MMC.L Regulatory News (MMC)

26 November 2015

Management Consulting Group enters into a binding agreement regarding

the disposal of certain operations of Kurt Salmon

Further to the announcement of 23 November 2015, MCG today announces that it has now entered into a binding agreement with Solucom for the sale of certain operations of Kurt Salmon (the "Target Business"), comprising the Kurt Salmon businesses in France, Belgium, Luxembourg, Switzerland and Morocco, together with certain related operations in the United States, to Solucom, for a total gross cash consideration of approximately €84.0 million (equivalent to approximately £59.2 million) payable on completion of the sale (the "Disposal").

Highlights

· The Disposal is expected to realise gross cash proceeds of approximately £59.2 million, enabling the Group to repay existing indebtedness

· The Disposal represents an attractive value for shareholders, the proposed gross consideration representing approximately 80% of the Group's current market capitalisation and implying enterprise value to 2014 revenue and 2014 underlying operating profit from operations multiples of 0.72x and 16.7x respectively

· The transaction will rebalance the Group's portfolio in geographic terms, reducing exposure to the French market and refocusing MCG on growth opportunities in North America and Asia

· The remaining Kurt Salmon business will benefit from tight focus on the retail and consumer goods industry vertical where it is a market leader, together with the US healthcare business

· Accounting for the IFRS loss on sale will have a significant negative impact on the Company's distributable reserves and consequently, if the disposal proceeds, the Company will not be in a position to pay the interim dividend of 0.23 pence per share which was announced on 31 July 2015

The Disposal, because of its size relative to the Group, is a Class 1 transaction for MCG under the Listing Rules and is therefore conditional, inter alia, on the approval of MCG shareholders. MCG shareholders representing approximately 51% of the Company's issued ordinary share capital, excluding shares held in Treasury, have given irrevocable undertakings to vote in favour of the resolutions to be proposed at the general meeting to approve the Disposal. A circular containing further information on the Disposal along with a notice convening a general meeting is expected to be sent to MCG shareholders on or around 30 November 2015.

Alan Barber, Chairman of MCG, commented:

"We are pleased to have progressed to a binding agreement with Solucom to dispose of certain operations of Kurt Salmon. This disposal will significantly reduce Group indebtedness and create a business with a more balanced portfolio in geographic terms, focused on growth markets. 

The retained Kurt Salmon business will benefit from a tight focus on two industry verticals where the business has a strong position. We believe that this transaction is firmly in shareholders' interests and will position MCG to concentrate its effort and resources on the businesses which are being retained."

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1. Introduction

Further to the announcement of 23 November 2015, Management Consulting Group PLC ("MCG" or the "Group") today announces that it has entered into a binding agreement with Solucom for the sale (the "Disposal") of certain operations of Kurt Salmon (the "Target Business"), comprising the Kurt Salmon businesses in France, Belgium, Luxembourg, Switzerland and Morocco, together with certain related operations in the United States, to Solucom, for a total gross cash consideration of approximately €84.0 million (equivalent to approximately £59.2 million) payable on completion of the sale ("Completion").

The Disposal is of sufficient size relative to the Group to constitute a Class 1 transaction for MCG under the Listing Rules and is therefore conditional upon, amongst other things, the passing of a resolution (the "Disposal Resolution") approving the Disposal by shareholders of MCG (the "Shareholders") at a general meeting (the "General Meeting"). The Disposal is also conditional upon:

(i) there having been no material adverse change in the staff retention rates and current year forecast operating results of the Target Business since the date of signing of the Disposal Agreement to the later of the passing of the Disposal Resolution by Shareholders at the General Meeting and 6 January 2016; and

(ii) the French Anti-trust Authority (Autorité de la Concurrence) approving the Disposal

MCG is expected to receive net cash proceeds of approximately €81.9 million (equivalent to approximately £57.7 million) after the deduction of estimated transaction costs of €2.1 million (equivalent to £1.5 million). MCG will use the net proceeds to repay the Group's net bank indebtedness under the Company's existing banking facility, which is expected to be approximately £50 million (equivalent to €71 million) at Completion and will retain the remaining net proceeds for general corporate purposes. The Group has arranged a new working capital facility of £15 million (the "Working Capital Facility"), which will replace the existing banking facility on Completion and, together with the balance of the net cash proceeds of the Disposal, will be available to fund the Group's ongoing working capital requirements.

