Strategic Minerals Regulatory News (SML)

2 Sep 2008 07:22



Smallbone Plc("Smallbone" or "the Group")

Acquisition of Christopher Peacock Cabinetry (CPBEC Inc) 

("Peacock" or "the Acquisition")

Smallbone Plc, the international supplier of luxury lifestyle brands, today announces contracts exchanged on the acquisition of Christopher Peacock Cabinetry (CPBEC Inc), a luxury kitchen retailer in the US, with completion expected by 5 September 2008. 

Terms of the Acquisition

Acquisition for a total consideration of up to US$15 million (£8.3 million)

Initial consideration of US$8 million in cash and US$4.5 million in equity, issued at £1.11p per share, with a lock-in period of one year from the Acquisition 

Further consideration of up to US$2.5 million and a further 824,502 shares potentially to be issued based on achieving various performance measures 

Acquisition expected to be earnings enhancing in first year 

Details of the Acquisition

Charles Smallbone, Chairman & Chief Executive of Smallbone, commented:

 "It has always been our intention to create a strong business in the US and I remain extremely confident that this market provides us with huge potential across the Group. 

"This acquisition immediately gives us critical mass in the US enabling our US business to become a standalone operation. Peacock is a pre-eminent luxury kitchen brand in the US and has real scalability to expand from an already very profitable base. It is an excellent business in its own right and fits right at the heart of what we do." 

Christopher Peacock commented: 

"2008 is proving to be an exciting year for Christopher Peacock Cabinetry and we are particularly delighted with the substantial increase in sales and profitability that we are seeing this year.

"This is a wonderful opportunity to join the Smallbone Group as our businesses are entirely complimentary and we can build them together rapidly. We see great potential to redevelop cross-selling opportunities and believe that Smallbone's highly developed and efficient workshop operations will directly aid ours to continue to improve gross margins. Excitingly, we also now have the opportunity to progress our growth by building our showroom network along the same lines that Smallbone Plc has so successfully demonstrated with its own brands."

2 September 2008

Smallbone Plc("Smallbone" or "the Group")

Acquisition of Christopher Peacock Cabinetry 

("Peacock" or "the Acquisition")

Smallbone Plc, the international supplier of luxury lifestyle brands, today announces contracts exchanged on the acquisition of Christopher Peacock Cabinetry (CPBEC Inc), a luxury kitchen retailer in the US, with completion expected by 5 September 2008. 

Information on Peacock

Peacock designs, manufactures and installs luxury bespoke furniture for kitchens, dressing rooms and living rooms. The brand was established in 1993, with the current company incorporated in Connecticut, United States, in October 2001.

Peacock was founded by Christopher Peacock, a former Smallbone sales designer who worked at the Group's then Greenwich, Connecticut showroom from 1987 to 1992. Christopher Peacock also helped Smallbone Chairman and Chief executive Charles Smallbone establish the Paris Ceramics brand in the US. Peacock is 100% owned by Christopher Peacock.

  Peacock is recognised as a leading brand in the US and is considered to be a rising star in the luxury kitchen brands market. A leading US magazine, House Beautiful, this year awarded Peacock the title "Kitchen of the Year", and showcased its latest collection in a specially erected conservatory on Rockefeller Plaza with exposure on the prestigious CBS America Today programme. Additionally, The New York Times recently devoted its 2 front pages to Peacock in its specialist design section with an in-depth profile.

Peacock is vertically integrated, building its sales and marketing model via its own designers, based out of its own showrooms, with furniture built from its own workshops and installed by its own installation teams. This model is identical to all the furniture brands with the Smallbone Group and Peacock is therefore seen as a perfect fit. 

Headquartered in Norwalk, Connecticut, and with a factory in Wardensville, West Virginia, Peacock currently employs 106 staff, all in the US. The company's senior management, all of whom will be staying with the company post acquisition, consists of: 

Christopher Peacock (President & CEO)

Michael Cummaro (Chief Financial Officer)

James Morton (Executive Vice President)

Consideration

The total consideration payable is up to US$15 million (£8.3 million). The initial consideration is payable as to US$8 million in cash and US$4.5 million in Smallbone plc shares with a 'lock-in' period of one year from the Acquisition. The balance of the consideration is payable upon meeting certain performance targets for 2008 and 2009. 

The US$4.5 million equity element of the consideration is being satisfied by the issue of 2,226,157 shares at a price of 111 pence per share. If the mid market price of Smallbone plc's shares (having adjusted for the effect of any division or bonus issue of shares) has not reached 111 pence per share at any time between today and the second anniversary of the Acquisition, a further 824,502 shares will be issued to the Vendor, representing the difference between 111 pence and the 81 pence mid market share price prevailing immediately prior to the conclusion of the Acquisition.

