10 Dec 2009 13:07
10 December 2009
Redstone plc
("Redstone", the "Company" or the "Group")
Approval for waiver of an obligation under Rule 9 of the Takeover Code
Proposed reorganisation
Notice of Extraordinary General Meeting
A circular has today been sent to shareholders which provides details of the proposed reorganisation and which seeks shareholder approval for the reorganisation and the waiver of an obligation under Rule 9 of the Takeover Code at an Extraordinary General Meeting convened for 30 December 2009. A summary of the Circular is detailed below and an electronic version of the Circular will be available from the Company's website www.redstone.co.uk.
On 17 September 2009, the Board announced its intention to seek approval from Shareholders for certain matters relating to the issue of Loan Notes to Gartmore and SVGIM. The Circular sets out the Board's proposals in that regard and the reasons why the Board are unanimously recommending that Shareholders vote in favour of the Proposals. Gartmore's shareholding of 21,260,097 Ordinary Shares represents 14.59 per cent. of the Ordinary Shares in issue at today's date whilst SVGIM's shareholding of 28,972,502 Ordinary Shares represents 19.88 per cent. of the Ordinary Shares in issue at today's date. Under Rule 9 of the Takeover Code, unless a specific waiver is obtained from the Panel and approved by the Independent Shareholders on a poll, Gartmore and/or SVGIM would normally be obliged to make a mandatory offer for the Company in the event that either of their aggregate percentage holding of voting rights attaching to the Company's issued share capital increased to 30 per cent. or more as a result of a Conversion.
The Board is also asking Shareholders to approve a number of amendments to the Existing Articles primarily to reflect the implementation of the remaining provisions of the Companies Act 2006, the Shareholders' Rights Regulations, where applicable, and the Reorganisation.
Background to and reasons for the Proposals
As previously announced, the Group has spent much of the latter part of 2009 exploring potential ways to reduce the Group's indebtedness to a more sustainable level. Having disposed of the Telecoms division for £17 million, the Board worked with its advisors in exploring potential ways of funding the business. It was subsequently announced that the Company had secured up to £6 million of new funding for the Group, with the provision for a further £2 million, and revised its agreements with the Group's other debt providers. The injection of new capital and revision of existing debt agreements has helped, and will continue to help, secure the future development of the Group as it focuses on its key information and communication technology strengths.
The Board is aware that the potentially dilutive nature of the Loan Notes may not be attractive to Shareholders. However, having explored the alternatives in the timeframe available, the Board believes that the issue of the Loan Notes, which provided the Group with the financing it required to secure its future, was the correct course of action.
Future business of the Company and current intentions
The Board is of the view that, following implementation of the Proposals, the business of the Company would be carried on in substantially the same manner as it is at present, with no major changes although the Company will continue to seek cost-savings and reductions where appropriate. Gartmore has subscribed for Loan Notes to support its existing investment in the Company. Gartmore is not intending to seek any changes to the Board, and has confirmed that it would be its intention that, following any increase in its proportionate shareholding as a result of Conversion, the business of the Company would be continued in substantially the same manner as at present, with no major changes. It has also confirmed that it has no intentions regarding employment, the location of the Company's places of business or redeployment of the Company's fixed assets. Furthermore Gartmore is not intending to prejudice the existing employment rights, including pension rights, of any of the employees or management of the Group nor to procure any material change in the conditions of employment of any such employees or management.
The SVGIM entities have an interest in Ordinary Shares and Loan Notes in the amounts set out in the Circular. All such interests are managed by SVGIM acting either as investment adviser or investment manager to each of the entities. SVGIM is not intending to seek any changes to the Board, and has confirmed that it would be its intention that, following any increase in the proportionate shareholding controlled by it as a result of Conversion, the business of the Company would be continued in substantially the same manner as at present, with no major changes. It has also confirmed that it has no intentions regarding employment, the location of the Company's places of business or redeployment of the Company's fixed assets. Furthermore SVGIM is not intending to prejudice the existing employment rights, including pension rights, of any of the employees or management of the Group nor to procure any material change in the conditions of employment of any such employees or management.
The Loan Notes
As announced on 17 September 2009, the Group completed a fundraising of up to £6 million through the issue of the Loan Notes to Gartmore and SVGIM, with the provision for a further £2 million. The proceeds from the Loan Notes have provided funds for general working capital purposes and to strengthen the Group's balance sheet.