If the Disposal is completed, it will result in the vesting, on completion, of awards under the Company's Restricted Share Plan and Restricted Share Plan 2 (together, the "Restricted Share Plans") held by employees of the Target Business ("Target Business Awards"). It is estimated that if completion of the Disposal was to take place on 31 December 2015, the number of Ordinary Shares that will be needed to satisfy outstanding Target Business Awards that have either already vested but not been exercised, or will vest on completion, will be approximately 9 million Ordinary Shares. Under the current terms of the Company's Restricted Share Plans, the Target Business Awards can only be satisfied by: (i) Ordinary Shares purchased in the market by an employee benefit trust funded by MCG and/or (ii) by a cash equivalent sum. As both (i) and (ii) would necessarily involve an uncertain cash outflow from MCG, MCG will seek approval from Shareholders for the Restricted Share Plans to be amended so that up to 9 million new Ordinary Shares can be issued to satisfy awards under the Restricted Share Plans (the "RSP Target Business Disposal Resolution").

As a separate resolution, Shareholders will be asked to approve the award of a transaction incentive bonus to each of Nicholas Stagg (the Chief Executive), in the sum of £200,000, and Christopher Povey (the Finance Director), in the sum of £130,000, which are outside the parameters of the management Remuneration Policy previously approved by Shareholders and will be payable 30 days after Completion (the "Transaction Incentive Bonus Resolution"). Payment is contingent on: (i) the completion of the Disposal; and (ii) the relevant director remaining in employment, and not having given notice of leaving employment with the Group, before the time of payment. The Chief Executive's transaction incentive bonus falls within the requirements of Listing Rule 11.1.10 R.

Irrevocable undertakings to vote in favour of each of the resolutions at the General Meeting have been received by Solucom from Shareholders (including all members of the Board in respect of their entire beneficial interests in the Ordinary Shares, save that Nicholas Stagg and Christopher Povey have undertaken not to vote on the Transaction Incentive Bonus Resolution and have taken no part in the Board's consideration of this matter) representing approximately 51% of the Company's issued Ordinary Share capital, excluding shares held in Treasury, as at 25 November 2015 (the latest practicable date prior to the publication of this Announcement).

2. Description of the Target Business and background to and reasons for the disposal

MCG provides professional services across a wide range of industries and sectors. It comprises two independently managed practices: Alexander Proudfoot and Kurt Salmon. Alexander Proudfoot develops and implements operational improvements to its clients to increase productivity and reduce costs. Kurt Salmon provides consultancy services to a wide range of industries in both the private and public sectors. Alexander Proudfoot is not affected by the Disposal.

The Target Business comprises the Kurt Salmon businesses in France, Belgium, Luxembourg, Switzerland and Morocco, together with certain related operations in the United States. The Target Business generated profit before tax of £2.14 million (Group: £4.93 million) and revenues of £96.9 million (Group £242.8 million), in each case for the year ended 31 December 2014. The Target Business had total assets of £25.88 million (Group: £334.83 million) as at 30 June 2015 (all of these preceding figures are unaudited, save for the Group figures which are audited).

In France, which represented approximately 74% of the revenues of the Target Business in the first half of 2015, Kurt Salmon provides management consulting services to a wide range of industry sectors, principally serving large French corporates and public sector clients. The largest industry practices of Kurt Salmon in France in terms of revenues are those in the financial sector and in industrials and utilities. 

The revenues of the Kurt Salmon business in France contracted during the 2012-14 period and this weaker trading performance adversely impacted the results of MCG as a whole. In the first half of 2015, we saw signs of improving business confidence in the French market, with some underlying revenue growth (5% on a constant currency basis) and an improved operating profit margin.

The Kurt Salmon operations in the other European and North African geographies (in Belgium, Luxembourg, Switzerland and Morocco) are related to the Kurt Salmon business in France in terms of industry sector coverage and clients, and also share some consulting staff resources and back office functions. In aggregate, these other European and North African operations represented approximately 14% of the total revenues of the Target Business in the first half of 2015.

The remainder of the Target Business comprises two New York-based practices of Kurt Salmon, one of which is industry focused and provides management consulting services to financial sector clients, and the other, CIO Advisory, which provides IT-related management consulting services principally to Chief Information Officers, but also focusing largely on financial sector clients. These US practices are also related to Kurt Salmon's French business, in particular in terms of their client base.

The Target Business therefore comprises the French operations of Kurt Salmon and those operations in other geographies which are related to the French operations. Under the terms of a licence agreement to be entered into at Completion, the Purchaser will have the right to use the Kurt Salmon name for a transition period of up to three years in the territories in which the Target Business currently operates.

