Interserve Regulatory News (IRV)

THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA, JAPAN, SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH RELEASE, PUBLICATION OR DISTRIBUTION WOULD BE UNLAWFUL. PLEASE SEE THE IMPORTANT NOTICE AT THE END OF THIS ANNOUNCEMENT.

INTERSERVE PLC

28 February 2014

Proposed Acquisition of Initial Facilities

Creation of one of the UK's largest providers of support services operations

Interserve, the international support services and construction group, today announces that it has entered into a conditional agreement with a subsidiary of Rentokil Initial Plc, to acquire its facilities service business (Initial Facilities) for a cash consideration of £250 million (the Transaction). The Transaction will be funded through a new bank facility, together with the net proceeds of a placing of up to 12,897,771 new ordinary shares, representing up to 9.99 per cent of Interserve's existing issued ordinary share capital, announced separately today (the Placing).

Initial Facilities comprises the facilities services businesses of the Rentokil Initial Plc group, with operations in the UK, Ireland and Spain. Employing approximately 25,000 people, it provides a comprehensive range of facilities services from specialist single services, including cleaning, catering, security, mechanical and electrical building maintenance, energy management and statutory compliance, to fully integrated Total Facilities Management (TFM). Initial Facilities has a strong record in serving a broad customer base within the private sector, including professional service businesses, national retailers, transport operators and a variety of industrial businesses.

Through this Transaction, the board of Interserve (the Board) believes that Interserve will become one of the largest providers (top three by revenue) of support services activities in the UK. The Transaction will create an organisation of increased scale, underpinning future business performance and growth and offering an attractive proposition for customers, partners and employees of both companies.

The Board considers that the Transaction will create a strong platform for future growth and enhance value for shareholders, employees and customers. In particular, the Board believes that the Transaction will provide the following:

· A strengthened market position and a strong fit of service portfolios, giving Interserve a top three (by revenue) position in the UK support services market and a greater ability to deliver further revenue growth within this £70 billion UK facilities management market (source: Credo, 2013)

· Greater breadth of services and capabilities, allowing the Interserve group as enlarged by the Transaction (the Enlarged Group) to broaden its customer proposition and self-deliver certain services that are currently subcontracted

· A wider addressable market due to Initial Facilities having a greater proportion of contracts in the private sector, complementing the current prominent position that Interserve has within the public sector

· The ability to deliver estimated pre-tax cost synergies of approximately £5 million by the end of 2015, primarily from streamlined corporate support and operational management functions and procurement efficiencies

· A broader pool of management talent with excellent reputations in the marketplace

The Board expects the Transaction to be earnings enhancing in the year ending 31 December 2014 and significantly earnings enhancing in the year ending 31 December 2015, being the first full year following completion of the Transaction.

Adrian Ringrose, Chief Executive of Interserve, said:

"We believe that this acquisition will deliver significant strategic progress in growing one of our core businesses and will make us a top three player by revenue in the UK facilities services market.

"The breadth and fit of the services we will now be able to offer, added to the advantages of increased scale and potential synergies, will create a compelling proposition, leaving us well placed for future growth. We look forward to bringing the enhanced capabilities of the enlarged Group to a wider addressable market of both new and existing customers, whilst providing more opportunity for our expanded employee base.

"I am pleased to be able to announce this acquisition today in parallel with Interserve's full year 2013 results, in which we report 12% year on year revenue growth."

Mike Brown, Managing Director of Initial Facilities, said:

"This is a good combination and a very complementary home for our business, its customers and employees. We will be a core part of one of the UK's largest support services organisations and that focus will undoubtedly present new opportunities that all of our stakeholders can be excited about. I am looking forward to working with the Interserve management team who share the same ambitions for the company going forward."

Initial Facilities is of sufficient size relative to Interserve to constitute a class 1 transaction under the Listing Rules and the Transaction is therefore both subject to and conditional upon the approval of shareholders of Interserve.

Further details of the Transaction, together with a notice convening a General Meeting on 17 March to approve the Transaction, is contained in a circular that will be sent to shareholders today, 28 February 2014. The circular will include a recommendation from the Board of Interserve that shareholders vote in favour of the Transaction.

