S & U Regulatory News (SUS)

S & U plc ("S & U" or "the Group" or the "Company") Proposed Disposal of Loansathome4u to Non-Standard Finance plc

7 July 2015

The Company today announces that it has entered into a conditional agreement to sell its home credit business which trades as Loansathome4u, for a total cash consideration of £82.5 million to Non-Standard Finance plc.

Highlights

· The Proposed Disposal will generate £80 million net of expenses

· Gross cash proceeds from the Proposed Disposal equate to approximately 694 pence per S & U share compared to the closing price per S & U share of 2281 pence on 6 July 2015

· Profit on sale will increase net assets by £47 million*, and create a net cash balance of £26 million*

· The Proposed Disposal will allow for £34 million of investment into Advantage and £13 million for the development of Advantage's nascent SME vehicle lending product

· Intention for a significant return of capital and possible future distributions to shareholders

· The Proposed Disposal is conditional upon the approval of the Company's shareholders

· Directors and certain shareholders of the Company, who together control directly or indirectly approximately 51.94 per cent. of the issued ordinary share capital of the Company, have given irrevocable undertakings to vote in favour of the Proposed Disposal

*Derived from pro-forma figures based on 31 January 2015 accounts

Commenting on the Proposed Disposal Anthony Coombs, S & U plc Chairman, said:

"The recent unsolicited approach from Non-Standard Finance plc for our home credit business led the Board to reconsider the Group's future strategy.

"The Board believes that there are significant benefits from the sale of Loansathome4u for realising fair value for our shareholders; but also significant opportunities to further accelerate the expansion of Advantage and develop its nascent small business vehicle lending products, as well as other higher growth areas of specialist finance.

"It is our intention to make a significant return of capital once we have concluded our assessment of reinvestment options and following discussions with the Company's shareholders."

Enquiries:

Anthony Coombs, Chairman S & U plc, 0121 705 7777

Media and Investor Relations

Will Swan, Smithfield, 0207 360 4900

Financial Advisers, Sponsors and Brokers

Chris Hardie, James Felix, Arden Partners, 0207 614 590

Introduction

The Company today announced that it has conditionally agreed to sell Loansathome4u for a cash consideration of £82.5 million to Non-Standard Finance plc. In view of its size, the Proposed Disposal is a Class 1 transaction under the Listing Rules and is therefore subject to, and conditional on, inter alia, Shareholder approval at a General Meeting. A circular convening a general meeting will be sent to S & U shareholders as soon as practicable.

Background

The Company was founded in 1938. Today it comprises two parts. The first and largest is Advantage, a motor finance business founded within the Group in 1999 and based in Grimsby. Advantage has achieved 16 years of unbroken profits growth. For the financial year ending January 2011 Advantage's profit before tax had reached £4.2 million on revenues of £16.0 million. In the financial year ending January 2015 this had risen to £16.7 million on revenues of £36.1 million.

The second and more traditional component of S & U is Loansathome4u, its home credit division. This is the direct descendant of the credit drapery business founded by Clifford Coombs 77 years ago. In the financial year ended 31st January 2015 Loansathome4u produced revenues of £38.3 million and profit before tax of £8.4 million. Net assets as at 31 January 2015, excluding an inter-company receivable balance of £16.3 million, for Loansathome4u were £33.1 million. The inter-company receivable represents cash lent to S & U which will be retained as part of the Proposed Disposal.

A recent unsolicited approach led the Board to reconsider the Group's future strategy, the significant benefits the approach gives for realising fair value for shareholders and the opportunity the Proposed Disposal gives the Group for further and faster expansion in Advantage and its Advantage SME vehicle loans product as well as other higher growth areas of specialist finance discussed in more detail below. Following further negotiations, the Board is now able to recommend the Proposed Disposal being placed before Shareholders.

Description of Loansathome4u

Loansathome4u operates from 40 locations throughout England, Wales and Scotland including the head office in Solihull. It operates and is licensed through two companies: Loansathome4u is a part of the holding company, S & U, and has 19 branches throughout the Midlands, the South of England, South Wales and South Yorkshire; SD Taylor is a wholly owned subsidiary of S & U which covers the North of England, North Wales and The Lowlands and Central belt of Scotland. Loansathome4u is the trading name for both home credit companies which employ over 300 people and operate through approximately 530 representative agencies. These employees and representatives provide a home credit service for around 100,000 customers.

