rob Lindsay Carlow (Investment Analyst) (age 37)
Mr Carlow is a postgraduate in environmental economics from the University of Glasgow. Working closely with Mr Guy, he focuses on business development and land acquisitions.
On completion of the Acquisition Agreement, Digby Guy, Graham Carter, Jon Strickland, Rob Carlow and Trevor Blackburn will enter new service agreements. These service agreements will contain wording which prohibits these employees from competing with the business of Aitchesse for a period of six months following the termination of their employment.
Strategy of Aitchesse
There is an increasing demand for long-term superior returns from illiquid and alternative assets such as forestry assets. Research published in 2015 by Towers Watson showed alternative assets under management reached $6.3 trillion in 2014, up 10.5 per cent. on the prior year. There has also been an increase in UK pension funds' appetite for alternatives.
As discussed above, Aitchesse anticipates a move away from the transactional element of the business and more towards asset management so as to align Aitchesse's strategy with the Group's. As part of the strategy and to help grow assets under management, the Company is considering a proposal to part-fund an option to acquire forestry land together with the Sellers with a view to selling that land to future clients.
The Company envisages that Aitchesse will continue to focus on forestry in the UK going forward, so as to serve UK-resident investors who would like the comfort of working with assets located in the UK.
Selected financial information of Aitchesse
Selected financial information on the trading record of the Aitchesse business for the three financial years ended 30 June 2015 is set out below:
|
|
Financial
|
|
Financial
|
|
Financial 2015 (Audited)
|
|
|
£ |
|
£ |
|
£ |
|
Continuing Operations |
|
|
|
|
|
|
Revenue |
1,496,165 |
|
1,687,014 |
|
2,277,179 |
|
Administrative expenses |
(1,542,496) |
|
(1,657,337) |
|
(1,358,557) |
|
Other income |
7,328 |
|
13,182 |
|
24,176 |
|
|
-------- |
|
-------- |
|
-------- |
|
(Loss)/profit from operations |
(39,003) |
|
42,859 |
|
942,798 |
|
|
|
|
|
|
|
|
Finance income |
10,745 |
|
7,695 |
|
5,973 |
|
Finance costs |
(4,530) |
|
(2,837) |
|
(1,965) |
|
|
-------- |
|
-------- |
|
-------- |
|
(Loss)/profit before income tax expense |
(32,788) |
|
47,717 |
|
946,806 |
|
|
|
|
|
|
|
|
Income tax charge |
(17,767) |
|
(17,721) |
|
(204,205) |
|
|
-------- |
|
-------- |
|
-------- |
|
(Loss)/profit for the year |
(50,555) |
|
29,996 |
|
742,601 |
|
|
-------- |
|
-------- |
|
-------- |
|
Net (loss)/profit for the year |
(50,555) |
|
29,996 |
|
742,601 |
|
|
-------- |
|
-------- |
|
-------- |
5. Existing assets/liabilities and strategies for the existing assets/liabilities
The Group's existing significant assets and liabilities, and strategies for those assets and liabilities are as follows:
Principal publicly quoted securities
Gresham House Strategic
The Group currently holds 706,806 ordinary shares in Gresham House Strategic, representing approximately 19.2 per cent. of the issued share capital. As at 3 November 2015, being the latest practicable date prior to the publication of this announcement, the Group's interest in ordinary shares in Gresham House Strategic had a market value at bid price (as of close of business on that date) of £5.866 million.
Further details of the Company's strategy and investment in Gresham House Strategic are set out in section 3 above.
Property
Newton-le-Willows
A "brownfield" five acre site situated close to the town centre of Newton-le-Willows in the borough of St Helen's which is a 30 minute drive from Manchester. This was previously part of an industrial estate of approximately 31 acres that had come to the end of its useful life and on which outline planning consent for food retail (on approximately five acres) and residential (on approximately 25.8 acres) had been granted. Given its previous use as an industrial site some remedial activity will be required to realise such redevelopment and detailed planning permission would be required for development.
On 22 September 2015, the sale of 25.8 acres gross of the site at Newton-le-Willows to Persimmon was completed. In accordance with the sale agreement with Persimmon, the aggregate consideration for the sale of the 25.8 acre site is £7,280,000 (less reallocated Section 106 payments, together with associated transport contributions and monitoring fees totalling £30,000). The net proceeds of £7.25 million is being paid in instalments of which a deposit and initial payment of £944,610 has been received and the balance will be receivable in three tranches over the next 41 months.
The Company will explore sale options for this site now the sale of the main residential site has been completed.
A valuation report on the five acre site at Newton-le-Willows, prepared by Jones Lang LaSalle and showing the value of the property to be £2,250,000 as at 30 September 2015 will be contained in the Admission Document.
Southern Gateway, Speke
The property was previously a pharmaceutical manufacturing facility for GlaxoSmithKline and is situated approximately 600 metres from the Jaguar Land Rover Halewood car manufacturing plant in south Liverpool. It comprises approximately 375,000 sq.ft. of mixed industrial and office uses, together with a significant number of car spaces on a total of 17 acres. Its previous use has resulted in some soil and groundwater issues. Although remedial activity may be required on any future redevelopment, these issues have not restricted current use or lettings or given rise to liabilities.
