US$55m Cash Offer for Jeffrey Chain
Renold PLC
29 February 2000
RENOLD PLC
US$55 million cash offer for Jeffrey Chain
Precision engineering group Renold plc, the leading international manufacturer
and supplier of chains, gears, couplings and rotors, today announces a US$55
million (approximately £34.5 million) cash offer for Jeffrey Chain, a leading
US manufacturer of industrial chain, to be funded by bank debt.
Summary
* On completion, Renold will be one of the largest suppliers of industrial
chain in the US, the world's biggest market for industrial chain. Renold
already has leading market positions in Europe, and is a major supplier
into the Australian and Canadian markets.
* Jeffrey Chain has strong US brands and established relationships with major
US distributors of power transmission equipment and original equipment
manufacturers.
* These will provide Renold with a significant opportunity to increase its
penetration of the US market, through accelerated growth in sales of Renold
products manufactured in Europe.
* Similarly, outside the US, the opportunity to sell Jeffrey Chain's products
through Renold's extensive world-wide sales network will extend its overall
product offering.
* The acquisition will bring to the Group a substantial, well-resourced
manufacturing facility with the potential for increasing capacity. Jeffrey
Chain's manufacturing capability will be further enhanced through the
application of Renold's world class process and manufacturing technology.
* In the year ended 31 December 1999, Jeffrey Chain achieved an operating
profit of US$5.6 million (after goodwill amortisation of US$0.8 million and
management fees of US$0.3 million which cease on completion) on turnover of
US$46.4 million.
Commenting on the announcement, David Cotterill, Chief Executive of Renold,
said:
'This acquisition represents a major step in our strategy to develop further
our core chain business.
Jeffrey Chain gives us a strong foothold in the world's largest single market
for power transmission products. It is an excellent fit with our existing
chain businesses and provides Renold with new growth opportunities worldwide.'
Current Trading and Prospects
Over the three months since the trading statement issued on 15 November 1999,
the Group's chain businesses have continued to perform satisfactorily,
maintaining their strong margins, and this has been coupled with an upturn in
order intake by the machine tool businesses. Whilst trading conditions remain
challenging, these factors underpin the expectation in the statement of an
improvement in performance in the second half.
The Board is of the opinion that the acquisition of Jeffrey Chain will be
earnings enhancing in the year to 31 March 2001 and that opportunities exist
for considerable future benefits from the acquisition for the Renold Group.
A presentation to analysts will be held at Shandwick, Aldermary House, 15
Queen Street, London EC4N 1TX at 10.30am today.
Enquiries
Renold plc
David Cotterill 29th February 2000: 0207 329 0096
John Allan Thereafter: 0161 437 5221
PricewaterhouseCoopers Corporate Finance
Colin Gillespie 0161 245 2224
Shandwick International
Ben Padovan 0207 329 0096
Note to Editors
Renold
Renold is one of the world's leading manufacturers and suppliers of industrial
chain. The Group's chain business comprises the manufacture and sale of
transmission chain, conveyor chain and cam drive systems for automotive
engines, and contributed 57 per cent of the Group's turnover in the year ended
3 April 1999. Over the last five financial years, the chain business has
achieved significant growth in profit contribution, enjoying consistently
strong margins.
Jeffrey Chain
The business of Jeffrey Chain was established in 1887 and is one of the
largest US manufacturers of industrial chain, with an extensive range of
engineered and precision roller chain products which are used in a wide
variety of industrial applications including conveying, elevating and power
transmission.