Historically Loansathome4u provided the core of S & U's earnings and has generated, on average, cash before taxation and dividend payments of £6.6 million per annum over the course of the last three financial years. It has produced consistent revenues and profit before tax reaching £38.3 million and £8.4 million respectively in the year ended 31 January 2015. The loan book at that date was £34.6 million and net assets of £49.4 million, which included a £16.3 million inter-company receivable balance. The gross assets of Loansathome4u at 31 January 2015 were £52.6 million

A summary of the results for Loansathome4u for the 3 years ended 31 January 2015 is set out below:

Reasons for the Proposed Disposal

In recent years, Loansathome4u has produced an increasingly smaller proportion of Group earnings. In the year ended 31 January 2015, Loansathome4u represented approximately 36.2 per cent. of the Group's profits before tax.

Whilst results have been consistent, there has been limited growth in home credit loan receivables in the past three years. Despite the recruitment of an estimated 5,000 new customers last year, overall customer numbers have not risen over the last three years. Whilst the estimated potential home credit market in the UK is around 3 million people, only 1.5million to 2 million are active at any time. Further, while home credit remains a staple component of the cash flow management of individuals in its socio-economic market, it has not proved a growing one with the past three financial years achieving little growth in individual customer receivables.

In common with much of the financial services sector, home credit has been a focus in recent years of some regulatory scrutiny. The Competition Commission Inquiry into the home credit sector in 2006 and the more recent High Cost Credit Review are examples of this. Both inquiries recognised the considerable merits of the home credit sector in providing a convenient, forgiving and flexible service for its customers. Nonetheless, the Directors believe that the introduction from 1 April 2014 of a rules based regulatory regime overseen by the Financial Conduct Authority (FCA) may lead to greater costs for the industry resulting in consolidation and a reduction in the number of smaller participants. The Directors believe that further evidence of the increasing regulatory pressures is evidenced by the reduction of home credit lenders from membership of the Consumer Credit Association in the period following the introduction of the regime. However, given the relatively small size of these home credit competitors, the Board have concluded that S & U is unlikely to benefit significantly from acting as a consolidator in the home credit market.

Your Board has therefore concluded that the sale of Loansathome4u will allow the Group to devote additional resources to Advantage motor finance and Advantage's SME vehicle lending product and enable it to develop other higher growth areas of specialist finance.

Terms of the Proposed Disposal

Immediately prior to the completion of the Proposed Disposal the trade and assets of the home credit business held in S & U will be hived down into SD Taylor Limited ("Hive Down"). Non-Standard Finance plc will then acquire the entire issued share capital of SD Taylor Limited for a consideration of £82.5 million payable in cash on Completion. The consideration is subject to adjustment to reflect any net debt of SD Taylor at Completion and any variance in the working capital of SD Taylor at Completion.

Financial and Other Effects of the Proposed Disposal

Completion of the Proposed Disposal is expected to, subject to the passing of the Resolution and the Hive Down taking effect, take place on 4 August 2015. After tax and professional fees, the sale of Loansathome4u is expected to generate around £80 million of cash which will initially reduce indebtedness but thereafter will be invested in the business or distributed to shareholders. The profit on sale of the business will increase the net assets of the Group by approximately £47 million and, based on pro-forma information, create a positive net cash balance of £26 million. Inevitably the initial impact on profits will be to dilute underlying earnings per share in the second half of the current financial year ending 31 January 2016, since savings on indebtedness repaid and income from the net proceeds is less than the expected profit contribution from Loansathome4u in the second half of the financial year. Further some Head Office overhead after crediting interest, estimated at £1.95 million per annum and previously funded by Loansathome4u, will now fall on the Group.

In the short term proceeds not already allocated in Advantage or new business areas as further described below, will be placed on deposit or to purchase relatively higher yielding Government securities. The Group currently has revolving credit facilities of £40 million and term loan facilities of £30 million with M&G.

