STCK.L Regulatory News (STCK)

19 April, 2016

Stock Spirits Group Plc: Circular - response to Western Gate Private Investments Limited ("Western Gate") statement

Stock Spirits publishes Circular to shareholders and responds to Western Gate's requisition resolutions ("Western Gate Resolutions")

Further to the announcement made by Stock Spirits Group PLC (SSG) (the "Company") on 5 April 2016 acknowledging the announcement made by Western Gate, the Company has today published a Circular containing a letter from the Chairman to Stock Spirits shareholders. The Western Gate Resolution will be discussed and voted upon at the Company's forthcoming Annual General Meeting, to be held at the offices of J.P. Morgan on 23 May 2016. The letter sets out the Board's response to Western Gate's resolutions and its voting recommendations.

Your Board unanimously recommends that you VOTE AGAINST the Western Gate Resolutions for the following reasons:

· Luis Amaral is the CEO and largest shareholder in Eurocash, the Company's largest customer. We believe this represents an overriding conflict of interest. Luis Amaral wants to gain undue influence at the expense of other shareholders

· Luis Amaral wants Stock Spirits to chase market share without any reference to profitability

· Any influence gained over Stock Spirits' pricing strategy will directly benefit Luis Amaral through his shareholding in Eurocash

· The Board believes that the interests of all shareholders are best served by a Board that is independent and does not include directors hand-picked by any one shareholder

· To require a full M&A review at this time would be a wholly unnecessary use of Company resources, coming so soon after the recent strategic review

· The actions taken by the Stock Spirits management last year and following the recent Operational Review are working, and the performance in Poland is improving as demonstrated by our recent trading update

Commenting on the Circular, Stock Spirit's Chairman, David Maloney, said:

"We would ask that shareholders consider carefully the Circular that we have published today and would recommend that they vote against the resolutions put forward by Western Gate which are disruptive and detrimental.

The Board feels strongly that Mr Amaral's links with Eurocash mean that he is not seeking changes that would be in the best interest of all shareholders, which your Board is focused on. As we announced yesterday, Chris Heath has taken early retirement, with Mirek Stachowicz taking on the role of interim CEO. This renders the resolution calling for the Chris's removal redundant.

We firmly believe that the Board, as currently constituted, has the right experience to take the Company forward until we find a permanent replacement as CEO and would not benefit from the addition of two non-executive directors hand-picked by Mr Amaral.

My letter sets out a more detailed response to the points raised by Mr Amaral, in particular to set the record straight on corporate costs. We believe given our work on strategy announced at the last results, that a review of M&A at this time would be a distraction and a poor use of senior management resources.

What is more, whilst there is still much to be done, the actions we are taking are already bearing fruit as last week's positive trading statement highlighted. But we are not prepared to take part in an aggressive price war in order to recover market share at any cost.

This would result in a reduced profit for Stock spirits with the economic benefit transferred across to our customers, including Luis Amaral's Eurocash business."

Chairman's Letter to Shareholders Extracted from Today's Circular

Dear Stock Spirits Shareholder,

Introduction

I am writing to you as Chairman of Stock Spirits ahead of the company's Annual General Meeting ("AGM") on 23 May 2016.

Firstly, I draw your attention to recent developments in the Company:

- The 2015 financial results were published on 10 March 2016 and can be found on our website: www.stockspirits.com 

- Following this, we announced a trading update for Q1 2016 on 14 April 2016, a copy of which is also available on the website

- From these documents you will see that results are starting to improve and whilst there is still much for us to do I firmly believe that the actions that we are taking will move us back into a position of sustainable growth

- On 15 April 2016, we announced the appointment of Marek Sypek as the new Managing Director of our Polish business

- Yesterday, 18 April 2016, we announced that Chris Heath will be stepping down as CEO with immediate effect to take early retirement. He will be replaced by Mirek Stachowicz, an independent Non-Executive Director of Stock Spirits since November 2015, who will serve as Interim CEO until a suitable replacement is found.

On 5 April 2016, your Board announced that it had received a notice from Western Gate Private Investments Limited ("Western Gate") to put four extra resolutions to all shareholders at the forthcoming AGM. The effect of passing these resolutions would be:

- that two additional directors, selected by Western Gate, be appointed as directors of the Company;

- that Chris Heath, Chief Executive Officer, is removed as a director of the Company; and

- that the Company conducts a further Board level review of its strategy for mergers and acquisitions ("M&A") and does not implement any M&A projects until such strategy is presented to and approved by shareholders at future General Meetings.

We consider these requisitions to be unnecessarily disruptive and detrimental to the majority of shareholders of the Company and proposed by a shareholder who has a material conflict of interest by being both the CEO and largest shareholder of our largest customer.

