(Alliance News) - Connect Group PLC on Wednesday said it intends to sell its mixed freight distributor business Tuffnells as part of a GBP15 million deal.
Shares in Connect were up 31% at 23.80 pence in London in midday trading.
The specialist distributor said it had commenced a strategic review of Tuffnells back in November 2019. As a result of this, its Smiths News Holdings Ltd subsidiary has now signed a conditional share purchase agreement with Palm Bidco Ltd.
Palm Bidco is a recently incorporated special purpose vehicle and is "backed by investors brought together by the specialist restructuring advisory firm Broad Oak Support Services LLP".
Under the agreement, Connect will sell The Big Green Parcel Holding Co Ltd plus all subsidiaries - including Tuffnells Parcels Express Ltd. The aggregate deferred consideration is GBP15 million, which is payable in tranches between 18 months and three years after completion. Payment is not subject to any conditions.
Connect said that "in order to facilitate the proposed turnaround of Tuffnells" and the difficulty of obtaining external debt financing for Tuffnells during the Covid-19 pandemic, it has agreed to provide an up to GBP10.5 million term loan with a 10% per annum interest rate to Tuffnells once the deal is complete.
Shareholder approval is required for the deal. If approval is not granted, Smiths News will pay a GBP100,000 break fee to Palm Bidco and half the net proceeds of any future Tuffnells sale.
Connect based its decision to sell Tuffnells on its belief that "Tuffnells affords no material synergies to the group's other businesses including Smiths News or to Tuffnells itself" and that holding onto the business would "hinder the group's ability to leverage cost efficiencies in managing its central overheads".
Further, the sale will eliminate Tuffnells' "significant on-going financial drag" on Connect's profit and cash flow given its "financial underperformance".
Funds from the Tuffnells sale will be used "to defray the cost of settling Tuffnells' cash overdraft at completion and the transaction costs, fees and expenses relating to the proposed transaction, with the excess used to reduce net debt".
Connect Group Chair Gary Kennedy will step down once the Tuffnells deal completes.
The company had resolved to enter talks with lenders to renew or extend its debt facilities beyond their current January 2021 expiry date and had appointed external debt advisors. However, Connect now considers it to be "inappropriate at this time to enter new or extended financing arrangements" and has opted to defer its refinancing given the Covid-19 pandemic.
"The group expects to re-commence the refinancing process following completion of the proposed transaction (which has been consented to by the requisite majority of the company's existing lenders) and when the debt markets and general market conditions each settle following their current period of heightened volatility," said Connect.
A general meeting to vote on the Tuffnells deal will take place, with notice sent out "as soon as practicable".
Kennedy said: "Despite the trading difficulties in recent years, Tuffnells remains a leading player in its specialist field with every opportunity to thrive under new and committed ownership. Within the group, its disposal will remove the distraction from our strong and profitable news and magazines distribution business, enabling further efficiencies as the group resizes its central functions.
"Looking ahead, we remain focused on strengthening the group's balance sheet, while deploying our surplus free cash flow capital to deliver a reduction in net debt and maintaining attractive total shareholder returns."
Connect said it is expecting "significant and material uncertainty for the group and/or for Tuffnells" in the midst of the pandemic. It has a GBP175 million committed bank facility and at the end of March has GBP68 million of undrawn committed borrowing facilities available.
By Anna Farley; annafarley@alliancenews.com
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