RENOLD PLC
('Renold' or 'the Company')
Proposed acquisition of Jeffrey Chain
Introduction
The Board of Renold announces that Renold, through its wholly-owned subsidiary
Jeffrey Chain Acquisition Company, Inc. ('Newco'), has conditionally agreed to
acquire Jeffrey Chain, a leading US manufacturer of industrial chain. The
Acquisition will be effected by the purchase by Newco of all of the
partnership interests in Jeffrey Chain LP and all of the common stock of
Jeffrey Chain Corporation (together 'Jeffrey Chain'), for a cash consideration
of US$ 55 million (approximately £34.5 million) on a debt free basis and
subject to possible adjustment dependent on the level of working capital of
Jeffrey Chain at completion (the 'Acquisition'). In the year ended 31
December 1999, Jeffrey Chain achieved an operating profit of US$5.6 million
(after goodwill amortisation of US$0.8 million and management fees of US$0.3
million which cease on completion) on turnover of US$46.4 million.
The consideration will be satisfied by the repayment on completion of Jeffrey
Chain's aggregated net borrowings and by the payment of the balance to the
Sellers. The consideration is being funded by debt, using the acquisition
facilities to be provided by Barclays Bank PLC.
The Directors believe that the Acquisition represents a major opportunity to
make a step change in the development of the Company's core chain business.
On completion of the Acquisition, the Renold Group will be one of the largest
suppliers of industrial chain in the US, the world's biggest single market for
industrial chain, in addition to its existing leading market positions in the
European chain industry.
The Acquisition is conditional, inter alia, on the matters detailed in the
summary of the sale and purchase agreement set out in Appendix 1 and in
particular, in view of its size, on the approval of Renold's shareholders.
Jeffrey Chain comprises Jeffrey Chain LP and Jeffrey Chain Corporation.
Jeffrey Chain LP is a State of Delaware limited partnership, which is
approximately 1 per cent owned by Jeffrey Chain Corporation and approximately
99 per cent. owned by the Sellers. Jeffrey Chain Corporation is a company
incorporated under the laws of the State of Delaware, which is wholly-owned by
the Sellers and which is the general partner of and owns approximately 1 per
cent of Jeffrey Chain LP. The Sellers are Code Hennessy & Simmons, II L.L.P.,
a US private equity investment firm, Gerd Krohn, the President and Chief
Executive Officer of Jeffrey Chain, and others, who own between them, in
varying proportions, approximately 99 per cent of the partnership interests in
Jeffrey Chain LP, and all of the common stock of Jeffrey Chain Corporation.
Information on Jeffrey Chain
The business of Jeffrey Chain was established in 1887 and is one of the
largest US manufacturers of industrial chain, with an extensive range of
engineered and precision roller chain products which are used in a wide
variety of industrial applications including conveying, elevating and power
transmission.
Jeffrey Chain has two primary product lines:
-engineered chain, branded 'Jeffrey Chain', which is manufactured to customer
specifications and application requirements, as well as to standard designs;
and
-precision roller chain, which is supplied to standard specifications and
branded under the 'Whitney Chain' name.
In the opinion of the Board, Jeffrey Chain is one of the major suppliers of
engineered chain to the US market. In addition, it is one of a limited number
of US businesses able to supply a comprehensive range of chain products to
both the engineered and precision roller chain markets, where both product
brands have a strong presence and recognition. This ability to deliver a
comprehensive product range qualifies Jeffrey Chain to supply many of the
leading distributors in the US power transmission market. Products are also
sold directly to original equipment manufacturers and users serving a
diversity of markets including automotive, timber, construction and
environmental.
In addition to its extensive product range, Jeffrey Chain provides full
service support and product solutions to customers, through its significant
technical and engineering capability and innovative product development.
Jeffrey Chain's headquarters are in Morristown, Tennessee and there are
stockholding service centres in California and Illinois. The 200,000 square
foot Morristown facility accommodates a well-equipped and versatile
manufacturing plant, together with the sales, engineering and support
functions. As at 31 December 1999, Jeffrey Chain had 296 employees, who are
non-unionised.
The President and Chief Executive Officer of Jeffrey Chain LP is Gerd Krohn,
aged 49, who joined Jeffrey Chain in 1985. In March 1996, Mr Krohn led a
management buy-out of the business of Jeffrey Chain LP, with other members of
the existing management team, backed by Code Hennessy & Simmons, II L.L.P., a
US private equity investment firm. Mr Krohn and the other key members of the
existing management team are entering into new service agreements with Newco
on completion, brief details of which are set out in Appendix 1 to this
announcement.