As at 30 June 2015, the Group had let 295,671 square feet of the property at Speke, representing approximately 81.2 per cent. of the total available. As at 30 June 2015 there were 14 tenants generating an aggregate of £783,679 per annum in rent. All the significant remaining space has been agreed to being let, subject to completion of final documentation.
A sale process is being considered for the site and Jones Lang LaSalle has been appointed to advise.
A valuation report on the property at Speke, prepared by Jones Lang LaSalle and showing the value of the property to be £7,600,000 as at 30 September 2015 will be contained in the Admission Document.
Principal unquoted securities
Attila (BR) Limited
Attila is a private company registered in England & Wales which owned a four acre development site (formerly a Royal Mail sorting office) in Edinburgh city centre. This site was sold to CALA Management Limited subject to detailed planning consent for residential development being obtained. On 15 June 2015 the sale completed and the Group received a payment of accrued interest on its unsecured loan notes of £275,000. Deferred consideration is also due to be paid to Attila in 2016 and the Directors expect the Group to receive approximately £1.228 million through a combination of repayment of principal and interest on its unsecured loan notes.
Kemnal Investments Limited
Kemnal is a private company registered in England & Wales and is a vehicle that provided a mezzanine loan to Memorial Holdings Limited (see below) which is due for repayment in 2017.
The Group currently holds £465,788 10 per cent. Unsecured Loan Notes 2017, representing approximately 15.1 per cent. of the total loan notes in issue, and 16 ordinary shares representing approximately 14.4 per cent. Of the issued share capital of Kemnal Investments Limited. The estimated value based on a directors' valuation is par, being £465,804.
Memorial Holdings Limited
Memorial Holdings is a private company registered in Jersey which owns and operates, through its two wholly owned subsidiaries, a 55 acre cemetery at Chislehurst in the London Borough of Bromley known as Kemnal Park Cemetery. The cemetery is to be developed in phases to meet market demand with the first phase already completed. This initial phase consisted of a non-denominational chapel, including offices, and a car park.
The Group currently holds 155,600 ordinary shares, representing approximately 3.2 per cent. of the issued share capital of Memorial Holdings Limited and had an economic interest in a further 1.2 per cent. of the issued share capital in Memorial Holdings Limited through the Company's investment in Kemnal Investments Limited (certain shares in Memorial Holdings Limited are held in trust for Kemnal Investments Limited in connection with its mezzanine financing activities), which together have an estimated market value based on a directors' valuation of £441,350.
Co-operative loan
On 23 September 2015 the Company announced that its facility with the Co-operative Bank had been reset at £2.85 million after £428,000 of the initial proceeds from the sale of the 25.8 acres gross site at Newton-le-Willows to Persimmon had been applied in reducing the amount outstanding.
The Company is currently in negotiations with two banks regarding a new bank facility and has received a credit committee approved letter of offer from both. The proposed offers are for loan facilities of approximately £7 million with an interest rate of approximately 5.25 per cent. per annum. Whilst there is no guarantee that a facility will be entered into, the Company intends to use the loan facility to (i) repay the Short Term Loan Notes and (ii) replace the Co-operative Bank facility and (iii) deploy the balance of the loan to fund future investment opportunities.
6. Incentive Arrangements
The Company believes that its success depends, in part, on the future performance of the management team. The Company also recognises the importance of ensuring that employees are incentivised and identify closely with the success of the Company.
On 1 December 2014 the Directors subscribed for Supporter Warrants over the Company's Ordinary Shares. In the admission document issued in October 2014, the Company set out its intention to establish suitable long-term retention share schemes linked to the Company's performance. In addition, it set out its intention that the Group's employees (including the executive directors) be appropriately incentivised which may include a discretionary bonus scheme. The incentivisation for employees (excluding the executive directors) was also to include receiving carried interests and performance fees.
The Company proposes to introduce the Incentive Arrangements comprising a long term incentive plan and a bonus share matching plan, further details of which are set out below. The purpose of these plans is to align the interests of Shareholders and management in the long-term success of the Company and to attract and retain key talent for execution of the Company's strategy.
Long Term Incentive Plan
As soon as reasonably practicable, the Company proposes to implement a long term incentive plan for the benefit of the management team (from time to time), to incentivise them as well as align their interests with those of Shareholders.
These arrangements will only reward the participants if shareholder value is created. For the purposes of the plan, "shareholder value" shall broadly mean the difference between the market capitalisation of the Company at the point in time that any assessment is made and the sum of:
(i) the market capitalisation of the Company a) at 1 December 2014 for first awards made to management who joined the Company before 30 September 2015 and b) at the date of award in all other cases; and
(ii) the aggregate value (at the subscription price) of all Ordinary Shares issued thereafter and up to the point in time that any assessment is made, in each case adjusted for dividends and capital returns to Shareholders and/or issue of new shares.
