Merger Update
JOINT ANNOUNCEMENT
MATRIX INCOME & GROWTH VCT PLC
MATRIX INCOME & GROWTH 3 VCT PLC
14 APRIL 2010
RECOMMENDED PROPOSALS FOR A MERGER BETWEEN MATRIX INCOME & GROWTH VCT PLC ("VCT
1") AND MATRIX INCOME & GROWTH 3 VCT PLC ("VCT 3") TO BE COMPLETED BY PLACING
VCT 3 INTO MEMBERS' VOLUNTARY LIQUIDATION PURSUANT TO SECTION 110 OF THE
INSOLVENCY ACT 1986 AND THE TRANSFER BY VCT 3 OF ALL OF ITS ASSETS AND
LIABILITIES TO VCT 1 IN CONSIDERATION FOR NEW ORDINARY SHARES OF 1 PENCE EACH
IN THE CAPITAL OF VCT 1 ("VCT 1 NEW SHARES") AND THE CANCELLATION OF THE
LISTING OF THE VCT 3 ORDINARY SHARES OF 1 PENCE EACH IN THE CAPITAL OF VCT 3
("VCT 3 SHARES") ("THE SCHEME")
SUMMARY
VCT 1 and VCT 3, both of which are managed by Matrix Private Equity Partners
LLP ("Matrix Private Equity"), announced on 9 February 2010 that agreement in
principle had been reached for the merger of the two companies.
Discussions have now been concluded and proposals for consideration of the
Scheme have today been sent to both companies' shareholders. The Scheme will,
if effected, result in the merger of VCT 3 with VCT 1, creating an enlarged
company ("Enlarged Company") with net assets of over £32 million (taking into
account the dividends to be paid by the companies on 21 April 2010). The merger
is expected to deliver cost savings and other strategic benefits to both sets
of shareholders.
BACKGROUND
VCT 1 was launched in July 2004 and has raised £20.9 million (net of expenses)
since inception. VCT 3 was launched in September 2005 and has raised £18.9
million (net of expenses) since inception. The objectives of both companies is
to provide investors with a regular income stream by way of tax-free dividends,
and to generate capital growth through portfolio realisations, which can be
distributed by way of additional tax-free dividends.
As at 31 December 2009, VCT 1 had investments in 18 companies with an aggregate
value of £11,779,583 and audited net assets of £16,979,370 (83.34p per VCT 1
Share). VCT 1 has paid dividends since launch totalling 16.3p per VCT 1 Share
and has also declared an interim dividend for the year ended 31 December 2009
of 5.0p per VCT 1 Share. VCT 1 has bought back 1,803,832 VCT 1 Shares for an
aggregate consideration of £1,453,310.
As at 31 December 2009, VCT 3 had audited net assets of £17,478,122 (90.04p per
VCT 3 Share), and, in aggregate, investments in 18 companies. Since launch,
dividends have been paid totalling 5.55p per VCT 3 Share (£1,109,018 in
aggregate) and has also declared an interim dividend for the year ended 31
December 2009 of 4.0p per VCT 3 Share. VCT 3 has bought back 691,970 VCT 3
Shares for an aggregate consideration of £427,863.
The two companies have made investments alongside each other and other funds
managed by Matrix Private Equity benefiting from accessing larger transactions
than might otherwise have been the case. As a venture capital trust ("VCT")
becomes invested and, in light of changes to VCT investment restrictions, the
benefits of having two separate VCTs with similar investment portfolios no
longer outweigh the costs of separate listed companies.
VCTs are required to be listed on the Official List of the UK Listing
Authority, which involves a significant level of listing costs as well as
related fees to ensure the VCT complies with all relevant legislation. As a VCT
becomes fully invested, its net assets may start to decrease, primarily due to
dividends, buy backs and annual expenses. The running costs can become a
proportionately greater burden which may have an adverse effect on a VCT's
return for its shareholders. A larger VCT should therefore be better placed to
spread such running costs across a greater investment portfolio and, as a
result, may be able to pay a higher level of dividends to shareholders over its
life.
With the above in mind, VCT 1, VCT 3 and Matrix Private Equity entered into
discussions to consider a merger of the companies to create a single larger
VCT; the aim being to achieve strategic benefits and reductions in the annual
running costs for both sets of shareholders whilst, in respect of the
arrangements with Matrix Private Equity, ensuring a fair and proportionate
amalgamation of the current arrangements across the two companies.