Renold's corporate strategy
The Renold Group operates in two market sectors:
- power transmission, which includes the chain, coupling and gear
businesses; and
- machine tools and rotors.
The Board's strategy is to continue to develop the core businesses through
technical leadership and a strong international presence in markets where the
barriers to entry are high and where there is an opportunity for price
leadership in the market. The key drivers for the future success of the
Renold Group are both the continued emphasis on developing the businesses in
growth markets and gaining a significant presence in attractive markets where
Renold is under represented.
Reasons for the Acquisition
Renold is one of the world's leading manufacturers and suppliers of industrial
chain. The Group's chain business, comprises the manufacture and sale of
transmission chain, conveyor chain and cam drive systems for automotive
engines, and contributed 57 per cent of the Group's turnover in the year ended
3 April 1999. Over the last five financial years, the chain business has
achieved significant growth in profit contribution, enjoying consistently
strong margins.
Through the Group's principal chain brands of Renold, A&S and Brampton, the
chain business has a strong presence in Europe. In particular, the Board is
of the opinion that the chain business is the market leader in Germany, the
UK, Belgium and the Netherlands, and the second largest supplier in France,
Italy and Spain. The Group is also a major supplier into the Australian and
Canadian markets. However, the Group's share of the US industrial chain
market is relatively low and the Acquisition presents a significant
opportunity for growth in the North American operations.
The Acquisition will bring to the Group a substantial, well-resourced
manufacturing facility, in a comparatively low cost environment within the US,
with the potential for increasing capacity. This will complement the existing
manufacturing facilities of the chain business, which are principally in the
UK, France and Germany. Jeffrey Chain's manufacturing capability will be
further enhanced through the application of Renold's world class process and
manufacturing technology.
Jeffrey Chain has strong US brands and established relationships with major US
distributors of power transmission equipment and original equipment
manufacturers. These will provide Renold with a significant opportunity to
increase its penetration of the US market, through accelerated growth in sales
of Renold products manufactured in Europe. Similarly, outside the US, the
opportunity to sell Jeffrey Chain's products through Renold's extensive world-
wide sales network will extend its overall product offering.
Following the Acquisition, Gerd Krohn, President and Chief Executive Officer
of Jeffrey Chain LP, will report to Ian Trotter, Managing Director - Chain
Businesses, and Jeffrey Chain will be integrated into Renold's chain business.
Financial information on Jeffrey Chain
The business of Jeffrey Chain was the subject of a management buy-out on 15
March 1996. Jeffrey Chain LP and Jeffrey Chain Corporation, which were both
formed for the purposes of that management buy-out, acquired the business and
certain assets of Jeffrey Chain Corporation, the predecessor company. Jeffrey
Chain Corporation is an investment vehicle and did not trade in the period
from 1 January 1997 to 31 December 1999 and its net assets are immaterial to
Jeffrey Chain LP. As there is no requirement to do so in the US, consolidated
financial statements have not been prepared for Jeffrey Chain and the
financial information set out below relates solely to Jeffrey Chain LP.
The following table sets out a summary of the audited results of Jeffrey Chain
LP, for the three years ended 31 December 1999:
Year ended 31 December
1999 1998 1997
$'000 $'000 $'000
Turnover 46,408 45,630 45,706
--------- --------- --------
Operating profit 5,552 4,944 5,104
--------- --------- --------
Operating profit is after charging:
Amortisation of existing goodwill 788 787 788
Management fee from Code Hennessy &
Simmons which will cease on Completion 263 266 285
--------- --------- --------
Profit before taxation 3,076 1,886 1,891
--------- --------- ---------
Net assets as at 31 December 7,286 4,952 3,719
--------- --------- ---------
Jeffrey Chain LP's performance in the three years ended 31 December 1999 has
been strong despite difficult trading conditions in its markets. Whilst
turnover has remained stable, market share has grown and Jeffrey Chain LP has
achieved higher underlying gross margins and maintained a strong cash flow.
