Mothercare Regulatory News (MTC)

30 Apr 2007 07:03

Mothercare PLC30 April 2007 For Immediate Release 28 April 2007 Proposed Acquisition Of Chelsea Stores Holdings Limited ("CSHL") By Mothercare plc ("Mothercare") (the "Proposed Acquisition") Summary The directors of Mothercare are pleased to announce that they have agreed termsfor the Proposed Acquisition of CSHL, which owns and operates the Early LearningCentre ("ELC"), for a total consideration of £85 million. The consideration willbe in the form of new Mothercare ordinary shares and the assumption of CSHL'snet debt of approximately £36 million. Highlights • Following completion of the Proposed Acquisition, Mothercare will ownand operate 'Early Learning Centre' as well as 'Mothercare', two specialistbrands closely associated with children and parenting. The directors ofMothercare (the "Directors") believe that both brands have a reputation forspecialism, quality, safety and innovation in their respective productcategories. With complementary target customers and product offerings, theDirectors believe that the brands will fit naturally together. • The Directors expect the enlarged group to deliver annual pre-taxsynergies of at least £8 million in the second full financial year after thedate upon which the acquisition becomes effective. Synergy benefits are expectedfrom: I. Optimising the enlarged UK store portfolio: Complementary product offerings and additional geographic reach for both brands will provide benefits, particularly through: • Extending ELC into out-of-town locations, where it currently has limited presence; • Extending both brands into additional catchments where there is currently only one brand, via web-in-store, concessions or product inserts; and • Rationalising and right sizing the combined property portfolio, particularly in catchments where both are represented. II. International expansion: There will be opportunities to extend the global reach of the enlarged group, which will have 420 international franchise stores; through the introduction of the brands into countries where one or the other brand is not currently located. III. Buying and sourcing: Margin benefits are expected to arise through improved sourcing and in-house design capabilities and the combination of Mothercare's sourcing operation in India with ELC's sourcing operation in Hong Kong. IV. Direct and marketing: There is scope to leverage the established catalogue and growing internet businesses of both brands, which combined will represent a £60 million turnover business in its own right, through linked websites, combined databases, joint marketing and operational efficiencies. V. Cost efficiencies: Given the complementary nature of the two businesses there is an opportunity for efficiency improvements and cost savings, through the rationalisation of certain central functions and supply and distribution activities, particularly in the UK. • The Proposed Acquisition is expected to be earnings enhancing in thefirst full financial year after the date upon which the acquisition becomeseffective.(1)(2) • During the 52 week period ended 6 May 2006, CSHL generated EBITDA(3)of £6 million and adjusted EBITDA(3)(4) of £10 million. • For the 52 week period ending 5 May 2007, CSHL's EBITDA(3) is forecastto be approximately £7 million and adjusted EBITDA(3)(4) is forecast to beapproximately £10 million. • The consideration for the Proposed Acquisition, totalling £85 million,will be in the form of new Mothercare ordinary shares and the assumption ofCSHL's net debt on completion, currently valued at approximately £36 million. • The agreed valuation of the Mothercare shares to be issued asconsideration, based on a Mothercare share price of 361.45p(5), wasapproximately £49 million on 18 March 2007. As a result of the rise in theMothercare share price since 18 March, based on yesterday's closing share priceof 406.25p the value of the new Mothercare shares to be issued as considerationwould be approximately £55 million, giving total consideration of £91 million. • CSHL currently has three stores branded as Daisy & Tom, one of whichis in the process of being closed. Following the completion of the ProposedAcquisition, the Daisy & Tom brand will be retained by one of CSHL's currentshareholders. Commenting on the Proposed Acquisition, Ben Gordon, Chief Executive ofMothercare said: "Mothercare and the Early Learning Centre are each specialists in their ownmarkets and the combination of these two brands will create a key destinationfor parents of babies and young children. The Proposed Acquisition createsexciting opportunities for Mothercare's UK and international multi-channelbusinesses, enables significant synergy benefits and will be earnings enhancingin the first full financial