The key terms of the Loan Note Instrument are as follows:
the Loan Notes can be converted into ordinary shares in the Company at the Conversion Price but only if the Noteholder is not required to make a mandatory offer for the Company under Rule 9;
the Loan Notes will have the benefit of a second charge, ranking behind the indebtedness to Barclays Bank PLC;
the Repayment Premium shall be payable on the maturity date;
in the event that the Whitewash Resolution is not passed, as well as the Repayment Premium, the Super Premium shall also be payable on the maturity date;
the Loan Notes may be issued in tranches on different dates with the initial tranche being an aggregate of £3 million;
the second tranche of up to £3 million, can be requested by the Company at any time provided that there has not been a Material Adverse Change (as defined in the Loan Note Instrument);
the maturity date shall be 1 October 2011 or, if earlier, the occurrence of a Major Transaction (as defined in the Loan Note Instrument).
At the date of this announcement, £3 million of the committed £6 million of Loan Notes had been issued by the Company. Each of Gartmore and SVGIM have received an arrangement fee of 0.5 per cent. of the aggregate facility (£6 million).
Based on the assumptions set out in Part 3 of the Circular, the interests of the Noteholders in the share capital of the Company on a Full Conversion would be as follows:
| Noteholder | Number of New Ordinary Shares | Number of Loan Note Shares | % of voting rights on a Full Conversion |
| Gartmore | 21,260,097 | 656,934,307 | 46.46 |
| SVGIM | 28,972,502 | 656,934,307 | 46.99 |
Incentivisation of senior management
The Board believes that to enhance the value of the business in the future it is essential that the senior management of the Group are well motivated and appropriately rewarded. Whilst the Company has a number of share option schemes in place which enable selected employees to benefit from a rising share price, your Board is keen to provide an additional incentive which is also aligned as closely as possible to the interests of the Shareholders.
The Board has therefore agreed in principle with the Noteholders that a management incentive plan (the "Redstone Management Incentive Plan") will be put in place, under which, senior management would be granted options to subscribe for Loan Notes. As at the date of posting this document, the Redstone Management Incentive Plan remained under negotiation although it was expected that the Board, save for the Independent Director, would be eligible to participate in the Redstone Management Incentive Plan. The total amount of Loan Notes to be made available to senior management will be calculated by reference to the amount of Loan Notes in issue at the time the Redstone Management Incentive Plan is put in place. Any allocation will be decided by the Remuneration Committee after the Redstone Management Incentive Plan has been put in place.
The aggregate amount of Loan Notes that may be issued to the senior management is not expected to exceed 35 per cent. of the total issued Loan Notes and any Conversion of these Loan Notes would not result in management holding in excess of 29.99 per cent. of the entire issued share capital of the Company.
Accordingly, the Remuneration Committee has undertaken a review of the current incentive arrangements for senior management and has approved the framework of the Redstone Management Incentive Plan and Resolution 6 therefore proposes that the Redstone Management Incentive Plan be adopted in accordance with the principal terms as outlined above. Save for the Independent Director, the Board shall be disenfranchised from voting on Resolution 6.
The Board also wishes to restructure the current option arrangements for existing employees. It is recognised that all outstanding options are currently out of the money and are not providing an effective incentive for employees throughout the Group. It is therefore intended to allow employees to surrender their existing underwater options in return for the grant of new options with an exercise price equal to the Conversion Price. The current option schemes provide for the issue of new shares to satisfy options up to a maximum of 10 per cent. of the issued share capital in any rolling 10 year period. Due to the potential dilutive effect of the proposed issue of Loan Notes, it is proposed that this limit be increased to 25 per cent. of the issued share capital of the Company prior to conversion of the Loan Notes. Assuming that there is a Full Conversion, and options were granted to the new 25 per cent. maximum dilution limit, the number of options would represent approximately 3.4 per cent. of the entire issued ordinary share capital of the Company following a Full Conversion. It is intended that the rules of the Redstone Unapproved 2008 Incentive Option Scheme will be amended to allow for the grant of options at a price lower than the market value of a New Ordinary Share and for the rules of the Redstone Approved 2008 Incentive Option Scheme and the rules of the Redstone Unapproved 2008 Incentive Option Scheme (together, the "Option Schemes") to be amended to reflect the increased share capital dilution limit.
It is not intended that Peter Hallett or Stephen Yapp would participate in the amended Option Schemes. Save for the Independent Director, the Board shall be disenfranchised from voting on Resolution 7.
