23 Nov 2020 07:30
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION.
THIS IS AN ANNOUNCEMENT UNDER RULE 2.4 OF THE CITY CODE ON TAKEOVERS AND MERGERS (THE "CODE") AND IS NOT AN ANNOUNCEMENT OF A FIRM INTENTION TO MAKE AN OFFER UNDER RULE 2.7 OF THE CODE. THERE CAN BE NO CERTAINTY THAT AN OFFER WILL BE MADE.
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.
FOR IMMEDIATE RELEASE
23 November 2020
Possible Cash Offer for Countrywide plc
Re-confirmation of Offer Price After Completion of Due Diligence
Summary
· Connells' due diligence work on Countrywide now completed
· Offer price re-confirmed at 250 pence per share in cash
· The making of a firm offer now subject only to Countrywide board recommendation and shareholder support
· Due diligence revealed that significant capital investment is required, in excess of the levels envisaged under the Alchemy Proposal
· An acquisition by Connells would enhance the security and stability of Countrywide's business, benefitting employees and customers, as well as its lenders, who would be repaid in full
· No alternative proposal to address Countrywide's urgent need for a recapitalisation has been announced, with the exception of the discredited proposal from Alchemy
· Countrywide faces a number of significant risks as a standalone business:
· Potential to enter administration without a significant capital injection
· Requirement for substantial and sustained investment over the long term
· Unknown management team to lead a major turnaround
· Ongoing financing risks and costs even after a recapitalisation
· Highly competitive environment, with ongoing structural shift to online and hybrid estate agents
· Difficult and uncertain market conditions
· Potential for value-destructive disposals
· Connells' proposal would offer significant and tangible upside to Countrywide shareholders through a cash premium today, which is far more attractive than the theoretical, distant and risky prospect of potential future benefits under a standalone strategy
Commenting today, David Livesey, the Connells Group Chief Executive, said:
"Countrywide shareholders have repeatedly been promised jam tomorrow and it has never been delivered. There is no quick and easy fix for Countrywide. Turning the business around, especially in unpredictable market conditions, will be a difficult, expensive and lengthy process. Countrywide needs new ownership, not yet another speculative scheme that is based on hope rather than experience. Our proposal gives Countrywide shareholders significant immediate upside in cash, at a 72% premium to the undisturbed price, with none of the downside risks of remaining independent."
Update on Connells Possible Cash Offer for Countrywide
The board of Connells Limited ("Connells" or "we") announces that it has completed its due diligence in relation to Countrywide plc ("Countrywide" or the "Company") and re-confirmed its proposal to the Countrywide Board to acquire Countrywide at a price of 250 pence per Countrywide share (the "Possible Cash Offer"). Our due diligence work reinforces the statement made by the Countrywide Board on 22 October 2020 that significant capital investment is required in the Company.
The making of any firm offer in accordance with Rule 2.7 of the Code is now subject only to receiving the recommendation of the Countrywide Board and Connells obtaining irrevocable undertakings from Countrywide's major shareholders. Connells reserves the right to waive either or both of these pre-conditions in whole or in part.
The Possible Cash Offer would provide Countrywide shareholders with immediate, certain and significant value, at a substantial premium to Countrywide's undisturbed share price of 145.0 pence per share. The combination of Connells and Countrywide would enhance the security and stability of Countrywide's business for the benefit of its employees, customers, and other stakeholders and ensure that Countrywide's lenders would be repaid in full.
The Connells Board has noted the press speculation about alternative proposals under which Countrywide would remain as a listed company with a recapitalised balance sheet and new management team. At present, with the exception of the discredited proposal from Alchemy Partners, no such proposal has been announced or explained by any party.
The Connells Board believes that its Possible Cash Offer is significantly more attractive to Countrywide shareholders than any alternative proposal, if one is ever made, under which Countrywide remains as a listed company in the speculative hope that it can raise the necessary capital, find the right management, implement the right strategy, make the required investment, motivate its employees and overcome significant market uncertainty in order to potentially deliver some incremental future value to Countrywide shareholders in excess of the value of the Possible Cash Offer.
Risks associated with Countrywide remaining a standalone business
Shareholders in Countrywide are exposed to significant risks if it remains as a standalone business.
Potential to enter administration without a significant capital injection
The Countrywide Board has indicated that Countrywide is in urgent need of recapitalisation to reduce its net debt and lessen its exposure to its lenders. The Countrywide Board has stated its belief that, in the absence of a recapitalisation, Countrywide is unlikely to be able to execute its business strategy over the short and medium term and comply with its current financial covenants, with the risk that it could end up in administration, leaving Countrywide shareholders exposed to losing all or a substantial portion of their investment.
Requirement for substantial and sustained investment over the long term
The Connells Board believes that, over recent years, Countrywide has under-invested in its technology, branch network and people, and this, coupled with aggressive cost cutting, has contributed to its decreased market share. The Connells Board believes that the investment needed to put the business back on a solid footing is likely to be far larger than the levels referred to in the Alchemy Proposal. Set in the context of a challenging market, this investment will reduce Countrywide's standalone profitability and cash flow for at least the next few years.
Unknown management team to lead a major turnaround
There is no clarity over who would lead Countrywide as a standalone business. The current Countrywide management team have mostly indicated that they would step down under the Alchemy Proposal, but a new CEO has not been identified. The Connells Board believes that turning around Countrywide requires a strong management team with deep experience in the estate agency sector. It needs leadership with a track record in running large businesses in the sector, who can bring real market expertise and insight, not individuals from outside the industry. Countrywide has tried bringing in an outsider before with results that Countrywide shareholders will be familiar with.
Ongoing financing risks and costs even after a recapitalisation
Even with a £90 million equity injection as contemplated by the Alchemy Proposal, Countrywide would remain exposed to material financing costs and risks. The interest rate on the Company's new loan facility under the Alchemy Proposal would still cost up to as much as LIBOR plus 9.50%.
The Alchemy Proposal would have been Countrywide's third capital raise in a little over three years. Even before the Alchemy Proposal, Countrywide had raised nearly £180 million in new equity since March 2017 but, immediately prior to our Possible Cash Offer, it had a market capitalisation of only £47.6 million, only about a quarter of the amount raised. Investors in the previous two capital raises have suffered material losses.
Highly competitive environment, with ongoing structural shift to online and hybrid estate agents
The UK real estate services market is highly competitive with strong online and hybrid estate agents, as well as an array of strong local independent estate agents. This structural shift has reduced margins across the sector, especially at full-service high street estate agents.
Over recent years, Countrywide has struggled to compete effectively in this environment. Its "back to basics" strategy announced on 8 March 2018 has failed to deliver revenue or EBITDA growth while its balance sheet has continued to weaken.
Difficult and uncertain market conditions
Even if an effective vaccine against Covid-19 is found, the long term impact of the pandemic on the UK economy is expected to be severe, particularly in property markets which are bound to face significant headwinds due to Brexit uncertainty, the end of the furlough scheme, the end of the stamp duty holiday and the upcoming restrictions on the Help To Buy scheme. As investors in a standalone business, Countrywide shareholders will be exposed to all of these risks and the Company may not overcome them without significant long term investment, a strong balance sheet and experienced management.
Potential for value-destructive disposals
There has been press speculation that Countrywide could embark on a strategy of disposals with a view to reducing its bank debt. The Connells Board believes that a strategy of piecemeal disposals aimed at delivering an estate-agency-only business would damage value and be fraught with risk. Conveyancing, financial services and surveying are essential to Countrywide's estate agency operation and enable it to offer customers a complete proposition. Disposing of profitable non estate-agency divisions would deprive Countrywide of complementary defensive units which are important to supporting the entire business, especially during challenging market conditions.
We do not believe an asset stripping strategy would create value for shareholders or be good for Countrywide's employees, customers or other stakeholders. Nor is it straightforward to achieve, as demonstrated by Countrywide's failure to sell Lambert Smith Hampton. Furthermore, Countrywide's current lenders have indicated that they would not be supportive of a disposal strategy as a means by which to de-leverage Countrywide's balance sheet.
Conclusion
The Connells Board believes that the Alchemy Proposal was just the latest in a series of expensive corporate initiatives of Countrywide over many years, all of which have promised future upside that has never been delivered. The enormous scale of the challenge facing Countrywide can be seen by the fact that it needs to reverse the performance of a business that has lost over £500 million pre-tax over the last three calendar years.
The Connells Board believes that a substantial cash premium today is far more attractive to Countrywide shareholders than the theoretical prospect of distant potential future upside under an as yet unknown standalone strategy to be implemented by an unknown management team, with all the attendant downside risk.
Financial terms of the Possible Cash Offer
The Possible Cash Offer represents a premium of:
· 85% to 135.0 pence per Countrywide share, the price at which the Countrywide Board recommended that shareholders approve Alchemy taking control of the Company;
· 72% to 145.0 pence per Countrywide share, being the closing price of the Company on 6 November 2020, which is the last business day prior to the commencement of the offer period in relation to Countrywide; and
· 116% to 115.7 pence per Countrywide share, being the six month volume weighted average price of the Company to 6 November 2020, which is the last business day prior to the commencement of the offer period in relation to Countrywide.
The Possible Cash Offer implies a value of approximately £82.1 million for the issued ordinary share capital of Countrywide and an enterprise value of £172.3 million for Countrywide.
Benefits of the Possible Cash Offer for Countrywide shareholders
Under the Possible Cash Offer, Countrywide shareholders will benefit from:
· a clean, simple and straightforward transaction;
· a premium cash price for their Countrywide shares that is far in excess of the discounted price at which control of Countrywide would pass to Alchemy;
· a de-risked proposal where value is not dependent on future market conditions at a time of significant uncertainty, including renewed lockdown measures in the UK and Brexit;
· no ongoing exposure to the financing risk faced by Countrywide, which has been highlighted by the Countrywide Board;
· the opportunity for all Countrywide shareholders to achieve full liquidity for their entire shareholding now; and
· no exposure to the £8 million of costs payable by Countrywide under the Alchemy Proposal.
Benefits of Connells' Possible Cash Offer to Countrywide's employees and other stakeholders
Connells is one of the largest estate agency groups in the UK, with a strong entrepreneurial culture and a firm commitment to investing in its branches, technology and people. As part of the enlarged Connells group, Countrywide's employees and other stakeholders will benefit from this investment as well as from access to Connells' platform, expertise and capital. Furthermore, the Connells Board believes that a well-invested high street branch network, coupled with a diversified brand portfolio, will allow the combined business to provide an attractive offering to its customers.
Code matters
The Possible Cash Offer does not constitute an offer or impose any obligation on Connells tomake an offer, nor does it evidence a firm intention to make an offer within the meaning of theCode. Connells does not, therefore, regard it as forming the basis for an announcement pursuant to Rule 2.2(a) of the Code. Accordingly, there can be no certainty that any offer will ultimately be made, even if the pre-conditions below are satisfied or waived.
In accordance with Rule 2.6(a) of the Code, Connells must, by no later than 5.00 pm on 7 December 2020, either announce a firm intention to make an offer for Countrywide in accordance with Rule 2.7 of the Code or announce that it does not intend to make an offer for Countrywide, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. This deadline can be extended with the consent of the Panel on Takeovers and Mergers in accordance with Rule 2.6(c) of the Code.
Pursuant to Rule 2.5 of the Code, Connells reserves the right to vary the form and / or mix of the offer consideration set out in this announcement. Connells also reserves the right to make the offer at a lower value:
1. with the recommendation or consent of the Countrywide Board;
2. if Countrywide announces, declares or pays any dividend or any other distribution or return of value to shareholders, in which case Connells reserves the right to make an equivalent reduction to the Possible Cash Offer and / or other offer terms;
3. following the announcement by Countrywide of a whitewash transaction pursuant to the Code (other than the Alchemy Proposal); or
4. if a third party announces a firm intention to make an offer for Countrywide pursuant to Rule 2.7 of the Code which, at that date, is valued at a lower price than the Possible Cash Offer referred to above.
The making of any firm offer in accordance with Rule 2.7 of the Code is now subject only to receiving the recommendation of the Countrywide Board and Connells obtaining irrevocable undertakings from Countrywide's major shareholders. Connells reserves the right to waive either or both of these pre-conditions in whole or in part.
Any firm offer in accordance with Rule 2.7 of the Code will be subject to customary terms and conditions for a transaction governed by the Code and the UK listing rules, including any required regulatory approvals.
A further announcement will be made in due course.