The Kurt Salmon business which will be retained by MCG following the Disposal comprises the international consulting practice focusing on clients in the retail and consumer goods sectors, and currently principally operating in the United States, Canada, the United Kingdom, Germany, Japan and China, and a healthcare consulting practice operating principally in the United States. Kurt Salmon is an established international brand and a leading management consulting firm addressing clients in the retail and consumer goods sector. The Kurt Salmon business which will be retained by MCG represented 48% of the revenues of Kurt Salmon as a whole in the first half of 2015.

The Board has concluded that the terms of the Disposal provide an opportunity to exit from the Kurt Salmon business in France and its related operations, which together form the Target Business, at an attractive price for Shareholders. The Target Business of Kurt Salmon is one of the leading consulting firms in France, but as part of the MCG Group its potential for investment and growth is limited, both in the French market itself and through the further expansion of its broad-based industry sector offerings internationally.

The Disposal provides an opportunity for the Group to significantly reduce both its leverage and its significant exposure relative to the Group to the consulting market in France, as well as allowing the Group to concentrate on the retained businesses of Kurt Salmon, which will be focused primarily on clients in the global retail and consumer goods sector, and Alexander Proudfoot. Following the Disposal, the operations of the MCG group will comprise the retained Kurt Salmon business, and Alexander Proudfoot. 

3. Key benefits of the Disposal

· Achieves an attractive value for Shareholders

The agreed gross cash proceeds of approximately €84.0 million (equivalent to approximately £59.2 million) (which is subject to post-closing adjustments relating to amounts of debt, debt like items, appropriate level of the existing provisions, cash and working capital in the Target Business at Completion) represents approximately 80% of the Group's market capitalisation as at 25 November 2015. By comparison the revenue and profit before tax of the Target Business for the year ended 31 December 2014 represented approximately 40% of the Group's revenue and 43% of the Group's profit before tax for that year.

The sale price is based on an agreed enterprise value (i.e. including debt-like items and before other adjustments) of €98.5 million (equivalent to £69.4 million). This implies enterprise value to revenue, and enterprise value to underlying profit from operations multiples for the Target Business of 0.72x and 16.7x respectively, based on the financial information for the year ended December 2014. These multiples compare very favourably to the equivalent implied 2014 multiples for the Group of 0.44x and 9.1x.1

· Allows the Group to reduce indebtedness

MCG will use the net proceeds to repay the Group's net bank indebtedness under the existing banking facility, which is expected to be approximately £50 million at Completion and will retain the remaining net proceeds for general corporate purposes. The Group has arranged a new Working Capital Facility of £15 million, which will replace the existing banking facility on Completion and, together with the balance of the net cash proceeds of the Disposal, be available to fund the Group's ongoing working capital requirements.

· Rebalances the Group's portfolio of businesses in geographic terms

The Disposal will reduce the proportion of the Group's business which is derived from France and continental Europe, and so increases the relative proportion of the Group's revenues from other markets, in particular North America. This is consistent with the Board's strategy to focus on higher growth opportunities in North America and Asia.

· The Kurt Salmon business retained by the Group will focus on two industry verticals

The Kurt Salmon business retained by the Group will focus largely on serving global clients in the retail and consumer goods sector. Kurt Salmon is recognised as a leading management consulting firm in that sector. The retained Kurt Salmon business will also continue to operate a healthcare practice in the US.

4. Principal terms and conditions of the Disposal

The Disposal will be effected by way of a sale of the entire issued share capital of the Management Consulting Group France SAS (the "Target Company"). The gross cash proceeds payable by the Solucom to the Company for the shares in the Target Company shall be approximately €84.0 million (equivalent to approximately £59.2 million) (subject to post-closing adjustments relating to the debt, debt like items, the appropriate level of existing provisions, cash and working capital position at Completion).

The Disposal is expected to complete in January 2016. The Disposal is conditional upon:

(i) the approval by Shareholders of the Disposal Resolution at the General Meeting;

(ii) there having been no material adverse change in the staff retention rates and current year forecast operating results of the Target Business since the date of signing of the Disposal Agreement up to the later of the passing of the Disposal Resolution by Shareholders at the General Meeting and 6 January 2015; and

(iii) the French Anti-trust Authority (Autorité de la Concurrence) approving the Disposal.

In the event that the conditions referred to above have not been satisfied by 29 February 2016, the Disposal Agreement will terminate. In addition, Solucom's obligation to complete is subject to the provision by its financing banks of funding in accordance with the terms of binding commitment letters entered into between Solucom and the relevant banks at the same time as the Disposal Agreement or otherwise on similar terms and Solucom has agreed to use its best endeavours to procure that such financing is available to enable completion to occur.

The Company has agreed to grant Solucom a licence to use the Kurt Salmon name for a period of three years from Completion in France, Belgium, Switzerland, Luxembourg and, in relation only to the financial sector and related CIO-advisory business being acquired by the Purchaser and subject to it being used in conjunction with the Solucom name, the United States subject to certain customary terms and conditions.