The purpose of this Circular is to explain why your Board strongly recommends that you vote against the resolutions proposed by Western Gate (the "Western Gate Resolutions").

Background

Since becoming Chairman of Stock Spirits in May 2015 I have met with many shareholders, including Luis Amaral and his Western Gate colleagues. I have listened to all shareholder views and discussed these views in detail with my Board colleagues.I will now summarise the conclusions of the Board's strategic and operational review and also the actions being taken to improve the performance of the Polish business, and then I will address Western Gate's concerns.As set out in our preliminary results on 10 March 2016, the Board's conclusions from the strategic review were that although the principal elements of our strategic goals outlined at the time of the Group's Initial Public Offering are still valid, several issues, including the heightened competition in the Polish market and difficulty in completing material acquisitions in the CEE region, mean that we need to refine elements of the strategy. The key actions announced by the Board to address the issues include:

- Returning the Polish business to growth through greater focus on addressing the competitive environment;

- Optimising the return from all our assets, whether through operational initiatives or disposing of assets that are intrinsically undervalued at present;

- Ensuring greater stability of senior management in key positions and adding new operational roles to strengthen our business;

- Adjusting our M&A strategy and focusing on further business development, and I will touch on M&A later in this document;

- Committing that if we are not able to announce a meaningful acquisition in the near term the Board will consider the best way to return surplus capital to shareholders

Returning Poland to growth is our key priority and the Board also undertook an operational review where we enlisted the support of Ernst & Young to ensure that we had an objective view of the situation in Poland. I will not go through all the competitive actions that are being taken as a result of the operational review but these will address the changing consumer and market trends in Poland.Many of these actions are expected to produce tangible results in the first half of 2016, whilst others will take longer to bear fruit. It is important to note that actions have already been taken to improve the performance of the Polish business and the positive momentum we saw in the second half of 2015 has continued into 2016. 

Who are Western Gate and Luis Amaral?

Western Gate, which holds 9.67% of the issued share capital of Stock Spirits, represents the private family office of Luis Amaral. Luis Amaral is also the CEO and largest shareholder of Eurocash (holding approximately 43.6% of its shares). Eurocash is currently Stock Spirits' largest customer. Western Gate notified the company in early December 2015 that it had acquired an 8.1% holding in the Company and subsequently notified us that it had increased this to 9.67% in February 2016.

There has been significant engagement with Luis Amaral and Western Gate by the Company

The Board and management meet with all major shareholders regularly, both during investor roadshows and as necessary on an ad hoc basis to discuss any specific issues or concerns those shareholders might have. Members of the Board have met with Luis Amaral on three occasions in the first quarter of 2016, once in February and twice in March. Throughout each of these meetings, the Company has listened to, carefully considered and addressed the points raised by Mr Amaral.

Despite this sustained constructive engagement, the Board was disappointed to learn that subsequent to these meetings Luis Amaral immediately felt the need to speak with members of the press regarding the issues discussed in these meetings, rather than continue the dialogue with the Company directly. We see this as inconsistent with the behaviour of a long term, value-focused investor with the interests of all shareholders in mind.

Addressing Western Gate's stated concerns as per the announcement published on 5 April 2016

I will address each of the key points highlighted by Western Gate in turn:

Western Gate said: "A 12.1% drop in market share from 38.4% at IPO to 26.3% as at December 2015, evidenced by a 33.5% decline in Polish revenue from FY13 to FY15 and resulting in the Company surrendering its market leading position in the Polish vodka market"

We recognise that we have lost significant market share in the last 18 months and are determined to recover lost ground, but not at any cost.

Our competitors have repeatedly reduced prices during this period and some of their core products are now back to 2013 prices. They have effectively absorbed all of the 15% excise duty increase from January 2014. We believe this is a mistake and is damaging the spirits industry generally in the short term.

Our strategy is to focus on value creation by creating products that consumers are prepared to pay a premium for. We allowed our new product development programme to slow down in 2014 and competitors took full advantage of this by launching more new products than previously. We have taken steps to address this and launched 33 new products in Poland in 2015, 29 of which only reached customers in the second-half and therefore are still in the early stage of growth, but we expect them to have a more material impact on our profitability and market share in 2016. In addition, we have launched another three new products so far this year in Poland.

To demonstrate the success of our New Product Development (NPD) since IPO:

− The returns on our NPD investment have improved each year, with total gross margin exceeding the cost of investment by more than 2x over this period, therefore generating an immediate positive cash return;

− The impact of NPD has been margin accretive in all years;

− Even though the majority of NPD released in 2015 was towards the end of the year, it generated almost 6% of total Group turnover for the year.