These banking partners have been consulted regarding the Proposed Disposal and have all signed letters of consent to the maintenance of their facilities. The Board regards the maintenance of this headroom, at attractive terms, as an important factor in its expansion plans.

Finally, as recently mentioned in the Annual Report and Accounts for the year ended 31 January 2015, the Group has, over the past 18 months been pursuing a Bank Deposit Taking Application with the PRA and FCA with a view to further diversifying the Group's funding mix. Such an application had been scheduled to be made during H1 2015, but owing to the anticipated receipt of net proceeds from the Proposed Disposal and the additional funding that the Proposed Disposal should provide, such an application has been postponed. However, in the longer-term it is still your Board's intention that this application should be resumed, so as to enable both the diversity and scale of funding anticipated for the Group's growth.

On Completion, Mike Thompson (Managing Director of SD Taylor Limited) and Mike Mullins (Managing Director of Home Credit) will be stepping down from the Board and will leave the Company. I would like to extend my deep appreciation to both Mike Thompson and Mike Mullins for their valuable contributions to the Board over several years. I wish them both well in their future endeavours.

Use of Proceeds

1. Future Development of the Group

The Board believes that a large element of the proceeds can be applied in the existing Advantage business and to grow new business streams.

Accelerated Growth at Advantage

Advantage currently has over 26,000 customers and last year concluded 12,000 new loan transactions an uplift of 41 per cent. over the previous year. The used car market in the UK comprises around 7 million transactions each year of which only one million are sold with finance on the car. The potential market is therefore very substantial and growing. The Directors are confident these factors will enable the rate of expansion of Advantage, which has seen revenue grow at a compound annual growth rate of 26.6% over the three financial years between 31 January 2013 and 2015, to be maintained or accelerated.

As a consequence, the past three years has seen S & U invest over £40 million in the development of Advantage. The Directors believe that current budgets will require approximately a further £34 million investment in the next 18 months, to be funded from the net proceeds. Advantage continues to develop its under-writing standards and its predictive abilities which allow it to attract customers with good margins and to extend its reach up-market to customers who may have been rejected by the banks, usually on technical grounds.

As a result of the current recovery in consumer confidence and opportunities available to Advantage, the Board expects current record levels of debt quality and financial repayments should persist providing a very strong platform for future growth.

Advantage SME Vehicle Lending

Advantage's expertise in retail motor finance already has allowed it to access related commercial vehicle lending, particularly to those of its customers who are self-employed. The Directors expect to develop the business into broader small scale business lending. The Directors expect that loans of an average of £12,000 will be provided, secured on the assets they finance and other forms of security, and, as such, they intend to allocate up to £13 million over the next 18 months from the net proceeds to fund these endeavours.

New Business Areas

Although no specific funding has been earmarked, the Board is exploring areas of personal finance, initially in partnerships with well-established market participants. Provided these areas can demonstrate reliable, sustainable and high quality margins to maintain existing levels of return on capital employed, they will be carefully explored.

2. Return of Capital to Shareholders and Dividend Policy

Whilst the Board remains confident of continuing the growth in earnings per share which has seen the value of S & U rise substantially over the past 10 years, it is mindful of both the need to operate an efficient and appropriately capitalised balance sheet and to reward shareholders reflecting not only our trading success but also the increase in the Group's net asset value resulting from the Proposed Disposal.

In respect of the year ended 31 January 2015, our three dividend payments will total 66p per share; as announced on 24 March 2015 and approved at the AGM held on 21 May 2015, the final dividend of 30p per share will be paid on 10 July 2015 to ordinary shareholders on the register at 19 June 2015. Since 2010, S & U's earning per share have increased from 55.2p to 156p. Dividend per share has risen from 34p to 66p and consequently dividend cover has increased from 1.62 to 2.36 times. Over time it is our intention that dividends should be covered twice by earnings.

On receipt of the net proceeds from the Proposed Disposal, the Board will continue to assess reinvestment options and review the Company's capital structure. Following this it would also be our intention to make a significant return of capital to shareholders; the form of this distribution will be agreed after discussion with the Company's Shareholders. The Board will monitor the capital requirements of the Group based on experience in expanding the business streams noted above. This could result in further distributions.