Profit before taxation is stated after deducting interest payable and similar
charges in respect of the financing of a management buy-out in 1996. As at 31
December 1999, the net assets of Jeffrey Chain LP were US$7.3 million; after
adjusting for goodwill of US$8.8 million, cash of US$0.6 million, debt of
US$22.7 million and accrued interest of US$1.3 million (totalling aggregated
net borrowings of US$23.4 million), net tangible assets to be acquired, free
of debt, are US$21.9 million.
Summary of the Sale and Purchase Agreement
A summary of principal terms of the sale and purchase agreement, including the
principal conditions, is set out in Appendix 1 to this announcement.
Financing, proforma statement of net assets and gearing
Under new banking arrangements, a multi-currency syndicated facility
comprising term loans of US$40 million and £11 million and a revolving credit
facility totalling £12 million in aggregate, together with a working capital
facility of £14 million (together with ancillary facilities), will be provided
to Renold and certain of its subsidiaries by Barclays Bank PLC who will
initially be the sole syndicate member. The new facilities will enable Renold
to fund the Acquisition, replace existing UK facilities and provide on-going
working capital for the Renold Group as enlarged by the Acquisition.
Following the Acquisition, Renold's interest cover and balance sheet gearing
will be at levels considered acceptable by the Board. The level of gearing is
expected by the Board to reduce in subsequent years.
Current trading and prospects
Over the three months since the trading statement issued on 15 November 1999,
the Group's chain businesses have continued to perform satisfactorily,
maintaining their strong margins and this has been coupled with an upturn in
order intake by the machine tool businesses. Whilst trading conditions remain
challenging, these factors underpin the expectation in the statement of an
improvement in performance in the second half.
The Board is of the opinion that the Acquisition of Jeffrey Chain will be
earnings enhancing in the year to 31 March 2001 and that opportunities exist
for considerable future benefits from the Acquisition for the Renold Group.
General
A circular, together with a form of proxy, will be sent to Renold's
shareholders today, convening an Extraordinary General Meeting, to be held at
Renold House, Styal Road, Wythenshawe, Manchester M22 5WL at 9.30am on 17
March 2000, at which an ordinary resolution will be proposed to approve the
Acquisition.
Enquires:
Renold plc
David Cotterill 29 February 2000: Tel: 0207 329 0096
John Allan Thereafter: Tel: 0161 437 5221
PricewaterhouseCoopers Corporate Finance
Colin Gillespie Tel: 0161 245 2224
Shandwick
Ben Padovan Tel: 0207 329 0096
PricewaterhouseCoopers, which is authorised by the Institute of Chartered
Accountants in England and Wales to carry on investment business, is acting
for Renold plc and no one else in relation to the matters described in this
document and will not be responsible to any other person for providing the
protections afforded to its customers or for advising any other person in
relation to these matters.
APPENDIX 1
Summary of the Sale and Purchase Agreement
The parties to the sale and purchase agreement, which is dated 28 February
2000, are (1) Renold, (2) Newco, (3) Jeffrey Chain LP, (4) Jeffrey Chain
Corporation and (5) the Sellers ('the Sale & Purchase Agreement').
Completion of the Sale and Purchase Agreement ('Completion') is conditional,
inter alia, upon:-
a) approval of Renold's shareholders at the Extraordinary General Meeting;
b) confirmation that the representations and warranties given by the Sellers
remain true and complete in all material respects at Completion;
c) confirmation that the Sellers have complied with their covenants in all
material respects in the Sale and Purchase Agreement in the period between
exchange and Completion;
d) the Sellers having procured the repayment by Jeffrey Chain of all
outstanding indebtedness of Jeffrey Chain and the release of all
associated security; and
e) an acceptable opinion from the Sellers' counsel to Newco in relation to,
inter alia, the authority of Jeffrey Chain LP, Jeffrey Chain Corporation
and certain of the Sellers to enter into the Sale and Purchase Agreement.