As previously documented, following our decision to reduce discounts and rebates to "normal" levels, we ended 2014 and started 2015 with very poor relationships with many of our key customers, including Eurocash. This adversely affected our financial results and market share in 2015. We worked hard throughout 2015 to rebuild these relationships and are now trading with all of our regular customers again. We are supporting our customers with appropriate marketing and promotional activities and are increasing the number of small stores we cover in order to close the gap to our main competitor in this type of stores.

We could increase our market share significantly by reducing prices across the range, but this would result in reduced profit for Stock Spirits with the economic benefit transferred across to our customers, including Luis Amaral's Eurocash business. Nevertheless, we are addressing the competitive environment and product price differentials and we have decided to reduce prices on selected core products in order to ensure that we remain competitive - we should expect to see the results of this coming through in Q2 2016 onwards. We will not however participate in an aggressive price war in order to recover market share at any cost.

We expect all of the steps we are taking to have a positive impact on market share in 2016 and beyond.

Western Gate said: "Corporate costs spiralling up 111% since 2011, whilst revenues have declined 11% over the same period" and "2015 corporate costs of €16.7m, which we believe are mainly comprised of the UK head office costs where the Company has no major revenue generating operations, equating to 31.2% of the Company's reported FY15 EBITDA"

It is misleading to compare current costs with the cost base in 2011. As explained at the time of our IPO, the previous private equity structure we had then was not suitable for a company listed on the London Stock Exchange. We indicated that additional costs would be necessary and this was approved by the shareholders at the time. The analysis below therefore focuses on 2015 costs and key drivers of movements since IPO.

The comments made by Western Gate about corporate costs are also misleading. As has been clarified to Luis Amaral in each of the meetings he attended with us, our corporate costs include other costs in addition to pure head office costs. These include costs which are controlled through central budgeting but are charged to the operating businesses (market support costs); the direct costs of being a listed company and the costs for any projects which we undertake (for example refinancing or aborted M&A). In addition transactional and translation foreign exchange differences ("FX") are included in this category and FX, as has been highlighted in the results historically, has had a significant impact.

The table below shows the breakdown of those costs for 2015 and key movements since IPO (2013) as this is a more meaningful comparison. As can be seen total Group head office costs were £7m last year, and have reduced since the IPO. Clearly corporate costs are not mainly made up of UK head office costs as claimed by Western Gate. Western Gate has also claimed that the Group could significantly reduce costs by having the head office in Poland rather than the UK. Again as explained to Mr Amaral, the Board has discussed this and concluded that the one off costs and the huge disruption to the management of the business far outweigh any potential cost savings. Given Mr Amaral has stated that he does not wish to see the company delisted, any move of the head offices, would result in the PLC costs remaining.

The Board also notes that Western Gate's proposal to add two additional directors to the Board would unnecessarily increase the corporate costs. Corporate cost increases since the IPO have therefore been driven primarily by the significant impact of FX. The impact of the performance share plan and the costs of being a listed company have added to the cost base. The remaining cost base has reduced by over €3m, since IPO to mitigate some of these additional costs. On a constant currency basis, total corporate costs, excluding FX, have actually decreased by €1,427k since IPO, this demonstrates careful management of the cost base not a lack of cost control.

Stock management have focussed on tight cost control since the business was formed in 2008 and will continue to do so going forward. Opportunities to reduce or eliminate unnecessary costs are proactively pursued on an ongoing basis.

Western Gate said: "A culture of "Group Think" at the Board level which has helped contribute to "Remote control management" from the UK and, as evidenced by the market share loss and share price fall, is not working and may have resulted in the loss of key regional leadership with 5 regional managers (across 3 regions) leaving the Company since IPO and no dedicated Polish CEO in place since January 2015"

At all times all of our businesses, including Poland, have been run by experienced management teams who have been based in the relevant market. In January 2015, the company appointed three very experienced, senior Group Executives to run the Polish business in place of the previous management team. Ian Croxford took up the role of Managing Director whilst Paula Cardwell took up the role of Finance Director and both were based full time in Poland throughout 2015. Richard Hayes, as Marketing Director, was also based in Poland full time until a local Polish Marketing Manager was appointed in September 2015. Paula Cardwell has now returned to her Group role following the appointment of Bradley Holder as Finance Director in February 2016. Brad has 20 years' experience in consumer goods companies in Poland including Coca Cola and Pepsi. Ian Croxford will remain full time in Poland until we have completed a full handover of the control of our Polish business to Marek Sypek, who will join Stock Spirits in June 2016. Marek Sypek has a wealth of experience of successfully running consumer goods companies in Poland and has delivered strong profit growth in companies including Johnson & Johnson and Agros-Nova (one of Poland's largest producers of soft drinks, jams and preserve vegetable products).