year. Having completed Mothercare's turnaround andput strong foundations in place to grow the business, the time is right to makethis important strategic step." Commenting on the Proposed Acquisition, Nigel Robertson, Chief Executive of CSHLsaid: "Mothercare and ELC working together makes perfect sense. Both brands arerecognised for innovation, quality, safety and integrity. We are excited by theopportunities the deal brings for ELC both in the UK and overseas. Thecomplementary nature of the two brands, along with our combined considerableexperience in the children's toy sector, means customers can look forward tocontinued high quality products and service from two of the best lovedchildren's retailers in the UK. This is a great opportunity for both businessesand the people who work in them." Shareholder and regulatory approvals The Proposed Acquisition is conditional upon the approval of Mothercare'sshareholders at an extraordinary general meeting and upon clearance fromrelevant regulatory authorities. Current trading Mothercare issued its pre-close trading update in respect of the 52 weeks ended31 March 2007 on 4 April 2007. The statement is available on the InvestorInformation section of the website, www.mothercare.com. For further enquiries, contact: Mothercare: 01923 206 001Ben Gordon, Chief Executive Neil Harrington, Finance Director Citigroup Capital Markets Limited (Financial advisor to Mothercare): 020 7986 4000Ian Hart Louise Stonestreet Brunswick (PR advisor to Mothercare): 020 7404 5959Susan Gilchrist Anna Jones CSHL: 01793 831 300Nigel Robertson, Chief Executive Gavin Jones, Finance Director Goldman Sachs International (Financial advisor to CSHL) 020 7774 1000Christos Tomaras Anne Perez Financial Dynamics (PR advisor to CSHL): 020 7831 3113Jonathan Brill Billy Clegg Notes: (1) Earnings before exceptional items, amortisation of intangible assets and theimpact of movements in the fair values of forward currency contracts recorded inaccordance with IAS 39. (2) This statement does not constitute a profit forecast and should not beinterpreted to mean that the earnings of Mothercare in the financial year inwhich the Proposed Acquisition completes, or in any subsequent period, wouldnecessarily be greater than that in the preceding financial year. (3) Prepared in accordance with IFRS and Mothercare's accounting polices. (4) Adjusted EBITDA excludes Daisy & Tom operating losses, non continuinginvestor costs, exceptional items and the impact of movements in the fair valuesof forward currency contracts recorded in accordance with IAS 39. (5) The average of the closing share prices of Mothercare ordinary shares in thefive business days prior to 18 March 2007, the date on which Mothercareannounced that it was in discussions with CSHL regarding the potentialacquisition. (6) Store numbers are stated as at 27 April 2007. Proposed Acquisition Of Chelsea Stores Holdings Limited ("CSHL") By Mothercare plc ("Mothercare") (the "Proposed Acquisition") Introduction On 18 March 2007, Mothercare announced that it was in discussions regarding apossible acquisition of CSHL, owner of the Early Learning Centre. Today,Mothercare announces that it has agreed to acquire CSHL for a totalconsideration of £85 million, in the form of new Mothercare ordinary shares andthe assumption of CSHL's net debt on completion, currently valued atapproximately £36 million. The agreed valuation of the Mothercare shares to be issued as consideration,based on a Mothercare share price of 361.45p(5), was approximately £49 millionon 18 March 2007. As a result of the rise in the Mothercare share price since 18March, based on yesterday's closing share price of 406.25p the value of the newMothercare shares to be issued as consideration would be approximately £55million, bringing total consideration to approximately £91 million. On completion the CSHL shareholders will own approximately 16 per cent. ofMothercare's ordinary shares. The Directors believe that the Proposed Acquisition represents an excitingstrategic opportunity for Mothercare. CSHL is a specialist retailer of toys andother children's goods. It operates 210 stores throughout the UK, 5 in Irelandand 89 international franchise stores (including two in the Channel Islands). Italso has a UK-based catalogue and internet platform and operates a smallwholesale business in the UK and internationally. The Proposed Acquisition offers Mothercare a unique opportunity to enlarge itsbusiness significantly, bringing together two specialist brands, 'Mothercare'and 'Early Learning Centre', both closely associated with children andparenting. The Directors believe that the businesses' operations are highlycomplementary and they expect the Proposed Acquisition to provide significantsynergy benefits, through