Whilst the precise structure of the plan remains to be determined, the beneficiaries of the plan will in aggregate be entitled to an amount of up to 20 per cent. of shareholder value (as defined above) created, subject to performance criteria set out below. In the calculation of the 20 per cent. share of value, the benefit of the Supporter Warrants shall be recognised. Individual participation in the shareholder value created will be determined by the Remuneration Committee in respect of the executive Directors.
There will be certain hurdles the Company's share price has to achieve before an award vests.
In the event that the Company achieves an average mid-market closing price equal to compound growth at 7 per cent. per annum for a period of 10 consecutive dealing days in the period after 1 December 2016 for first awards to management who joined the Company before 30 September 2015 and from the second anniversary of the date of award in all other cases, 50 per cent. of the award will vest.
In the event that the share price of the Company outperforms the FTSE All Share Index in the period after 1 December 2016, and from the second anniversary of the date of the award in all other cases, 50 per cent. of the award shall vest.
Each award will require a minimum term of employment of three years and awards will be made to current management and new joiners at the Company's discretion. The long-term incentive plan will be delivered either in awards of shares or options. Where possible the Company will deliver the plan tax-efficiently.
Bonus Share Matching Plan
The Company proposes to introduce a share matching plan linked to the discretionary annual bonus scheme to encourage management to invest in the long-term growth of the Company as soon as reasonably practicable.
Management entitled to a bonus greater than £50,000 will be permitted (but not required) to defer and reinvest up to 100 per cent. of their annual bonus into Ordinary Shares which will be released to them after three years together with any additional matching shares subject to performance criteria set out below.
In the event that the Company achieves a mid-market closing price equal to 7 per cent. per annum compound growth from the date of deferral, the participants will receive 50 per cent. of the matching shares benefit. In the event that the Company's share price out-performs the FTSE All Share Index from the date of deferral, the participant will receive 50 per cent. of the matching shares.
Shares will be awarded in the ratio one share for each share invested. In the event that this performance condition is not met, the participants will receive only the Ordinary Shares acquired with the deferred bonus.
In total the Company proposes that the total Ordinary Shares issued and issuable in satisfaction of the Incentive Arrangements and pursuant to the exercise of Supporter Warrants will not exceed 20 per cent. of the Company's total issued Ordinary Share Capital from time to time.
Whilst the Incentive Arrangements have not yet been finalised, shareholder approval is being sought to allow the Directors to implement a long term incentive plan and bonus share matching plan within the parameters described above.
The Company operates in a highly competitive market place where it will have to attract talent and retain talented individuals to achieve its objectives. The Directors believe the proposed incentive arrangements are key to the implementation of its strategy.
7. Directors, Senior Management, Investment Committee and Advisory Group
The Company's Directors, Senior Management, Investment Committee and Advisory Group are as follows:
Directors
The Board comprises three non-executive directors: Richard Chadwick, Anthony Townsend, and Peter Moon, and three executive directors: Duncan Abbot, Tony Dalwood and Michael Phillips.
Brief biographies of the Directors are set out below:
Anthony (Tony) Dalwood (aged 45) (Chief Executive)
Tony is an experienced investor and adviser to public and private equity businesses. Tony established SVG Investment Managers (a subsidiary of SVG Capital plc), acted as CEO and chairman of this entity, and launched Strategic Equity Capital plc. His previous appointments include CEO of SVG Advisers (formerly Schroder Ventures (London) Limited), membership of the UK Investment Committee of UBS Phillips & Drew Fund Management (PDFM), and the board of Schroders Private Equity Funds.
He is currently the chairman of the investment committee and board member of the London Pensions Fund Authority, an independent director of J.P. Morgan Private Equity Limited and a director of Branton Capital Limited.
Anthony Townsend (aged 67) (Non-Executive Chairman)
Anthony has spent over 40 years working in the City of London and was chairman of the Association of Investment Companies from 2001 to 2003. He is chairman of Baronsmead VCT 3 plc, British & American Investment Trust plc, F&C Global Smaller Companies plc, Finsbury Growth & Income Trust plc and Miton Worldwide Growth Investment Trust plc.
He was a director of Brit Insurance Holdings plc from 1999 to 2008 and represented it on the Council of Lloyd's of London from 2006 to 2008. He was managing director of Finsbury Asset Management Ltd from 1988 to 1998. He was a non-executive director of Worldwide Healthcare Trust plc from 1995 to 2013.
Duncan Abbot (aged 59) (Finance Director)
Duncan oversees the finance function and looks after compliance and operational matters. Duncan is an experienced manager and investor in smaller companies. He has sat on many boards of both quoted and unquoted companies. He has worked with Michael Phillips for twenty years. He was chairman of Christows Group Limited and co-founded iimia Investments with Michael. He is a Chartered Accountant and Fellow of the Chartered Institute for Securities and Investments.