Following the other regional senior management appointments made over the last 12 months, Marek Sypek, our new Polish Managing Director appointment, now completes the regional senior management team, all of whom have significant experience of operating within listed companies.

We have consistently run all of our businesses, including Poland, with on the ground management teams based in the relevant market. There has been no "remote control" management from the UK, and in Poland we have now appointed a very experienced and talented Managing Director, who is a Polish National, to drive this business forward.

There is no "Group Think" at the Board other than ensuring that our Group values and policies are followed while respecting all local cultural differences. Board members visit local operations and debate with local management individually and collectively. The Board has a balance of complementary experiences which were expanded by the addition of a Polish resident national last year.

Furthermore, Western Gate's proposals are detrimental to the Company as set out below:

Group Leadership

Western Gate has requisitioned that Chris Heath be removed as the CEO of the Group.

Following the announcement made yesterday, this proposal is clearly no longer relevant as this resolution would be ineffective. As a result this resolution will not be put to shareholders at the AGM. However I would like to comment as follows. The Board and the Nomination Committee of Stock Spirits have been discussing executive succession plans for some time. This has been considered in the context of the future growth plans of the Group and in terms of the optimum organisational design. I have been discussing this directly with the former CEO of the Company, Chris Heath. In early February 2016, an international executive search firm was contracted to commence a professional search for a successor for the CEO role. The plans of your Board were to ensure that the Company had a new Polish managing director in place before initiating any specific changes at the CEO level, as we believed that the business would not benefit from any further period of uncertainty. Luis Amaral's actions clearly interrupted the Board's careful planning and have brought forward the plans that Chris Heath and the Board had made in this regard.

Notwithstanding the above and that the search is ongoing, the original intention was to announce the change once an appropriate CEO candidate had been selected and the final decision taken. However the Board considers that due to the current disruption, this is the right decision for the Company at this moment and, following the announcement that Chris Heath will be retiring and stepping down as CEO with immediate effect, Mirek Stachowicz has been appointed as interim CEO until a suitable permanent successor has been confirmed. Mirek has considerable experience in leading consumer branded companies in Poland and CEE, comparable in size and complexity to Stock Spirits, both in an executive and non-executive capacity. His experience and knowledge of the consumer goods markets in Poland and CEE equips Mirek, to take the business to the next stage of our recovery. Whilst serving as interim CEO he will be based in the Warsaw office.

As noted earlier, the recent appointment of Marek Sypek completes the new senior regional management team and will ensure the Group can continue to focus on improving its performance.

The Board believes that the management team in situ is best placed to see through initiatives currently being undertaken following the completion of the operational review.

Western Gate's interests are not necessarily aligned with the long term interests of Stock Spirits shareholders as a whole:

Luis Amaral is the CEO and largest shareholder in Eurocash, the Company's largest customer. We believe this represents an overriding conflict of interest because as a customer Amaral would potentially benefit from changes to the Company's pricing strategies, understanding our competitive environment, and preventing any geographic diversification away from Eurocash's home market of Poland.

Management has put in place a number of initiatives to improve the performance in Poland. We have chosen not to chase uneconomic market share as this will be detrimental to the company and would only serve to benefit large customers such as Eurocash.

Western Gate and Luis Amaral's interests are therefore not necessarily aligned with other Stock Spirits shareholders who are focused on long term value creation.

We believe Western Gate is seeking undue influence at the expense of other shareholders

We believe that Western Gate and Luis Amaral, by proposing the appointment of two hand-picked directors to the Board, are seeking to gain undue influence, thereby limiting the Company's strategic and operational flexibility. This goes against best corporate governance, and would result in a degree of control beyond that which is appropriate for a minority shareholder in a listed company. Additionally, the appointment of directors chosen by Western Gate would effectively provide a transfer of influence, without any commensurate control premium to other Stock Spirits shareholders.

We do not believe that the proposed directors can be judged to be independent

The Board believes that any nominee put forward by Western Gate would have an overriding conflict of interest that would deem that nominee inappropriate to act as director of Stock Spirits. The role of the Board in discussing commercially sensitive matters, setting strategy and taking investment decisions would be unacceptably compromised in the presence of any representative appointed by the principal shareholder of Stock Spirit's largest customer.

In any event, the Board is strongly opposed to adding directors to the Board who may favour one particular shareholder over and above the interests of shareholders as a whole and would NOT consider any such nominee to be independent. Accordingly, the appointment of such directors could affect the Company's compliance with the UK Corporate Governance Code.