All documentation relating to the Transaction, as well as a recorded interview with Adrian Ringrose, Chief Executive, will be on the Interserve Group website: www.interserve.com

A presentation for analysts and institutional investors will be held today at 9.00am at Numis Securities Ltd, The London Stock Exchange Building, 10 Paternoster Square, London EC4M 7LT. For further details please call Capital MSL on 020 3219 8819. The presentation for analysts will be available on the Interserve Group website: www.interserve.com

For further information please contact:

Interserve

+44 (0) 118 932 0123

Adrian Ringrose, Chief Executive, Tim Haywood, Group Finance Director, Robin O'Kelly, Head of Communications

J.P. Morgan Cazenove

+44 (0)20 7777 2000

Guy Marks, Nicholas Hall

Numis

+44 (0)20 7260 1000

Heraclis Economides, Ben Stoop, Chris Wilkinson

Capital MSL

+44 (0) 20 3219 8819

Richard Campbell, Ian Brown

INTERSERVE PLC

Proposed Acquisition of Initial Facilities

Background to the Transaction

Since entering the market for support services some 15 years ago, and diversifying from its traditional construction background, Interserve has pursued a strategy of organic growth and investment, growth through acquisition, as well as actions to restructure its balance sheet. Strong operational management has resulted in significant progress in the development of its support services activities both in terms of revenue growth and rising operating margins, such that Interserve is now one of the prominent providers of facilities services to a wide variety of organisations, primarily in the public sector but with a growing private sector customer base.

The board of Interserve therefore believes that the Transaction will provide the following:

· Strengthened market position: The Transaction will position Interserve as one of the largest providers (top three by turnover) of support services activities in the UK. This will enhance Interserve's ability to offer its customers a range of services from TFM on a national basis, to more specialist single services either on a local or national basis. Nonetheless, the Enlarged Group will have a market share of below five per cent, hence providing significant opportunity for further revenue growth within this £70 billion UK facilities management market, of which £42 billion was outsourced in the UK in 2012 (source: Credo, 2013). The Board believes that the total facilities management market in the UK will grow at approximately three to four per cent per annum.

· Greater breadth of services and capabilities: Initial Facilities possesses additional capability in its fire and water related maintenance services as well as a more defined energy management proposition, which would be available to the whole customer base of the Enlarged Group. Enhancing the portfolio of services will enable the Enlarged Group to self-deliver certain services that are currently subcontracted and also broaden the customer proposition.

· Greater breadth of customers: Initial Facilities, with its greater proportion of contracts in the private sector, complements the current prominent position that Interservehas within the public sector. The Board believes that approximately 85 per cent of Initial Facilities revenue is generated from the private sector, with the public sector representing the remaining 15 per cent. The outsourced market for facilities services in the private sector is currently estimated to be nearly twice that of the public sector (£25.2bn vs £13.7bn, source: Credo, 2013) and Interserve's experience and credentials within this sector create a significant opportunity for the Enlarged Group.

The Enlarged Group's Support Services Activities would have a pro forma split of turnover of 48 per cent public sector and 52 per cent private sector. This balanced portfolio, coupled with the smaller average size of contracts within the private sector, will help ensure that the Enlarged Group will not be overly exposed to any one sector or customer contract.

· Synergy opportunities: The additional scale that comes with acquiring Initial Facilities will provide the Enlarged Group with further opportunity to leverage operational efficiencies as well as providing cost saving opportunities within areas such as corporate support and operational management functions. The Board also believes that the Enlarged Group will have the ability to access revenue opportunities which are not otherwise currently available to either Interserve or Initial Facilities.

· Additional management capability: Both Interserve and Initial Facilities have an excellent reputation in the marketplace. A broader pool of management talent will be a significant asset to the Enlarged Group as it continues to develop over time.

Information on Initial Facilities

Initial Facilities comprises the facilities services businesses of the Rentokil Initial plc group (the Rentokil Initial Group) with operations in the UK, Ireland and Spain, with the UK and Ireland representing 92.2 per cent of revenue in the year ended 31 December 2013. It provides a comprehensive range of facilities services from specialist single services, including cleaning, catering, security, mechanical and electrical building maintenance, energy management and statutory compliance, to fully integrated TFM. Initial Facilities has a strong record in serving a broad customer base within the private sector, incorporating services to many professional service businesses, national retailers, transport operators and a variety of industrial businesses. Initial Facilities has over 22,000 employees in the UK and Ireland and approximately 3,000 in Spain.

For the year ended 31 December 2013, Initial Facilities reported an operating profit of £8.8 million.

The trading results for Initial Facilities for the three years ended 31 December 2013 were as follows:

Note 1: excluding computer software

Synergies and integration

The Board believes that the Transaction presents opportunities for cost synergies. The Directors believe that the combination of Interserve and Initial Facilities can be expected to achieve recurring annual pre-tax cost synergies of approximately £5 million. The identified synergies reflect both beneficial elements and relevant costs that arise as a result of the Transaction. These synergies are contingent on the completion of the Transaction and could not be achieved by Interserve and Initial Facilities operating independently.