Richard Chadwick (aged 64) (Non-Executive Director)
Richard is a chartered accountant, who was appointed to the board of the Company on 17 June 2008 as a non-executive director. Richard spent 27 years within the J Sainsbury plc group of companies where he had considerable experience of property development and financing, having been director of corporate finance and of business development, and a non-executive director of the group's property development company. He is also a non-executive director of SpaceandPeople plc, a company in which Gresham House Strategic has an interest.
Peter Moon (aged 65) (Senior Non-Executive Director)
Peter started working in the City of London in 1972 and worked as an investment analyst and fund manager in a number of roles in unit and investment trusts, insurance and finally pension schemes. The last 25 years of his career were spent as the Investment Manager of the British Airways Pensions scheme and chief investment officer of the Universities Superannuation Scheme.
He is currently a director of Scottish American Investment Company and First Property Group and chairman of Arden Partners plc, a UK stockbroker and Bell Potter Securities UK Limited, the UK branch of an Australian stockbroker.
Michael Phillips (aged 53) (Strategic Development Director)
Michael is an experienced business manager with a history of founding and building businesses in fund management. Michael served as a director of Strategic Equity Capital plc for seven years, founded iimia Investment Group plc (now Miton Group plc), Christows Limited (now part of Investec's retail operations), and more recently REDS Investments Limited.
Michael is a Fellow of the Chartered Institute for Securities and Investments and is a non-executive director of Miton Worldwide Growth Investment Trust.
Senior Management
Senior management comprises the following:
Rupert Robinson, Managing Director of GHAM
Rupert was previously CEO of Investment of Schroders (UK) Private Bank. He has over 25 years, experience in private wealth and asset management advising families on asset allocation as well as focusing on product innovation, investment management and business development. Prior to Schroders he was head of private clients at Rothschild Asset Management Limited and a member of the Group Executive Committee.
Graham Bird (Head of Gresham House Strategic)
Former Strategic Planning and Corporate Development Director at Paypoint plc, Graham was previously Director of Strategic Investments at SVG Investment Managers and a director within the Corporate Finance department at JP Morgan Cazenove.
Jonathan Dighe (Commercial Director)
Jonathan has over five years of UK small company equities experience, working both as research analyst and as Director on the equity sales desk at Charles Stanley Securities. He is a former management consultant at Accenture, working on business transformation projects with BP and HSBC.
Investment Committee
The Investment Committee has been established to promote and maintain a prudent and effective allocation of capital across the Company's entire investment portfolio.
The Investment Committee is chaired by Tony Dalwood with the other members being Michael Phillips (Strategic Development Director), Rupert Robinson (Managing Director of GHAM) and two experienced investment management professionals - Bruce Carnegie-Brown and Matthew Peacock.
Bruce Carnegie-Brown
Bruce is chairman of Aon UK Ltd and of Moneysupermarket.com Group plc and a non-executive director of Santander UK plc. He was previously a managing partner of 3i QPE plc, a managing director of JP Morgan and CEO of Marsh Ltd.
Matthew Peacock
Matthew is Executive Chairman of Regenersis Plc and the founding partner of Hanover Investors. He has sat on numerous public company boards, including Elementis Plc, Renold Plc, 4imprint Plc, STV Group Plc and Fairpoint Plc and has previously been Chairman of Singer Capital Markets and a founding director of TDX Group. Prior to Hanover, Matthew held senior positions with Barclays De Zoete Wedd and Credit Suisse First Boston. Hanover Investors have pursued an illiquid investment strategy in small and mid-cap United Kingdom public equities and private equity transactions for over 12 years with a philosophy similar to that proposed at the Company. Hanover has worked alongside Tony Dalwood on a number of its investments over this period.
Advisory Group
The Advisory Group has been established to act as a general sounding board for the executive team and to provide a source of knowledge, experience, potential investment deal flow and contacts upon which they can draw. In addition, members of the Advisory Group may co-invest alongside the Company in either direct investments or specialist funds.
Sir Roy Gardner
Sir Roy is an adviser to Credit Suisse and the former Chairman of Compass Group, Chief Executive of Centrica plc and Chairman of Manchester United plc. He has also acted as CEO of Centrica.
Alan Mackay
Alan is a former Senior Partner and Head of Healthcare at 3i Group plc, appointed to the board in 1993. He is currently the Managing Partner at GHO Capital and former CEO of Hermes GPE.
Gareth Davis
Gareth is the current Chairman of Wolseley, William Hill and DS Smith. He is the former CEO of Imperial Tobacco and a former non-executive director of Hanson.
8. Selected financial information of the Group
Selected financial information on the trading record of the Group's business for the three financial years ended 31 December 2014 and the six-month period ended 30 June 2015 is set out below:
|
|
|
|
|
|
|
|
Financial
|
Financial
|
Financial
|
Six months
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Turnover |
|
|
|
|
|
Dividend & interest income.................. |
690 |
268 |
155 |
143 |
|
Rental Income....................................... |
1,038 |
999 |
475 |
329 |
|
Other operating income........................ |
102 |
76 |
39 |
10 |
|
|
|
|
|
|
|
|
1,830 |
1,343 |
669 |
482 |
|
|
|
|
|
|
|
Gains & losses on investments............... |
|
|
|
|
|
Gains and losses on investments held at fair value.......................................... |
(280) |
(504) |
(1,715) |
655 |
|
Movement in fair value of property investments...................................... |
2,086 |
(1,439) |
(593) |
(193) |
|
|
|
|
|
|
|
|
1,806 |
(1,943) |
(2,308) |
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Group operating (loss)/profit before finance costs & taxation.................... |
1,806 |
(2,689) |
(2,407) |
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/profit and total comprehensive income after taxation........................ |
996 |
(3,446) |
(2,512) |
52 |
|
|
|
|
|
|
The unaudited NAV Per Ordinary Share as at 30 June 2015 amounted to 298.5 pence per Ordinary Share.