optimising the enlarged UK store portfolio;international expansion; buying and sourcing margin benefits; leveraging Directand marketing and cost efficiencies. The purpose of this announcement is to provide details of the ProposedAcquisition and explain why the Directors believe it is in the best interests ofMothercare shareholders. A prospectus in respect of new Mothercare ordinaryshares to be issued and a circular containing a notice to convene theextraordinary general meeting to seek shareholder approval for the ProposedAcquisition will be posted to shareholders late in May or early in June. Background to and reasons for the Proposed Acquisition Over the last four years, Mothercare has undergone a period of significantturnaround which has restored shareholder value and laid the foundations forlonger term growth. Over this period, management has focused on driving salesand profit growth through the expansion of Mothercare's international franchiseoperations and its Direct business, streamlining its UK logisticsinfrastructure, developing its international supply chain and optimising its UKstore portfolio. Since the start of the programme, a pre-tax loss of £24.8million (under UK GAAP), for the 52 week period ended 29 March 2003, has beenturned into a pre-tax profit of £24.2 million (under IFRS), for the 53 weekperiod ended 1 April 2006 and total group sales have increased by 11.8 per cent.over the same period. Having stabilised the business, Mothercare is pursuing a strategy aimed atdelivering sustainable earnings growth and value for shareholders. Whilst thefocus of its strategy has been primarily based on organic growth, Mothercare hasalso considered investment and acquisition opportunities where they would bevalue enhancing for shareholders and consistent with Mothercare's strategy. The Directors have concluded that the Proposed Acquisition of CSHL represents anexciting strategic opportunity for Mothercare to increase the reach of its UK,international and Direct operations and to capitalise on the cross-sellingbenefits of having complementary brands and similar customer bases, whilst alsobenefiting from cost efficiencies. The Directors consider the Proposed Acquisition to be in the best interests ofMothercare and its shareholders, as a whole, and will be recommending that theshareholders of Mothercare vote in favour of the Proposed Acquisition, as theyintend to do in respect of their own beneficial holdings. Benefits of the Proposed Acquisition Following the Proposed Acquisition, Mothercare will own two brands closelyassociated with children and parenting. The Directors believe both brands carrywith them a reputation for specialism, quality, safety and innovation.Furthermore, with complementary target customers and product offerings, theDirectors believe that the brands will fit naturally together. Toys currently represent about 10 per cent. of Mothercare's UK business. Incombining Mothercare and ELC, that mix will shift such that toys, home & traveland clothing will each represent about one third of the enlarged group's UKbusiness. Mothercare has developed detailed plans for the integration of CSHL intoMothercare. Based on these plans the Directors expect the enlarged group todeliver annual pre-tax synergies of at least £8 million in the second fullfinancial year after the date upon which the acquisition becomes effective. Mothercare estimates that the exceptional integration costs associated with theProposed Acquisition will total £9 million, the majority of which will beincurred during the two financial years ending 28 March 2009. These amountsexclude costs associated with store optimisation, which will be estimatedfollowing the completion of store optimisation trials. Mothercare intends to invest a further estimated £5 million in capitalexpenditure in relation to the integration of the two businesses. The majorityof this investment will be made during the period to 28 March 2009. It isexpected that further significant investments will be made, over the next threeyears, in optimising the enlarged group's store portfolio. The amount of suchinvestments will be estimated following the completion of store optimisationtrials. The Proposed Acquisition is expected to deliver synergies and benefits for thecombined group, in particular: I. Optimising the enlarged UK store portfolio Mothercare currently operates from 225 stores and ELC operates from 210 storesin the UK. Bringing together the two businesses' different strengths in the toy productcategory and, more generally combining Mothercare's home and travel, andclothing product categories with ELC's more extensive toys' offering, willprovide customers a broader range of products and present a number ofcross-marketing opportunities. The combination of Mothercare