Enquiries
Connells c/o MHP CommunicationsDavid Livesey, Group Chief Executive
Richard Twigg, Group Finance & Commercial Director
Evercore (Financial Adviser to Connells) +44 (0)20 7653 6000Edward Banks
Tariq Ennaji
MHP Communications (PR Adviser to Connells) Reg Hoare +44 (0)20 3128 8793
Peter Hewer +44 (0)20 3128 8658
connells@mhpc.com
Sources and Bases of Information
Unless otherwise stated in this announcement:
1. the value of £82.1 million attributed to the fully diluted issued share capital of Countrywide is based on a value of 250 pence per Countrywide share and 32,826,068 Countrywide shares in issue on 20 November 2020 (being the last business day prior to the date of this announcement);
2. the enterprise value of £172.3 million is calculated by reference to a Countrywide equity value calculated as per paragraph 1 above, and:
a) net bank debt of £55.6 million as at 30 September 2020; plus
b) deferred VAT and PAYE / National Insurance contributions payable to HMRC of £34.6 million as at 30 September 2020;
3. unless otherwise stated, all prices for Countrywide shares have been derived from the daily official list of the London Stock Exchange and represent closing prices on the relevant date(s);
4. unless otherwise stated, the financial information relating to Countrywide is extracted (without material adjustment) from the 2018 Countrywide annual report, the 2019 Countrywide annual report, the 2020 Countrywide interim results or the prospectus published in relation to the Alchemy Proposal and dated 30 October 2020;
a) Countrywide's cumulative pre-tax losses amount of £500 million over the last three calendar years is derived from the sum of Countrywide's losses before taxation of £37.9 million in 2019, £259.5 million in 2018 and £211.2 million in 2017, as reported in Countrywide's annual reports of 2019 and 2018;
b) The interest rate on the Company's new loan facility under the Alchemy Proposal of up to LIBOR plus 9.50% is derived from section 12.3 of Part XII (Additional Information) of Countrywide's prospectus published in relation to the Alchemy Proposal and dated 30 October 2020;
5. Countrywide's cumulative capital raised since March 2017 of nearly £180 million is derived from:
a) proceeds of £37.8 million from the placing announced by Countrywide on 9 March 2017; plus
b) proceeds of £140 million from the placing and open offer announced by Countrywide on 2 August 2018; and
6. volume weighted average prices trading volume data have been derived from Bloomberg and, in the case of volume weighted average prices, have been rounded to the nearest single decimal place.
Publication on a website
In accordance with Rule 26.1 of the Code, a copy of this announcement will, subject to certain restrictions relating to persons resident in restricted jurisdictions, be available at https://www.connellsgroup.co.uk/microsite by no later than 12 noon (London time) on 24 November 2020. The content of the website referred to above is not incorporated into and does not form part of this announcement.
MAR
The information contained within this announcement is considered by Connells to constitute inside information as stipulated under the Market Abuse Regulation (EU) No.596/2014. Upon the publication of this announcement via a Regulatory Information Service, this inside information will be considered to be in the public domain.
Important notice
This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase or otherwise acquire, subscribe for, sell or otherwise dispose of any securities, whether pursuant to this announcement or otherwise.
The release, publication or distribution of this announcement in jurisdictions outside of the United Kingdom may be restricted by law or regulation and, therefore, persons into whose possession this announcement comes should inform themselves about, and observe, such restrictions. Any failure to comply with such restrictions may constitute a violation of the securities laws of any such jurisdiction.
Evercore Partners International LLP ("Evercore"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting as financial adviser exclusively to Connells and no one else in connection with the matters described in this announcement and will not be responsible to anyone other than Connells for providing the protections afforded to clients of Evercore nor for providing advice in connection with the matters referred to herein. Neither Evercore nor any of its subsidiaries, branches or affiliates owes or accepts any duty, liability or responsibility whatsoever (whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Evercore in connection with this announcement, any statement contained herein, any offer or otherwise. Apart from the responsibilities and liabilities, if any, which may be imposed on Evercore by the Financial Services and Markets Act 2000 and successor legislation, or the regulatory regime established thereunder, or under the regulatory regime of any jurisdiction where exclusion of liability under the relevant regulatory regime would be illegal, void or unenforceable, neither Evercore nor any of its affiliates accepts any responsibility or liability whatsoever for the contents of this announcement, and no representation, express or implied, is made by it, or purported to be made on its behalf, in relation to the contents of this announcement, including its accuracy, completeness or verification of any other statement made or purported to be made by it, or on its behalf, in connection with Connells or the matters described in this announcement. To the fullest extent permitted by applicable law, Evercore and its affiliates accordingly disclaim all and any responsibility or liability whether arising in tort, contract or otherwise (save as referred to above) which they might otherwise have in respect of this announcement or any statement contained herein.
Clifford Chance LLP is retained as legal adviser to Connells.
About Connells
Founded in 1936 and comprising nearly 600 branches nationwide, Connells group has grown into one of the UK's largest, most profitable high street estate agency and property services providers. In addition to operating under the Connells brand, the group trades under other well-known local names including Allen & Harris, Bagshaws Residential, Barnfields, Barnard Marcus, Brown & Merry, Fox & Sons, Jones & Chapman, Knight Partnership, Manners & Harrison, Roger Platt, Shipways, Swetenhams, William H Brown, Sharman Quinney, Burchell Edwards, Ashley Adams, Peter Alan, Rook Matthews Sayer, Paul Dubberley and Gascoigne Halman. As well as residential property sales and lettings, Connells group has a comprehensive range of business to consumer and business to business services including new homes, mortgage services, conveyancing, surveying, corporate lettings, asset management, land & planning and auctions. Visit www.connellsgroup.co.uk.