9. Consequences of becoming a trading company
If the Proposals are approved, the Company will move from being an investing company (as defined in the AIM Rules for Companies) and, instead, become a trading company (i.e. it will become a company which operates an asset management business with some direct and indirect investments).
The key expected consequences of such a development are as follows:
· NAV per share will cease to be an appropriate performance indicator. This is because the Directors intend to develop the asset management business where earnings and assets under management are more appropriate measures of performance;
· the Company may acquire businesses where the acquisition involves recognising purchased goodwill and other intangible assets, which may have to be amortised. Such amortisation would have a negative impact on the Company's balance sheet, despite such acquisitions being made in anticipation of contributing in time to the Company's earnings;
· the Company's Standard Industrial Classification might change. This would in turn alter the way it is categorised for various statistical and analytical purposes and may limit the ability of some investors to hold the Company's shares where the investors' investment mandates are specific as to the type of share they are able to hold; and
· the AIM Rules for Investing Companies will cease to apply.
10. Current trading and prospects
Tony Dalwood made a statement in the Interim Report published on 23 September 2015. During the period since the publication of that statement, the Company has continued its development as follows:
· On 28 October 2015, SPARK Ventures plc changed its name to Gresham House Strategic plc. Despite the volatility in the broader stock market, the net asset value of Gresham House Strategic has held steady. Gresham House Strategic is working to close the discount to net asset value at which its shares trade.
· There has been mixed news on the valuation of the Group's remaining property assets. Jones Lang LaSalle did not consider the valuation of the overage arising from the sale of the residential site to Persimmon. Overall, the valuation of property assets as at 30 September 2015 has increased. It is pleasing to see an uplift in the value of the property at Speke reflecting the activity there, but disappointing to see a reduction in the valuation of the residual retail site at Newton Le Willows: this reflects the well-publicised difficulties in the food retail sector. The Board continues to explore options for the property assets.
· Having sold the majority of the Newton-Le-Willows site, the balance of the consideration proceeds are deferred. The management team has been exploring ways of creating liquidity from these proceeds and the Speke asset through a new banking facility. Negotiations are in the final stages to secure a new £7million facility to replace the existing Co-operative Bank borrowings and provide further liquidity. In the coming weeks, the intention is that the facility will be documented and that the bank will take security over the Company's property assets and the proceeds of the sale to Persimmon of the Newton-Le-Willows site.
· The Company has received notification from the FCA that it is minded to authorise GHAM subject to completion of certain administrative steps that are within the control of the Company and that are expected to be completed by the end of November 2015.
Thus, alongside the proposed Acquisition, the Board is pleased with the Company's continuing development.
11. Summary of the principal terms of the Acquisition
On 4 November 2015, the Company, GHHL and the Sellers entered into the Acquisition Agreement pursuant to which GHHL has agreed to acquire the issued and to be issued share capital of Aitchesse.
The consideration for the acquisition comprises initial consideration of £4.02 million and, subject to Aitchesse achieving certain EBITDA targets, additional consideration of up to £3.7 million (depending on the actual EBITDA achieved).
The initial consideration shall be satisfied by:
· the payment of £1,840,746 in cash to the Sellers of which £374,610 shall be used to repay to Aitchesse amounts owing by certain of the Sellers;
· the issue of 507,522 new Ordinary Shares to the Sellers (based on a price of 298.5p per Ordinary Share); and
· the issue of £666,842 of Short Term Loan Notes to the Sellers.
The amount of additional consideration payable shall increase on a sliding scale depending on the EBITDA achieved by Aitchesse between a range of £1,733,333 and £3,466,666 with the full £3,697,237 additional consideration being payable if EBITDA of £3,466,666 or more is achieved and no additional consideration being payable if EBITDA of less than £1,733,333 is achieved. The additional consideration shall be satisfied by:
· the payment of up to £1,500,055 in cash to the Sellers; and
· the issue of up to 736,074 new Ordinary Shares (based on a price of 298.5p per Ordinary Share) to the Sellers.
The Short Term Loan Notes have an interest rate of 5 per cent. and are repayable on the earlier of (i) 30 April 2016, or (ii) on the securing of a new bank facility of no less than £7 million by the Company. The Short Term Loan Notes are not transferable.
The Acquisition Agreement is conditional upon, amongst other things, Admission.