and ELC stores in the UK provides additionalgeographic reach for both brands. There is potential for the combined group toreach additional catchment areas where either one or the other brand is notcurrently represented. ELC currently has limited out-of-town store presence. Subject to successfultrialling, Mothercare expects it to be possible to place ELC inserts in up to 73Mothercare out-of-town stores, thereby giving ELC access to the out-of-townmarket. Mothercare expects that the ELC inserts will improve sales densities inits stores. There is also the opportunity to extend the reach of both brandsthrough the enlarged store portfolio, for example, with the use of theweb-in-store capability across all stores. Mothercare intends to optimise the enlarged group's store portfolio,particularly in the catchments where both brands are currently located. II. International expansion Opportunities exist overseas to extend the global reach of both brands,initially through leveraging Mothercare's extensive and established franchisenetwork. The enlarged Group will have 420 international franchise stores(Mothercare 331 and CSHL 89). Mothercare currently has franchise operations in 24 countries without an ELCpresence and ELC has franchise operations in one country where there is noMothercare presence. In line with Mothercare's international growth strategy,management intends to work with the enlarged group's franchisees to explore theopportunities to open additional international stores, both standalone andcombined stores, and extend the global reach of both brands. III. Buying and sourcing The Directors believe that margin benefits will arise through increased volumesin the UK and overseas and improved sourcing and in-house design capabilities. ELC has an sourcing office in Hong Kong and Mothercare expects that the enlargedgroup will be able to leverage this sourcing capability to improve Mothercare'stoys and home and travel business. IV. Direct and marketing Mothercare and ELC both have growing internet businesses and well establishedcatalogue businesses. Combined they represent about a £60 million turnoverbusiness, generate approximately 18 million hits to the web sites and distributeapproximately six million catalogues per annum. Synergy benefits are expected from linking the Mothercare and ELC websites,utilising combined databases, cross marketing activities and logistics in areas,such as, warehousing, call centres and catalogue production cost savings. V. Cost efficiencies The highly complementary nature of both businesses is expected to give rise toefficiency improvements and cost savings through the rationalisation of certaincentral functions and supply and distribution activities, particularly in the UK. Integration of CSHL Mothercare has developed a detailed integration plan covering both businesseswhich is designed to allow the benefits from the combination of the Mothercareand ELC businesses to be realised over three years. It is intended that the enlarged group will continue to use the 'Mothercare' and'ELC' brands. In the opinion of Mothercare, the two brands have strong brandrecognition and complement each other. As a result, the integration plan willfocus on combining the operational structures of the two groups in order tosupport and enhance both brands. The integration activity is being planned in three phases with projects in eachof the five main areas being prioritised according to their likely impact andease of implementation. The first phase covers the financial year to 29 March2008, and phases two and three the following two financial years. Integrationactivities will be planned to ensure minimal disruption during the keypre-Christmas trading period. The plan for the first phase is to focus on quick wins, trials of new storeformats, including ELC inserts in Mothercare stores, and planning forinternational growth with the enlarged group's franchise partners. During the financial year ending 28 March 2009, Mothercare plans to commence theenlarged Group's UK store optimisation plan and start to leverage sourcing andcost benefits. During this phase Mothercare intends to commence franchiseoperations in new overseas territories. Mothercare intends to continue the store optimisation and rationalisationprogramme through the financial year ending 27 March 2010. By this time, it isenvisaged that integration of the two group's IT systems and supply chains willbe in their final stages. Information on CSHL(3)(4) CSHL is a designer and retailer of toys and other children's products for the 0to 6 year age range, primarily for the UK market although with increasinginternational presence. Approximately 80 per cent. of the ELC toys and gamesofferings are own brand. CSHL has 210 ELC branded stores in the UK, 5 in