The Remuneration Committee considers, having looked at alternative incentive plan arrangements
and having been so advised by FinnCap, that the Redstone Management Incentive Plan and the proposed amendments to the Option Schemes would be fair and reasonable insofar as the Shareholders are concerned.
The Takeover Code and the Waiver
The Takeover Code governs, inter alia, transactions which may result in the change of control of a public company to which the Takeover Code applies.
Following completion of the Proposals, Gartmore and SVGIM will each be interested in shares which in the aggregate carry not less than 30 per cent. of the voting rights of the Company but neither will hold shares carrying more than 50 per cent. of such voting rights and if Gartmore and SVGIM or any person acting in concert with either of them, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which either of them are interested, the provisions of Rule 9 shall apply to that increase.
The Panel has agreed, however, to waive the obligation to make a general offer that would otherwise arise as a result of a Conversion, subject to the approval of the Independent Shareholders. Accordingly, Resolution 1 is being proposed at the EGM, and will be taken on a poll. Only the Independent Shareholders will be entitled to vote on Resolution 1.
The Independent Director considers the Proposals to be in the best interests of the Company and the Independent Shareholders, and recommends that you vote in favour of the Whitewash Resolution. It should be noted that in the event that the Shareholders do not pass the Whitewash Resolution, the Loan Notes will attract the Super Premium and a further £12 million may become payable to the Noteholders that would otherwise not be payable.
Reorganisation
The Conversion Price represents a discount to the current 10 pence nominal value of an Existing Share. However, company law prohibits the issue of shares at a price below their nominal value and, accordingly, a share capital reorganisation will be necessary in order to undertake any Conversion. It is therefore proposed to reorganise the share capital of the Company by subdividing each issued Existing Share of 10 pence into one New Ordinary Share of 0.1 pence and one Deferred Share of 9.9 pence.
The New Ordinary Shares will have the same rights (including voting and dividend rights) as each Existing Share has at present. No new certificates will be issued in respect of the New Ordinary Shares and existing share certificates in respect of Existing Shares will be valid and will continue to be accepted as evidence of title for the New Ordinary Shares. The Company's ISIN (GB00B1VGFJ79) shall remain unchanged.
In order to effect the Reorganisation, new articles of association will need to be adopted to include the rights of the Deferred Shares, which will be minimal thereby rendering them effectively valueless.
The rights attaching to the Deferred Shares can be summarised as follows:
they do not entitle holders to receive any dividend or other distribution or to receive notice or, speak or vote at general meetings of the Company;
on a return of assets on a winding up, they only entitle the holder to the amounts paid up on such shares after the repayment of the capital paid up on the New Ordinary Shares and the payment of £100 million per New Ordinary Share;
they are not freely transferable;
the creation and issue of further shares which rank equally or in priority to the Deferred Shares or the passing of a resolution of the Company to cancel the Deferred Shares or to effect a reduction of capital shall not constitute a modification or abrogation of their rights; and
the Company shall have the right at any time to purchase all of the Deferred Shares for an aggregate consideration of not more than £1.00.
No application will be made for the Deferred Shares to be admitted to trading on AIM or any other stock exchange. No share certificates will be issued for any of the Deferred Shares. There are no immediate plans to purchase or to cancel the Deferred Shares, although the Directors propose to keep the situation under review.
Extraordinary General Meeting
Set out in the Circular is a notice convening the EGM to be held on 30 December 2009 at the offices of Osborne Clarke at One London Wall, London, EC2Y 5EB at 11.00 a.m., at which the Resolutions will be proposed for the purposes of implementing the Proposals.
Recommendation
The Independent Director, who has been so advised by FinnCap, considers the Proposals to be fair and reasonable and in the best interests of the Independent Shareholders and the Company as a whole. In providing advice to the Independent Director, FinnCap has taken into account the commercial assessment of the Board.
Accordingly the Independent Director recommends the Independent Shareholders to vote in favour of the Resolutions, as the Independent Director intends to do in respect of his beneficial shareholding amounting to 50,000 Ordinary Shares representing 0.03 per cent. of the Ordinary Shares.
The definitions which apply in the Circular have been used in this announcement.
Enquiries
Redstone plc
Tel: +44 (0)845 203 3943
Stephen Yapp, Executive Chairman
FinnCap
Tel: +44 (0)20 7600 1658
Marc Young
Charlotte Stranner
ICIS
Tel. +44 (0)20 7651 8688
Tom Moriarty
Bob Huxford