The Sellers are giving customary warranties about Aitchesse. They relate to, inter alia, information supplied, accounts, financial position, business since 30 June 2015, trading and contracts, employees, pensions, compliance, intellectual property. Completion is conditional upon, amongst other things, Admission and there having been no material adverse change to the prospects and business of Aitchesse since the date of the Acquisition Agreement and the warranties remaining true.
The Sellers will be restricted for a period of three years from Completion from soliciting, approaching or dealing with Aitchesse's customers, soliciting Aitchesse's employees and engaging in a business similar to that of Aitchesse.
The Company may terminate the Acquisition Agreement prior to Completion if, prior to completion of the Acquisition there is a material adverse change affecting Aitchesse or if there is a material breach of the Sellers' warranties. Material for this purpose is a liability to Aitchesse of £50,000 or greater.
Each of the Sellers have also agreed to enter into "lock-in agreement" with the Company, whereby they agree that, subject to certain exceptions, they will not dispose of any Initial Consideration Shares that they receive for a period of one year from the date of Admission.
12. General Meeting
The Notice of General Meeting will be set out in the Admission Document. Entitlement to attend and vote at the General Meeting and the number of votes which may be cast at the General Meeting will be determined by reference to holdings in Ordinary Shares at 6.00 p.m. on 18 November 2015.
The General Meeting has been convened for 2.30 p.m. on 20 November 2015 at the offices of Travers Smith LLP, 10 Snow Hill, London EC1A 2AL to enable Shareholders to consider and, if thought fit, pass the Resolutions set out in the Notice of General Meeting. The Resolutions will be proposed as ordinary resolutions.
Resolutions 1 and 2 are inter-conditional. The Acquisition and Admission are conditional on Resolutions 1 and 2 being passed. The implementation of the Incentive Arrangements is conditional on Resolution 3 being passed.
Resolution 1 - Approving the Acquisition
Resolution 1 will be proposed as an ordinary resolution to approve the Acquisition and the entering into by the Company and GHHL of the Acquisition Agreement.
Resolution 2 - Approving the issue of Consideration Shares
Resolution 2 will be proposed as an ordinary resolution to authorise the directors of the Company to issue the Consideration Shares pursuant to the Acquisition Agreement.
Resolution 3 - Approving the Incentive Arrangements
Resolution 3 will be proposed as an ordinary resolution to authorise the directors to consider the Incentive Arrangements and implement a long-term incentive plan and bonus share matching scheme substantially in accordance with the terms outlined in section 6 of this announcement.
13. Admission, settlement and CREST
As the Acquisition constitutes a reverse takeover under the AIM Rules for Companies and due to the Company's status changing from that of an investing company to an operating business Shareholder consent to the Acquisition is required at the General Meeting. Subject to the passing of Resolutions 1 and 2 and the satisfaction of the other conditions under the Acquisition Agreement and the Introduction Agreement and Admission, the admission of the Ordinary Shares and Shareholder Warrants to trading on AIM will be cancelled and application will be made to the London Stock Exchange for the Enlarged Share Capital and the Shareholder Warrants to be admitted to trading on AIM. Admission of the Enlarged Share Capital and the Shareholder Warrants to trading on AIM is, subject to the passing of Resolutions 1 and 2 and the satisfaction of all other conditions, expected to take place on or around 23 November 2015.
The Ordinary Shares and the Shareholder Warrants are eligible for CREST settlement. Accordingly, settlement of transactions in Ordinary Shares (including the Consideration Shares) and the Shareholder Warrants following Admission may take place within the CREST system if the relevant Shareholder or Warrantholders so wishes.
CREST is a voluntary system and Shareholders and Warrantholders who wish to receive and retain certificates will be able to do so.
The current arrangements of the Shareholders and Warrantholders of the Company will remain in force.
14 Warrants
14.1 Shareholder Warrants
Terms of issue of the Shareholder Warrants
On 1 December 2014, the Company issued 1,073,904 Shareholder Warrants to its existing Shareholders as at the close of business on 28 November 2014 on a 1:5 basis, such warrants having been admitted to trading on AIM.
Each such Shareholder Warrant entitles the Shareholder to subscribe for one Ordinary Share, exercisable from 1 January 2015 to 31 December 2019 (inclusive) at an exercise price of 323.27 pence.
As part of the Proposals, trading in the Shareholder Warrants will be cancelled and application for them to be readmitted to trading on AIM. Notwithstanding the re-admission, the Shareholder Warrants shall remain in force.
The Company hereby notifies the Shareholder Warrantholders that on 4 November 2015, the Company modified the Shareholder Warrant Instrument (in accordance with clause 10 of the Instrument) by a supplemental instrument in writing to correct a manifest error in the terms of the Shareholder Warrant Instrument. The modification amends the provisions relating to the adjustment of subscription rights in clause 6.1(a) of the Shareholder Warrant Instrument so that the drafting in the clause is the same as the drafting in the summary of the Shareholder Warrants contained in the Company's admission document dated 8 October 2014 and in the Admission Document.