Ireland and 89 internationalfranchise stores (including two in the Channel Islands). It also -has a Directinternet and catalogue business and operates a small wholesale business,providing products to domestic and international customers. Given its toy focus, CSHL's business is currently highly seasonal with nearlyhalf of its sales and all of its profits being generated in October, Novemberand December. In addition, CSHL currently has three stores branded as Daisy & Tom, one ofwhich is in the process of being closed. The Daisy & Tom business is currentlyloss making. Following the completion of the Proposed Acquisition, the Daisy &Tom brand will be retained by one of CSHL's current shareholders. During the 52 week period ended 6 May 2006, CSHL generated revenues of £186million, EBITDA of £6 million, adjusted EBITDA of £10 million, adjusted EBITA of£5 million and an operating loss before interest and tax of £3 million. As at 6May 2006, CSHL had gross assets of £107 million. For the 52 week period ending 5 May 2007, CSHL's EBITDA is forecast to beapproximately £7 million, its adjusted EBITDA is forecast to be approximately£10 million and its EBITA is forecast to be approximately £5 million. Management and employees During the 52 week period ended 6 May 2006 CSHL had on average approximately2,600 employees. Mothercare views the management and employees of CSHL as key to the success ofthe enlarged group. Mothercare plans to work with CSHL management to ensure thesmooth integration of the CSHL business into Mothercare. The combination ofMothercare and ELC will offer both groups of employees exciting careerprospects. It is the intention of Mothercare to offer positions in the enlarged group tothe people who are best suited to them, regardless of whether they are currentlyemployed by Mothercare or CSHL, thereby creating a first class combinedmanagement team. Furthermore, following the Proposed Acquisition, the existing statutoryemployment rights of all employees of CSHL will be fully safeguarded. Financing It is intended that CSHL's existing debt will be repaid on completion of theProposed Acquisition. In order to accommodate the proposed investment in theenlarged group and the increased seasonality of the business as a consequence ofthe Proposed Acquisition, Mothercare has extended its existing revolving debtfacility with HSBC Bank plc to £65 million (at LIBOR plus 1 per cent.). Financial effects of the Proposed Acquisition The Proposed Acquisition is expected to be earnings enhancing in the first fullfinancial year after the date upon which the acquisition becomes effective. (1)(2) Current trading Mothercare issued its pre-close trading update in respect of the 52 week periodended 31 March 2007 on 4 April 2007. The statement is available on the InvestorInformation section of the website, www.mothercare.com. Terms of the Proposed Acquisition The Proposed Acquisition is conditional on the approval of Mothercare'sshareholders at an extraordinary general meeting of shareholders, clearance fromthe Office of Fair Trading, the approval of the prospectus and the admission ofthe new Mothercare shares to the Official List and to trading on the LondonStock Exchange's market for listing securities. The acquisition agreement can be terminated by Mothercare if CSHL or any ofCSHL's shareholders commit a material breach of their obligations under theacquisition agreement or if CSHL breaches certain pre-completion undertakings. The two largest CSHL shareholders can terminate the acquisition agreement if themid-market price for a Mothercare share falls below 331 pence and completion hasnot occurred on or before 19 June 2007. The two CSHL shareholders who are to receive the largest percentage of shares inMothercare have agreed not to sell their shares in Mothercare for a period of180 days following completion except through Mothercare's brokers. Further details of the principal terms and conditions of the acquisitionagreement will be set out in the circular to be sent to Mothercare'sshareholders. Admission to listing Application will be made to the UKLA and the London Stock Exchange for the newMothercare ordinary shares to be admitted to the Official List and to trading onthe London Stock Exchange's main market for listed securities. Application hasnot been, and will not be, made for the new Mothercare ordinary shares to beadmitted to, or to trade on, any other stock exchange. For further enquiries, contact: Mothercare: 01923 206 001Ben Gordon, Chief Executive Neil Harrington, Finance Director Citigroup Capital Markets Limited (Financial advisor to Mothercare): 020 7986 4000Ian Hart Louise Stonestreet Brunswick (PR advisor to Mothercare): 020 7404 5959Susan Gilchrist Anna Jones CSHL: 01793 831 300Nigel Robertson, Chief Executive Gavin