Based on its current integration plan, cost savings are expected to arise in the following areas:

· the removal of duplicated operational functions within the Enlarged Group through combining corporate support and operational management functions; and

· procurement savings arising from the increased size and purchasing power of the Enlarged Group, for example in relation to fleet costs and insurance.

The Board expects to realise the above synergies on a phased basis as follows:

· approximately £1 million of pre-tax cost synergies in the financial year ending 31 December 2014; and

· approximately £5 million of pre-tax cost synergies in the financial year ending 31 December 2015,

in each case, when compared to £533.4 million of expenses (being the total operating expenses) and £2,134.6 million of expenses (being the cost of sales and total administrative expenses) of Initial Facilities and Interserve respectively for the year ended 31 December 2013.

The Board also expects that the integration process and the realisation of these synergies will result in one-off exceptional costs of approximately £10 million in the year ended 31 December 2014.

Given its track record and the nature of the Business being acquired, the Board is confident that the integration of the two businesses can be achieved without undue disruption to the underlying operations of each business and is committed to ensuring that the enhancement to customer service that is targeted through this process is fully delivered.

Effect of the Transaction

The Board believes that, taking into account the business and prospects of the Enlarged Group, the expected synergy benefits and associated costs of achieving them and the impact of the shares issued by the Company pursuant to the Placing, the Transaction will be earnings enhancing in the year ending 31 December 2014 and significantly earnings enhancing in the year ending 31 December 2015, being the first full year following completion of the Transaction. This statement is not meant or intended to be a profit forecast, and should not be interpreted to mean that the earnings per share of Interserve following completion of the Transaction will necessarily be above or below the historical published earnings per share.

Headline principal terms of the proposed Transaction

· Under the terms of the acquisition, Interserve will acquire Initial Facilities, including its operations in Ireland and Spain

· The consideration for the Transaction comprises the payment by Interserve to the seller of £250 million in cash with an adjustment to deliver a normalised level of working capital and a neutral net cash target

· Completion is conditional on the approval by shareholders of Interserve

· Save where a termination event has occurred, in the event that the Transaction is not approved by Interserve's shareholders or the recommendation of the Board set out in the circular is changed or adversely amended, Interserve will pay the seller a break fee of £3.5 million in cash upon the lapsing of the Transaction

· The parties will at completion enter into a transitional services arrangement

The detailed terms of the Transaction will be set out in the circular to shareholders.

Financing

On 28 February 2014, Interserve entered into a £400 million club facility agreement with Barclays Banks plc, The Royal Bank of Scotland plc, HSBC Bank plc and Lloyds Bank plc. This new facility replaces and extends an existing bilateral facility with Barclays Bank plc and an existing club facility with The Royal Bank of Scotland plc, HSBC Bank plc and Lloyds Bank plc. The new facility includes a £200 million term loan facility specifically for the purpose of financing the Transaction and related costs and expenses.

The Transaction is being funded through a combination of these funds together with the net proceeds of the Placing. The Company entered into a placing agreement with J.P. Morgan Limited, J.P. Morgan Securities plc (J.P. Morgan Securities) and Numis Securities Limited (Numis) on 28 February 2014 (the Placing Agreement), pursuant to which J.P. Morgan Securities and Numis agreed to procure institutional placees for the new shares to be issued pursuant to the Placing (the Placing Shares) or failing which, to subscribe themselves for the Placing Shares, at the higher of (i) the price per Placing Share as may be agreed between the Company, J.P. Morgan Securities and Numis; and (ii) the floor price per Placing Share pursuant to the Placing Agreement. The Placing, which has been underwritten by J.P. Morgan Securities and Numis, is expected to raise gross proceeds of approximately £70 million. Subject to the terms of the Placing Agreement, the Placing is expected to complete on 5 March 2014.

Current trading and future prospects

Interserve

Interserve's preliminary results for the year ended 31 December 2013 were announced on 28 February 2014 and contained the following statement in relation to the outlook for the Company:

"The Group continues to focus on growth, whether organic or acquired, and now with markets showing signs of broad improvement, we are confident of delivering further growth in 2014.

Internationally, we expect to see further revenue growth as we look to exploit the opportunities of our expanded presence and broader offering."

Initial Facilities 

Initial Facilities had a good start to 2014 and is trading in line with expectations of the management of the business.

Recommendation

The Board considers the Transaction to be in the best interests of shareholders as a whole. Accordingly, the Board recommends that shareholders vote in favour of the resolution to be proposed at the General Meeting, as the Directors intend to do in respect of their own beneficial holdings amounting (as at 27 February 2014, being the latest practicable date prior to the release of this announcement) to an aggregate of 767,543 shares, representing approximately 0.59 per cent of the Company's current issued share capital.