14.2 Supporter Warrants
On 1 December 2014, the Company issued 850,000 Supporter Warrants to certain directors and members of the Investment Committee and Advisory Group at a price of 7.5p per warrant. The Supporter Warrants have the same entitlements as the Shareholder Warrants issued to Shareholders save that they are not freely transferable (such Supporter Warrants are only transferable to certain family members, trusts or companies connected with the relevant Warrantholder) and accordingly are not admitted to trading on AIM nor will they become exercisable until 1 December 2015.
Each such Supporter Warrant entitles the holder to subscribe for one Ordinary Share at an exercise price of 323.27 pence.
The Company hereby notifies the Supporter Warrantholders that on 4 November 2015, the Company modified the Supporter Warrant Instrument (in accordance with clause 10 of that Instrument) by a supplemental instrument in writing to correct a manifest error in the terms of the Supporter Warrant Instrument. The modification amends the provisions relating to the adjustment of subscription rights in clauses 6.1(a) of the Supporter Warrant Instrument so that the drafting in that clause is the same as the drafting in the summary of the Supporter Warrants set out in the admission document dated 8 October 2014 and in the Admission Document.
15. Dividend policy and share buybacks
The Company's principal objective is to provide Shareholders with superior risk adjusted returns over the longer term, primarily through capital appreciation. The Directors' intention therefore is to re-invest funds into the Company rather than paying dividends but at the appropriate time they intend to review this dividend policy. In addition to considering such a dividend policy in the future, the board of the Company will, from time to time, consider the desirability of implementing a share buyback. The authority will only be exercised if the directors of the Company consider that it is in the best interests of the Shareholders at that time.
16. Recommendation
The Board considers the Proposals and the passing of the Resolutions to be in the best interests of the Shareholders as a whole and, accordingly, unanimously recommends that Shareholders vote in favour of all of the Resolutions at the General Meeting. The Company's Directors intend to vote their own shareholdings, totalling 453,119 Ordinary Shares, representing approximately 4.8 per cent. of the Company's existing issued ordinary share capital, in favour of each of the Resolutions.
Appendix 1 - Expected Timetable of Principal Events
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Publication of the Admission Document.......................... |
4 November 2015 |
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Latest time and date for receipt of Forms of Proxy........... |
2:30 p.m. 18 November 2015 |
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General Meeting............................................................. |
2:30 p.m. 20 November 2015 |
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Completion of the Acquisition, Admission and expected commencement of dealings in Ordinary Shares and Shareholder Warrants..................................................... |
8.00 a.m. on 23 November 2015 |
Each of the times and dates in the above timetable is subject to change, and if the above times and/or dates change, the revised time and/or date will be notified by an announcement through a Regulatory Information Service.
All times are London times unless otherwise stated.
APPENDIX 2 - DEFINITIONS
The following definitions apply throughout this announcement, unless the context requires otherwise:
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"Aitchesse" |
Aitchesse Limited, a company registered in Scotland with registered number SC232893 and with its registered office at Suite G, Riverview House, Friarton Road, Perth PH2 8DF |
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"Acquisition" |
the acquisition by the Company of the entire issued share capital of Aitchesse |
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"Acquisition Agreement" |
the conditional agreement between GHHL and the Sellers relating to the Acquisition |
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"Admission" |
the readmission of the Ordinary Shares and Shareholder Warrants to trading on AIM becoming effective in accordance with the AIM Rules for Companies |
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"Admission Document" |
the admission document to be published pursuant to Rule 14 of the AIM Rules on 4 November 2015 relating to, inter alia, the Acquisition |
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"Advisory Group" |
the advisory group of the Company, described in section 7 of this announcement |
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"AIM" |
AIM, a market operated by the London Stock Exchange |
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"AIM Rules for Companies" |
the rules for AIM companies published by the London Stock Exchange |
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"AIM Rules for Nominated Advisers" |
the rules for nominated advisers to AIM companies published by the London Stock Exchange |
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"AUM" |
assets under management |
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"Authorised Investment Trust" |
a company which has been approved as an investment trust by HMRC under section 1158 of the Corporation Tax Act 2010 |
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"Board" or "Directors" |
the directors of the Company |
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"CEO" |
chief executive officer |
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"Company" or "Gresham House" |
Gresham House plc, a company registered in England with registered number 871 and with its registered office at 5 New Square, London EC4A 3TW |
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"Completion" |
completion of the Acquisition in accordance with the terms of the Acquisition Agreement |
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"Consideration Shares" |
up to 1,243,596 Ordinary Shares which may be issued pursuant to the Acquisition Agreement |
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"Co-operative Bank" |
The Co-operative Bank plc |
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"CREST" |
the relevant system (as defined in the Uncertificated Securities Regulations 2001) in respect of which Euroclear UK & Ireland is the operator (as defined in the Uncertificated Securities Regulations 2001) |
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"Disclosure and Transparency Rules" |
the disclosure and transparency rules made by the FCA in exercise of its function as competent authority pursuant to Part VI of the FSMA, as amended from time to time |
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"Enlarged Group" |
the Company and its subsidiaries on Admission following completion of the Acquisition |
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"FCA" or "Financial Conduct Authority" |
the Financial Conduct Authority of the United Kingdom |
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"FSMA" |