5. Financial effects of the Disposal and the use of proceeds

MCG will use the net cash proceeds of the Disposal to repay the Group's net bank indebtedness, which is expected to be approximately £50 million at Completion, and will retain the remaining net cash proceeds for general corporate purposes.

The Group will continue to monitor its balance sheet, including the appropriate level of capital, liquidity and debt, taking into account opportunities to further invest in and grow the Group's remaining businesses, or to seek value for shareholders through further disposals should appropriate opportunities arise.

Shareholders should note that the Disposal will generate a one off IFRS loss on sale of approximately £50 million, principally as a result of the write off of goodwill held in the consolidated balance sheet of the Group which is allocated to the Target Business. The Group profit and loss account reflecting the Disposal will also include non-recurring expenses relating to the Disposal. Had the Disposal taken place on 30 June 2015, the pro forma net assets of the Retained Group would have been £153.5 million compared with the reported Group net assets of £186.9 million. The Board believes that the Disposal will not be accretive to earnings per share, principally as a result of the use of the proceeds to pay down the Group's net indebtedness and therefore to eliminate gearing in its balance sheet at Completion.

6. Board, Management and Employees

The current Chief Executive of Kurt Salmon, Chiheb Mahjoub, will stand down from the MCG Board and from his executive management role in Kurt Salmon after the General Meeting but before Completion.

7. Dividend policy

The Disposal will generate a one off IFRS loss on sale of approximately £50 million, principally as a result of the write-off of goodwill held in the consolidated balance sheet of the Group which is allocated to the Target Business. The accounting impact of this IFRS loss will have a significant negative impact on the Company's distributable reserves and consequently, if the Disposal proceeds, the Company will not be in a position to pay the interim dividend of 0.23 pence per share, which was announced on 31 July 2015 and was due to be paid on 6 January 2016. The Company will review the position after completion of the Disposal and it is likely that the Board will, as soon as reasonably practicable, seek to implement a reconstruction of reserves to enable dividend payments to be resumed. The Board will consider the Company's future dividend policy once this process is complete.

8. Directors' recommendation

The Board considers the Disposal to be in the best interests of MCG and the Shareholders as a whole. Accordingly, the Board will unanimously recommend that Shareholders vote in favour of the resolutions to be proposed at the General Meeting, as the Directors intend to in respect of their own beneficial holdings of Ordinary Shares (save that the Chief Executive and the Finance Director have undertaken not to vote their shares in respect of the Transaction Bonus Resolution), being in aggregate 7,723,617 Ordinary Shares, representing approximately 1.6% of MCG's issued Ordinary Share capital, excluding shares held in Treasury, in each case at 25 November 2015 (the latest practicable date prior to the publication of this Announcement). Nick Stagg and Chris Povey have undertaken not to vote on the Transaction Bonus Resolution and have taken no part in the Board's consideration of this matter.

References

1 These figures are based on a share price of £0.1475 per share as of 25 November 2015 (being the latest practicable date before the publication of this Announcement) and the audited financial information for the Group for the year ended 31 December 2014. The Group's market capitalisation is calculated as £73.8 million, being 500,427,971 million shares in issue at £0.1475 per share. The implied 2014 enterprise value of the Group is calculated as £107.4 million, being the market capitalisation of £73.8 million plus £33.6 million of net bank indebtedness reported at 31 December 2014.

Notes to editors:

MCG (MMC.L) provides professional services across a wide range of industries and sectors. It comprises two independently managed practices: Alexander Proudfoot and Kurt Salmon. Alexander Proudfoot develops and implements operational improvements to its clients to increase productivity and reduce costs. Kurt Salmon provides consultancy services to a wide range of industries in both the private and public sectors. Alexander Proudfoot is not affected by the Disposal. The Target Business comprises the Kurt Salmon businesses in France, Belgium, Luxembourg, Switzerland and Morocco, together with certain related operations in the United States. The Kurt Salmon business which will be retained by MCG following the Disposal comprises the international consulting practice focusing on clients in the retail and consumer goods sectors, and currently principally operating in the United States, Canada, the United Kingdom, Germany, Japan and China, and a healthcare consulting practice operating principally in the United States. Kurt Salmon is an established international brand and a leading management consulting firm addressing clients in the retail and consumer goods sector. The Kurt Salmon business which will be retained by MCG represented 48% of the revenues of Kurt Salmon as a whole in the first half of 2015.

Solucom is a leading French-based consulting business, with principal operations in France.

For further information, visit www.mcgplc.com