EXPECTED TIMETABLE
VCT 1 and VCT 3 dividend payment date 21 April 2010
Date from which it is advised that dealings in VCT 3 3 May 2010
Shares should only be for cash settlement and
immediate delivery of documents of title
VCT 1 annual general meeting 11.00 am 12 May 2010
VCT 3 annual general meeting 11.15 am 12 May 2010
VCT 1 extraordinary general meeting 11.30 am 12 May 2010
VCT 3 first extraordinary general meeting 11.45 am 12 May 2010
Record date for VCT 3 shareholders' entitlements under 19 May 2010
the Scheme
VCT 3 register of members closed 19 May 2010
Calculation date of the Scheme after 5.00 pm 19 May
2010
Suspension of listing of VCT 3 Shares 7.30 am 20 May 2010
VCT 3 second extraordinary general meeting 11.00 am 20 May 2010
Effective date for the transfer of assets and 20 May 2010
liabilities of VCT 3 to VCT 1 and issue of VCT 1 New
Shares ("Effective Date")
Announcement of the results of the Scheme 20 May 2010
Admission of and dealings in the VCT 1 New Shares to 21 May 2010
commence
Cancellation of the VCT 3 Share listing 8.00 am 21 May 2010
CREST accounts credited with VCT 1 New Shares 24 May 2010
Certificates for the VCT 1 New Shares dispatched 26 May 2010
MERGER OF VCT 1 WITH VCT 3
Following detailed consideration of the portfolios and financial position of
each company agreement has been reached to recommend a merger of the companies.
The merger will be completed by VCT 3 being placed into members' voluntary
liquidation pursuant to a scheme of reconstruction under Section 110 of the
Insolvency Act 1986. All of the assets and liabilities of VCT 3 will then be
transferred to VCT 1 in consideration for VCT 1 New Shares (which will be
issued directly to the shareholders of VCT 3). The merger will be completed on
a relative net asset basis (unaudited net assets as at close of business on the
day immediately preceding the Effective Date).
The merger will result in the creation of an Enlarged Company and should result
in material costs savings and simpler administration. As both companies have
the same directors, investment manager, investment policies and advisers, this
is achievable without major additional cost or disruption to the portfolio of
investments.
The merger will bring benefits to both groups of shareholders through:
* a reduction in annual running costs for the Enlarged Company compared to
the aggregate annual running costs of the separate companies, in particular
through the reduction in directors' and advisers' fees;
* the creation of a single VCT of a more efficient size with a greater
capital base over which to spread annual costs;
* participation in a large VCT with the longer term potential for a more
diversified portfolio thereby spreading risk across a broader range of
investments and creating an increased ability to support follow-on
investments;
* an increased ability to maintain a buy-back programme and the potential to
increase future dividends due to a reduced level of annual expenses, as
well as a reduced need to retain funds to meet them;
* increased flexibility in continuing to meet the various requirements for
qualifying VCT status; and
* the potential of greater liquidity in the secondary market.
Annual running costs for VCT 1 and VCT 3 are approximately £632,000 and £
627,000 respectively or £1,259,000 in total. These costs represent 3.7 per
cent. of VCT 1's audited net asset value and 3.6 per cent. of VCT 3's audited
net asset value, in each case as at 31 December 2009. It is considered that
this level of continued administrative annual running costs can be materially
reduced through the merger resulting in benefits to both groups of shareholders
The aggregate anticipated cost of undertaking the merger is approximately £
275,000 including VAT, legal and professional fees, stamp duty and the costs of
winding up VCT 3. The costs of the merger will be split proportionately between
the companies by reference to their respective roll-over value and merger
value.
On the assumption of the net asset value ("NAV") of the Enlarged Company
remaining the same as immediately after the merger, annual cost savings for the
Enlarged Company of at least £140,000 per annum (representing 0.43 pr cent. per
annum of the expected net assets of the Enlarged Company) are anticipated to be
achieved following completion of the merger. Again, assuming that the NAV of
the Enlarged Company remains constant for this purpose, and on the basis that
no new funds are raised or investments realised to meet annual costs, it is
believed that the costs of the merger would, therefore, be recovered within two
years.
THE SCHEME
The mechanism by which the merger will be effected is as follows:
* VCT 3 will be placed into members' voluntary liquidation pursuant to a
scheme of reconstruction under Section 110 Insolvency Act 1986; and
* all of the assets and liabilities of VCT 3 will be transferred to VCT 1 in
exchange for VCT 1 New Shares (which will be issued directly to holders of
VCT 3 Shares).