The Board believes that the interests of all shareholders are best served by a Board that is independent from any shareholder, and hence the Board does not believe that it is in the interests of shareholders as a whole for any directors nominated by Western Gate to be appointed.

The Strength of Stock Spirits' Corporate Governance

Stock Spirits has an experienced and diverse Board, with the required skills, experience and independence to review and challenge the Company's strategy effectively and in the interests of all shareholders. Three of the four existing non-executive directors, including the Senior Independent Director, were appointed following an extensive selection process prior to the IPO in October 2013.

Mirek Stachowicz, a Polish national based in Warsaw and who has been running consumer businesses in the CEE for the past 21 years, out of which 18 in Poland, was appointed as a non-executive director in November 2015. Mirek's appointment followed an extensive 6 month process comprising a review of the composition of the Board and, subsequently, a search for the most suitable new non-executive director. He has informed and enhanced the Board's focus on the key challenges in Poland.

We are confident that the current Board structure provides the right corporate governance framework for the Company and its shareholders and that the existing members have the appropriate combination of sector, geographic and UK public company experience. Despite the short term measures announced yesterday, the Board of Stock Spirits remains fully compliant with corporate governance best practice, and we do not believe that shareholders would benefit from the appointment of additional directors at this time.

The Nomination Committee reviews succession plans twice a year. The Board recognises that effective succession planning is fundamental to Board effectiveness. Ensuring there is development of talented personnel to move into senior management positions where appropriate, and providing cover for such positions, helps to mitigate the risks associated with unforeseen events such as the departure of a key individual, and also assists in promoting diversity. The necessary plans for short-term cover for senior roles were discussed and agreed on. As outlined in last year's Annual Report, a formal permanent succession plan has been developed, and this was enhanced.

Stock Spirits is fully compliant with the UK Corporate Governance Code

Stock Spirits' Existing M&A Strategy

As we set out in our preliminary results presentation and as discussed with shareholders including Luis Amaral and Western Gate during our recent roadshow, addressing the issues in Poland is unquestionably our first priority and this will not change until we see some further positive results from the actions being taken.

As part of the strategic review announced with our results, we reiterated that the principal elements of our strategic goals were still valid, but that we needed to make some small adjustments as we could not ignore the change in the Polish market and the difficulties experienced in completing any meaningful acquisitions in the CEE region. We decided to broaden our geographic footprint to include some adjacent territories which were similar in nature to those identified at the time of the IPO. We also believe that there may be attractive brands which are currently or potentially appealing to our existing markets but which are owned outside CEE. We are therefore surprised at Western Gate's false description of an entirely new strategy. We also explained that while our geographic focus for M&A has been broadened, management continue to focus only on the right acquisitions which add value where there are operational synergies. During the shareholder roadshow and the meetings with Western Gate we carefully explained that we did not intend to acquire companies outside our sphere of competence. We also reiterated that any material acquisition would require the approval of our shareholders. For example, taking into account 2015 results and the current share price, any potential acquisition for a purchase price above approximately €90m would in any case require shareholder approval (under the Listing Rules). The Board believes that Mr Amaral is not interested in the Company completing any small M&A transaction in the CEE area either despite this being the strategy approved by shareholders since the IPO.

It should also be said that if there is no success in achieving these goals, or identifying and executing sufficient value-creating investment opportunities in the near term, then capital will be returned to shareholders, but that is only secondary to utilising capital to grow value, which remains our goal as a Board.

In these circumstances, we do not believe that a further M&A review is necessary and would be costly and disruptive for the business.

Strategy in other markets

The situation in Poland understandably commands the most attention, but we should not forget that our other markets performed very well in 2015. The Board is particularly pleased with the performance of the new products we launched in those markets recently and the progress that is being made with our third party brands. This has enabled us to grow market share and profitability in most markets, with some performing ahead of expectations.

Stock Spirits' strategy has delivered considerable success in all markets over several years and we are now addressing the recent issues in Poland as recent results demonstrate.

Recommendation

For the reasons set out above, the Board of Stock Spirits considers that the Western Gate Resolutions are, in each case, not in the best interests of the Company or Stock Spirits Shareholders as a whole. The Board therefore unanimously recommends that all Stock Spirits Shareholders VOTE AGAINST the Western Gate Resolutions.

Action to be Taken

You will find enclosed a Form of Proxy for use in connection with the Resolutions.

Please support your Board by completing the last part of the Form of Proxy to vote as indicated on the Form.

I look forward to seeing you at the forthcoming AGM.

For further information:

Bell Pottinger: