Mears Regulatory News (MER)

5 November 2013

Mears Group PLC

("Mears", "the Company", or "the Group")

(Incorporated in England and Wales under the Companies Act 1985 - No 3232863)

Proposed disposal of Haydon Mechanical and Electrical Limited ("HMEL")

Disposal

The Board of Mears has agreed to dispose of the entire issued share capital of HMEL, a wholly owned subsidiary of the Company, which provides mechanical and electrical engineering services, to a specially created acquisition vehicle, Curzon 3003 Limited ("Curzon"), owned and controlled by key management personnel of HMEL ("Transaction").

Under the terms of the proposed Transaction, Mears is selling the entire issued share capital of HMEL for a consideration of £1. In addition, Mears will receive deferred consideration of up to £7 million in the event that, after completion of the Transaction, Curzon, HMEL or HMEL's business and assets are sold. In addition, Mears is converting an existing intercompany loan into a £2 million interest bearing secured loan to be repaid after five years, and a £7 million unsecured loan, which is to be repaid out of sums received on certain existing contracts and a share of future profits generated.

The Transaction is classified as a "related party transaction" as David Cutler, Anthony Percival, Gary Young and Glyn Mays are directors of HMEL and will form part of the management team of Curzon. Consequently, the Transaction is subject to, and conditional upon, inter alia, approval by Shareholders at a General Meeting of the Company which is expected to be held at 9.30 a.m. on 21 November 2013 at the offices of Mears, 8 Headfort Place, London SW1X 7DH. The Circular convening a General Meeting of the Company is expected to be posted later today, in which further information on the proposed Transaction can be found.

Information on HMEL

HMEL specialises in the design and installation of mechanical and electrical services across a number of sectors in the UK, but primarily for new build residential developments. The services provided are the total management of any project including the design of the works, the management of the work entailed and includes, in most cases, the post works maintenance programme. HMEL is run by its managing director, David Cutler, from its head office in London's Docklands.

For the year ended 31 December 2012, HMEL generated revenues of £62.3 million and a loss before tax of £1.8 million. For the six months ended 30 June 2013, HMEL generated unaudited revenues of £18.7 million and a loss before tax of £1.4 million. Gross assets as at 30 June 2013 were £29.8 million. Net assets as at 30 June 2013 were £7.5 million.

Background to and reasons for the Transaction

HMEL was acquired by Mears in 1999 as a complementary business to Mears and included a social housing division. It was an opportunity for the Group to expand its service offering. Since this time, the Mears social housing business has grown significantly, and in addition, the Company entered the domiciliary care market through the acquisition of Careforce in 2007 which in turn has been followed by a number of complementary acquisitions. In 2012, HMEL represented only 9 per cent. of the Group's turnover.

In the current operating environment for mechanical & electrical engineering services, with limited new build opportunities and increasing competition for these services, HMEL has been running at a loss. In addition, the business is today less of a focus for Mears as it looks to grow its two profitable core divisions of social housing and care. Therefore the decision was made by the Board, as set out in the Company's recent interim results announcement, to explore all options for this business to address the underperformance. As a result of the continuing underperformance the Board has reached the conclusion that it is in the interests of Shareholders to dispose of HMEL, which has culminated in the disposed Transaction. To date, the Board has not received any other offers for HMEL.

The benefits to Mears of the proposed Transaction include (i) some cash realisation in the next 12 months with the potential to realise future upside from a return to profitability within HMEL; and (ii) it will allow senior management to fully focus on the two core divisions of social housing and care and not to be distracted by managing HMEL, which has taken up a disproportionate amount of their time over the last 12 months. Any realisation of cash from the disposal of HMEL will be used to repay existing Group debt.

Principal Terms of the Transaction

Mears is selling the entire share capital of HMEL for a consideration of £1. In addition, Mears will receive deferred consideration of £7 million in the event that, after completion of the Transaction, Curzon, HMEL or HMEL's business and assets are sold in whole or in part. To the extent that the sale price after deducting any amounts outstanding under the £2 million secured loan and the £7 million working capital loan referred to below is less than £14 million, the deferred payment will be reduced proportionally.

Currently, there is an intercompany loan owed to Mears by HMEL which has been written down from £15 million to £9 million. On completion of the Transaction this intercompany loan will be converted into:

· a £2 million loan secured over the assets of Curzon and HMEL bearing a fixed interest rate of 3.5 per cent. over the base rate (capped at 5.5 per cent) payable quarterly in arrears. The loan must be repaid within five years of completion of the Transaction. This loan is structured as a revolving credit facility and HMEL may have up to £2 million outstanding at any time. If HMEL chooses to do so, it is entitled to utilise up to £1 million of the amount payable to Mears under the £7 million working capital loan referred to below as additional working capital whereupon such amount becomes payable, and is secured, on the same basis as the £2 million loan; and

· a £7 million working capital loan. The £7 million loan will be repaid by HMEL paying to Mears on a monthly basis, 50 per cent. of the sums received from the completion of the Legacy Contracts. Any further repayments of the £7 million loan will be funded from the equal share of future profitability generated by HMEL above an annual pre-tax profit threshold of £1.5 million. A rate of interest of 8 per cent. is payable on all payments due which have not been paid by their due date. Otherwise the £7 million loan is interest free. On the earlier of (i) any sale of Curzon or HMEL or a material part of the business and assets of HMEL; or (ii) the fifth anniversary of Completion, the obligation to pay any outstanding amount due under the £7 million working capital loan falls away other than in respect of amounts due at the date of the sale and the pro rata payment in respect to profits made in the year of sale.

Under the terms of the proposed Transaction, certain maintenance contracts undertaken by HMEL for local authority customers will be novated from HMEL to another Mears Group company prior to or as soon as reasonably practicable following completion and will not form part of the business being sold to Curzon. These contracts contributed revenues of £661,000 and a profit before tax of £7,000 during the year ended 31 December 2012.

The Board of Mears estimates it will generate a cash benefit of £5 million (excluding any future exit of Curzon) within 12 months of completion of the Transaction from a combination of payments received from Curzon and a tax benefit as a consequence of the Transaction.

If the proposed Transaction completes, it is expected that Mears will incur a one-off write down to its income statement of approximately £17.5 million.

Commenting, David Miles, Chief Executive, Mears Group, said:

"I am delighted to have agreed a sale of Haydon, our M&E division. Haydon played a significant role in the growth and maturity of Mears over the last 14 years. I would like to thank the Haydon management team and wish them future success. The activities of Haydon have now become non-core and the transaction is good for Mears and will now allow the Group to focus solely on growing its core operating divisions."

For further information, contact:

Expected Timetable of Principal Events

Future times and dates are indicative only and are subject to change by the Company. If the expected timetable of events changes from the above, the Company will release an announcement to this effect.

References to time in this announcement are to London time.

Investec Investment Banking, a division of Investec Bank plc, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority, is acting exclusively for Mears Group PLC in relation to the proposed Transaction. Investec Investment Banking is not acting for any other person and Investec Investment Banking will not be responsible to any person other than Mears Group PLC for providing the protections afforded to clients of Investec Investment Banking or for providing advice in relation to the proposed Transaction or in relation to the contents of or any transaction or arrangement referred to in this announcement.

Definitions