the Financial Services and Markets Act 2000 (as amended, modified, consolidated, re-enacted or replaced from time to time) |
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"General Meeting" |
the general meeting of the Company to be convened to approve the Proposals at 2:30 p.m. on 20 November 2015 at the offices of Travers Smith LLP, 10 Snow Hill, London EC1A 2AL |
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"Gresham House Strategic Investment Management Agreement" |
the agreement between Gresham House Strategic and the Company dated 21 July 2015 relating to the management of Gresham House Strategic
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"Gresham House Strategic Share Swap Agreement" |
the agreement between the Company and Gresham House Strategic for the sale and purchase of shares of SpaceandPeople plc. |
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"Group" |
the Company and its subsidiaries prior to Admission |
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"GHAM" |
Gresham House Asset Management Limited, a company registered in England and Wales with registered number 9447087 and with its registered office at 5 New Square, London EC4A 3TW |
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"GHHL" |
Gresham House Holdings Limited |
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"HMRC" |
HM Revenue & Customs |
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"Incentive Arrangements" |
the proposed long term incentive plan and a bonus share matching plan to be put in place by the Directors |
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"Introduction Agreement" |
the agreement between the Company and Liberum dated 4 November 2015 relating to Admission |
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"Investment Committee" |
the investment committee of the Company, described in section 4 of this announcement |
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"Issued Share Capital" |
the total share capital of the Company issued to Shareholders |
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"Jones Lang LaSalle" |
Jones Lang LaSalle Limited, a company registered in England & Wales with registered number 1188567 and with its registered office at 30 Warwick Street, London W1B 5NH |
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Liberum Capital Limited, the Company's financial adviser, nominated adviser and broker |
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"Listing Rules" |
the listing rules made by the FCA in the exercise of its function as competent authority pursuant to Part VI of the FSMA, as amended from time to time |
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"London Stock Exchange" |
the London Stock Exchange plc |
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"Main Market" |
the London Stock Exchange's main market for listed securities |
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"NAV" |
the basic net asset value of the Company |
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"NAV Per Ordinary Share" |
the NAV per Ordinary Share shown in the Company's interim accounts as at 30 June 2015 (being 298.5 pence per Ordinary Share) |
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"Notice" or "Notice of General Meeting" |
the notice of General Meeting to be set out at the end of the Admission Document |
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"Official List" |
the Official List of the UK Listing Authority |
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"Ordinary Shares" |
ordinary shares of 25 pence each in the share capital of the Company |
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"Persimmon" |
Persimmon Homes Limited |
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"Proposals" |
collectively, the Acquisition, Admission and the Incentive Arrangements |
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"Prospectus Rules" |
the prospectus rules made by the FCA in the exercise of its function as competent authority pursuant to Part VI of the FSMA, as amended from time to time |
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"Resolutions" |
the resolutions to be proposed at the General Meeting, to be set out in the Notice of General Meeting |
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"Sellers" |
together, Digby Guy, Caroline Guy, Graham Carter and John Strickland |
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"Shareholder Warrantholders" |
holders of the Shareholder Warrants |
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"Shareholder Warrant Instrument" |
the warrant instrument dated 7 October 2014 |
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"Shareholder Warrants" |
the warrants to subscribe for Ordinary Shares (further details of which will be set out in Part 7 of the Admission Document) pursuant to the Shareholder Warrant Instrument |
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"Shareholders" |
holders of Ordinary Shares |
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"Short Term Loan Notes" |
Short Term Loan Notes of Gresham House (further details of which will be set out at section 13.1 in Part 8 of the Admission Document |
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"SPARK"or "Gresham House Strategic" |
Gresham House Strategic plc, a company registered in England & Wales with registered number 3813450 and with its registered office at 2nd Floor, 77 Kingsway, London WC2B 6SR |
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"subsidiary" |
as defined in section 1159 and Schedule 6 of the Act |
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"Supporter Warrantholders" |
holders of Supporter Warrants |
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"Supporter Warrant Instrument" |
the warrant instrument dated 7 October 2014 which is summarised in section 14.2 of this announcement |
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"Supporter Warrants" |
the warrants to subscribe for Ordinary Shares pursuant to the Supporter Warrant Instrument |
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"Takeover Code" |
the City Code on Takeovers and Mergers published by the Takeover Panel |
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"UK" or "United Kingdom" |
the United Kingdom of Great Britain and Northern Ireland |
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"UK Corporate Governance Code" |
the UK Corporate Governance Code published by the Financial Reporting Council |
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"UK Listing Authority" |
the Financial Conduct Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA and in the exercise of its functions in respect of admission to the Official List |
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"United States" or "US" |
the United States of America |
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"Warrantholders" |
Shareholder Warrantholders and/or Supporter Warrantholders |
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"Warrants" |
the Shareholder Warrants and the Supporter Warrants or either of them (as the context requires) |
This information is provided by RNS
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