Completion will take place after all such conditions have been satisfied,
which is expected to be during March 2000.
Pursuant to the Sale and Purchase Agreement, the Sellers will sell to Newco
all of the limited partnership interests of Jeffrey Chain LP and all of the
outstanding common stock of Jeffrey Chain Corporation for a cash consideration
of US$55 million (approximately £34.5 million) on a debt free basis and
subject to possible adjustment dependent on the level of working capital of
Jeffrey Chain at Completion. The consideration will be satisfied by the
repayment on Completion of Jeffrey Chain's aggregated net borrowings and by
the payment of the balance to the Sellers. Any penalties payable on the
repayment of aggregated net borrowings will be borne by the Sellers.
There will be a working capital adjustment so that the consideration will be
increased or decreased by an amount equal to the difference between the actual
working capital of Jeffrey Chain at Completion (as shown in completion
accounts to be agreed between the above parties) and US$15.3 million
(approximately £9.6 million).
The Sale and Purchase Agreement contains certain representations and
warranties given to Newco and Renold ('Warranties') in relation to the affairs
of Jeffrey Chain. With the exception of certain Warranties relating, inter
alia, to title to the partnership interests and common stock being acquired
and authority to execute (which are given in an unqualified form), all of the
Warranties are given to the knowledge of the Sellers (which is deemed to
include the knowledge of key management members) after making due and careful
enquiry. With the exception of certain specified claims which may be brought
within longer periods, claims for indemnity under the Warranties must be
notified by Newco or Renold by 30 June 2001. Newco's rights of indemnity for
breach of Warranty, save in respect of claims relating to title to the
partnership interests and common stock, are subject to reaching a threshold of
US$300,000 (approximately £188,100) (in which event only the excess may be
claimed). Save in the event of fraud, the Sellers' maximum indemnity
obligation under the Warranties is limited to US$2,750,000 (approximately £1.7
million). As security for claims for breach of Warranty, part of the
consideration, comprising US$2,750,000, will be paid on Completion into an
escrow account which will (save for any outstanding claims notified by Newco
or Renold) be held for a period expiring on 30 June 2001 on the terms of an
escrow agreement to be executed between certain of the above parties on
Completion.
Newco and Renold also have the benefit of an indemnity up to a maximum of
US$1.8 million (approximately £1.1 million) from Code Hennessy & Simmons, II
L.L.P., being one of the Sellers, in respect of litigation proceedings brought
against Jeffrey Chain LP and its customer, Seabury Construction Co. Inc., by
the City of New York in the Supreme Court of New York in November 1999 and in
respect of proceedings brought against Jeffrey Chain LP by Seabury
Construction Co. Inc. the indemnity is not subject to any minimum dollar
threshold. Before claiming under the indemnity, Newco and Renold are required
to seek recovery from the escrow account established in 1996 and to the extent
such recovery and certain other recoveries are made from the 1996 escrow
account, the maximum amount of the indemnity is correspondingly reduced.
As a result of the gap in time between exchange and Completion, the Warranties
will be deemed to be repeated as at Completion. Newco and Renold have certain
rights to rescind the Sale and Purchase Agreement in the event, inter alia,
that there is a material breach of the Warranties or a material adverse change
in the financial position of Jeffrey Chain.
The Sale and Purchase Agreement includes covenants from the Sellers in
relation to the running of the business of Jeffrey Chain in the period up to
Completion. Code Hennessy & Simmons, II L.L.P., one of the Sellers, has
entered into certain covenants in favour of Newco and Renold not to poach
senior employees nor to solicit customers for a two year period from
Completion.
The key members of Jeffrey Chain's existing management team have agreed to
enter into new service agreements with Newco on Completion. Each such service
agreement contains usual US terms and conditions of employment and restrictive
covenants appropriate to each manager's position within Jeffrey Chain LP. Each
of the service agreements is for a fixed period varying from one to two years
from the date of Completion.
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