Financial Information on Peacock

In 2007 Peacock had revenues of $14.6 million (£7.8m) and pre-tax profits of $835,000 (£450,000) for the year ended December 2007 (unaudited). Peacock is set to show substantial growth in revenues and profits in 2008. Peacock's major revenue stream is furniture (80%), followed by installation (18%) and hardware, worktops and appliances (2%).

Rationale for the transaction

The acquisition will allow the Group to further penetrate the US kitchen furniture market, which is estimated to be 12 times the size of the UK market (CsiL - 2006 UK Kitchen Furniture Market). 

Peacock brings genuine and considerable additional potential to the Group. As a business, it is established very much on the same principles as both Smallbone of Devizes and Mark Wilkinson Furniture and is vertically integrated with its own workshop, but currently a limited showroom network. The company is strongly marketing oriented and the management has worked hard over a period of years to create a pre-eminent luxury brand in the US that is strongly identifiable through a mix of regular advertising and excellent product positioning. This is exactly in line with the Smallbone Group approach and, as such, Peacock is a perfect complimentary business to fit into the Group.

We believe there is a series of opportunities arising from the Acquisition. Cross purchasing of materials and services within the Group will be immediate, as will amending Peacock terms of business to be in line with the other Group companies to improve its cash generation. Peacock has a strong track record of promoting its business partners within the context of the sales it makes, and to that end, we see great potential in being able to cross fertilise Paris Ceramics products in the Peacock showrooms; indeed Paris Ceramics will be in the new Peacock San Francisco showroom when it opens later this month. 

Peacock has great potential to expand, particularly as it has a limited showroom network. We have already identified that its brand recognition far exceeds the geographic spread of its distribution, giving us a unique opportunity to expand an already very well known brand through building its showroom network. Indeed, the current Peacock showroom network of 4/5 outlets is significantly more restricted than those of either Smallbone of Devizes or Mark Wilkinson Furniture at the time those acquisitions were made. 

We also see considerable opportunities to generate improvements and achieve enhanced margins in the manufacturing base, particularly through the experience that we have in our Group from our strong and efficient UK manufacturing facilities. Peacock's well established operation at Wardensville, West Virginia already demonstrates how to overcome the single biggest issue that faces the luxury kitchen market in US, that of establishing a facility that can deliver both production line efficiency coupled with the requisite degree of artisan flair. This unique combination, which separates our Group brands from all others in the market, gives us the brand and pricing power in our respective markets.

Additionally, we believe that the Smallbone of Devizes brand has enormous potential in the US, which in 2007 represented only 6% of its total sales.  Smallbone has already successfully established a strong brand presence in the US and is performing well. The showroom in New York took over $8.6m of orders in its first year of trading and we are on track to have seven Smallbone showrooms in the US by the end of 2010.

Peacock's own workshop facility is on a 7-acre site that has substantial expansion potential. Within the next 12 to 18 months, we intend for the Smallbone of Devizes brand to satisfy its US demand from a US manufacturing base. This acquisition provides us with the opportunity for more streamlined operations and cost synergies across the Group as well as a strong resource base from which to start manufacturing in the US. This would enhance Group margins and the existing currency risk would effectively be eliminated.

The acquisition of Peacock therefore effectively reduces the risk of establishing a standalone manufacturing facility for Smallbone of Devizes in the US. It has always been our goal to take advantage of the significantly lower employment and overhead costs that are enjoyed in the US. We already benefit from these at our Paris Ceramics operation in Virginia and have received strong support from the State of Virginia, as it attracts new industry with successful incentive schemes. Additionally, we will benefit from lower timber and shipping costs, which come as a direct result of the fact that 60% of the timber used in Smallbone's products are indigenous North American hardwoods which are currently shipped to UK for production at our existing facilities in Devizes. 

The Group has a strong acquisition track record, substantially improving sales, profits and operating cash flows of the businesses it has acquired. For example, since the acquisition of Mark Wilkinson in 2005 for £5.6 million, turnover has increased by 22% with operating profits up from £382,000 in the year before acquisition to £2.3 million in 2007. 

Board 

Peacock will be managed as a separate, complimentary business within the Group. Upon completion, Christopher Peacock will join the Board of Smallbone plc as Executive Director. 

Financial Results and Current Trading

Smallbone plc today announced interim results, including a current trading update (see separate announcement).