Jones, Finance Director Goldman Sachs International (Financial advisor to CSHL): 020 7774 1000Christos Tomaras Anne Perez Financial Dynamics (PR advisor to CSHL): 020 7831 3113Jonathan Brill Billy Clegg Notes: (1) Earnings before exceptional items, amortisation of intangible assets and theimpact of movements in the fair values of forward currency contracts recorded inaccordance with IAS39. (2) This statement does not constitute a profit forecast and should not beinterpreted to mean that the earnings of Mothercare in the financial year inwhich the Proposed Acquisition completes, or in any subsequent period, wouldnecessarily be greater than that in the preceding financial year. (3) Prepared in accordance with IFRS and Mothercare's accounting polices. (4) Adjusted EBITDA excludes Daisy & Tom operating losses, non continuinginvestor costs, exceptional items and the impact of movements in the fair valuesof forward currency contracts recorded in accordance with IAS 39. (5) The average of the closing share prices of Mothercare ordinary shares in thefive business days prior to 18 March 2007, the date on which Mothercareannounced that it was in discussions with CSHL regarding the potentialacquisition. (6) Store numbers are stated as at 27 April 2007. Citigroup Global Markets Limited ("Citi"), which is authorised and regulated inthe UK by the Financial Services Authority, is acting for Mothercare and no oneelse in connection with the Proposed Acquisition and will not regard any otherperson as its client in relation to the Proposed Acquisition and will not beresponsible to anyone other than Mothercare for providing the protectionsafforded to clients of Citi, or for providing advice in relation to the ProposedAcquisition or any transaction or arrangement referred to in this document. Goldman Sachs International ("Goldman Sachs"), which is authorised and regulatedin the UK by the Financial Services Authority, is acting for CSHL and no oneelse in connection with the Proposed Acquisition and will not regard any otherperson as its client in relation to the Proposed Acquisition and will not beresponsible to anyone other than CSHL for providing the protections afforded toclients of Goldman Sachs, or for providing advice in relation to the ProposedAcquisition or any transaction or arrangement referred to in this document. This announcement does not constitute or form part of any offer or invitation topurchase, otherwise acquire, subscribe for, sell, otherwise dispose of or issue,or any solicitation of any offer to sell, otherwise dispose of, issue, purchase,otherwise acquire or subscribe for, any security. Some of the statements in this announcement include forward looking statementswhich reflect the Mothercare's or, as appropriate, the Directors' current viewswith respect to financial performance, business strategy, plans and objectivesof management for future operations (including development plans relating toMothercare's products and services). These statements include forward lookingstatements both with respect to Mothercare and the sectors and industries inwhich the Mothercare operates. Statements which include the words "expects","intends", plans", "believes", "projects", "anticipates", "will", "targets","aims", "may", "would", "could", "continue" and similar statements of a futureor forward looking nature identify forward looking statements for purposes ofthe US federal securities laws or otherwise. All forward-looking statements address matters that involve risks anduncertainties. Accordingly, there are or will be important factors that couldcause Mothercare's actual results to differ materially from those indicated inthese statements. Any forward looking statements in this document reflect theMothercare's current views with respect to future events and are subject tothese and other risks, uncertainties and assumptions relating to theMothercare's operations, results of operations, growth strategy and liquidity. These forward looking statements speak only as of the date of this announcement.Subject to any obligations under the Prospectus Rules, the disclosure rules madeby the Financial Services Authority ("FSA") under Part VI of the FinancialServices and Markets Act 2000 ("FSMA") and the listing rules made by the FSAunder Part VI of FSMA and save as required by law, the Company undertakes noobligation to publicly update or review any forward looking statement, whetheras a result of new information, future developments or otherwise. All subsequentwritten and oral forward looking statements attributable to the Mothercare orindividuals acting on behalf of the Mothercare are expressly qualified in theirentirety by this paragraph. This information is provided by RNS The company news service from the London Stock Exchange