IMPORTANT NOTICES

THE INFORMATION CONTAINED HEREIN SHALL NOT CONSTITUTE OR FORM ANY PART OF ANY OFFER OR INVITATION TO SUBSCRIBE FOR, UNDERWRITE OR OTHERWISE ACQUIRE, OR ANY SOLICITATION OF ANY OFFER TO PURCHASE OR SUBSCRIBE FOR, SECURITIES INCLUDING IN THE UNITED STATES.

THE MATERIAL SET FORTH HEREIN IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED, AND SHOULD NOT BE CONSTRUED, AS AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES OR ANY OTHER JURISDICTION. THE SECURITIES OF THE COMPANY DESCRIBED HEREIN HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE LAWS OF ANY STATE OF THE UNITED STATES OR ANY JURISDICTION THEREOF, AND MAY NOT BE OFFERED, SOLD, RE-SOLD, TRANSFERRED OR DELIVERED, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, ABSENT REGISTRATION OR PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION IN THE UNITED STATES.

THERE WILL BE NO PUBLIC OFFER OF SECURITIES IN THE UNITED STATES, UNITED KINGDOM OR IN ANY OTHER JURISDICTION.

This document includes statements that are, or may be deemed to be, "forward-looking statements", including within the meaning of Section 27A of the Securities Act and Section 21E of the U.S. Securities Exchange Act of 1934. These forward-looking statements are based on current expectations and projections about future events and can be identified by the use of a date in the future or forward-looking terminology, including, but not limited to, the terms "may", "believes", "estimates", "plans", "aims", "targets", "projects", "anticipates", "expects", "intends", "will", "could" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include matters that are not historical facts and include statements regarding the Company's intentions, beliefs or current expectations. They are not guarantees of future performance. 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. Any forward-looking statements in this document reflect the Company's view with respect to future events as at the date of this document and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the conditions to the acquisition being satisfied, the Enlarged Group's ability to integrate their businesses and personnel, the successful retention and motivation of the Enlarged Group's key management, the increased regulatory burden facing the Enlarged Group and the Company's operations, results of operations, financial condition, growth, strategy, liquidity and the industry in which the Company operates. No assurances can be given that the forward-looking statements in this document will be realised. Neither the Company, J.P. Morgan Limited (which conducts its UK investment banking business as J.P. Morgan Cazenove, "J.P. Morgan Cazenove") nor Numis Securities Limited ("Numis") undertake any obligation nor do they intend to revise or update any forward-looking statements in this document to reflect events or circumstances after the date of this document (except, in the case of the Company, to the extent required by the Financial Conduct Authority ("FCA"), the London Stock Exchange or by applicable law, the Listing Rules or the Disclosure Rules and Transparency Rules). None of the future projections, expectations, estimates or prospects in this document should be taken as forecasts or promises nor should they be taken as implying any indication, assurance or guarantee that the assumptions on which such future projections, expectations, estimates or prospects have been prepared are correct or exhaustive or, in the case of the assumptions, fully stated in the document. As a result of these risks, uncertainties and assumptions, the recipient should not place undue reliance on these forward-looking statements as a prediction of actual results or otherwise. For a more detailed description of the risks and uncertainties, please see the risk factors discussed in the Circular. The Company undertakes no obligation to update the forward-looking statements in this announcement or any other forward-looking statements it may make. Forward-looking statements in this announcement are current only as of the date on which such statements are made.

This Announcement has been issued by, and is the sole responsibility of, the Company. Neither J.P Morgan Cazenove nor Numis nor any of their affiliates, parent undertakings, subsidiary undertakings or subsidiaries of its parent undertakings or any of their respective directors, officers, employees or advisers or any other person accepts any responsibility whatsoever and makes no representation or warranty, express or implied, for or in respect of the contents of this Announcement and, without prejudice to the generality of the foregoing, no responsibility or liability is accepted by any of them for any such information or opinions or for any errors or omissions.

J.P. Morgan Cazenove, which is authorised and regulated in the United Kingdom by the FCA, is acting exclusively for the Company in connection with the Acquisition and not for any other person and will not regard any other person (whether or not a recipient of this document) as a client in relation to the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Acquisition or any transaction, arrangement or other matter referred to in this document.

Numis, which is authorised and regulated in the United Kingdom by the FCA, is acting exclusively for the Company in connection with the Acquisition and not for any other person and will not regard any other person (whether or not a recipient of this document) as a client in relation to the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Acquisition or any transaction, arrangement or other matter referred to in this document.

Neither the content of the Company's website nor any website accessible by hyperlinks to the Company's website is incorporated in, or forms part of, this Announcement.