This will result in the VCT 3 Shares effectively being merged into the VCT 1
Shares by reference to the respective net asset value of each company.
Following the transfer, the listing of VCT 3's Shares will be cancelled and VCT
3 will be wound up. Shareholders should note that the merger by way of the
Scheme will be outside the provisions of the City Code on Takeovers and
Mergers.
The merger by way of the Scheme is conditional upon the approval by the
shareholders of VCT 1 and VCT 3 of resolutions to be proposed at the VCT 1
extraordinary general meeting, the VCT 3 first extraordinary general meeting,
VCT 3 second extraordinary general meeting and certain other conditions as
further set out in the documentation sent to shareholders today.
Example:
As at 31 December 2009, the audited NAV per VCT 1 Share (taken from the audited
accounts of VCT 1 to 31 December 2009) was 83.34p. The merger value ("Merger
Value") per VCT 1 Share (this being the audited NAV of VCT 1 as at 31 December
2009 after adjustments in relation to the Scheme, anticipated merger costs and
recent interim dividends declared and then divided by the number of VCT 1
Shares in issue) would have been 77.68p had the Scheme been implemented on that
date.
As at 31 December 2009, the audited NAV per VCT 3 Share (taken from the audited
accounts of VCT 3 to 31 December 2009) was 90.04p. The roll-over value
("Roll-Over Value") of a VCT 3 Share (this being the audited NAV of VCT 3 as at
31 December 2009 after adjustments in relation to the Scheme, anticipated
merger costs and recent interim dividends declared and then divided by the
number of VCT 3 Shares in issue) would have been 85.27p (assuming no dissenting
VCT 3 shareholders) had the Scheme been implemented on that date.
The number of New VCT 1 Shares to be issued to VCT 3 shareholders would then
have been calculated by multiplying the number of VCT 1 Shares in issue by the
merger ratio, this being the Roll-Over Value per VCT 3 Shares divided by the
Merger Value of a VCT 1 Share. The VCT 1 New Shares would then have been issued
to VCT 3 shareholders pro-rata to holdings in VCT 3 (disregarding for these
purposes dissenting VCT 3 shareholders and the amounts required to purchase
such VCT 3 shares held). This would effectively have given 1.0977 New VCT 1
Shares for every VCT 3 Share held (assuming no dissenting VCT 3 shareholders),
21,306,522 New Shares in aggregate, had the merger been completed on 31
December 2009.
MANAGEMENT, ADMINISTRATION AND PERFORMANCE INCENTIVE ARRANGEMENTS
Matrix Private Equity is the investment manager of VCT 1 and VCT 3 and,
following a reorganisation of the Matrix group of companies, now also provides
administration services to both companies in place of Matrix-Securities
Limited.
The current management and administration fees payable to Matrix Private Equity
by the two companies is an annual management fee of 2 per cent. of the net
assets of the relevant VCT (exclusive of VAT, if any) and an annual
administration fee of 0.3 per cent. of the aggregate amount raised by that VCT
(plus VAT).
Matrix Private Equity is currently entitled to performance incentive fees in
respect of VCT 1 of an amount equivalent to 20 per cent. of subsequent cash
distributions made to shareholders in VCT 1 (whether by dividend or otherwise)
over and above the Target Return in any accounting period. The Target Return
for these purposes is dividends of 6p per VCT 1 Share per annum (index linked
from the third accounting period) (subject to a pro rata reduction or increase
for an accounting period which is less than or greater than 12 months), subject
to maintenance of a High Watermark of NAV per VCT 1 Share of 100p (i.e. the
original issue price of all VCT 1 Shares). Any cumulative shortfalls against
the annual Target Return ("Shortfall") have to be made up in later years before
any entitlement arises. An equivalent performance incentive fee entitlement
exists in VCT 3 (save that the entitlement is shared between Matrix Private
Equity and Matrix Group Limited in the ratio of 75:25 unless agreed otherwise
between them).
Matrix Private Equity will continue to provide investment management and
administration services to the Enlarged Company following the merger.
It is intended that the existing management and administration arrangements
between VCT 1, Matrix Private Equity and Matrix-Securities Limited will be
replaced with a new investment management agreement between the Enlarged
Company and Matrix Private Equity covering both management and administration
services. The new investment management agreement will provide for an annual
fee in respect of the 2 per cent. of the net asset element only of an amount
equivalent to 2 per cent. of the net assets of VCT 1 (exclusive of VAT, if any)
plus £120,000 (inclusive of VAT, if any), the £120,000 being subject to
increases in the Retail Prices Index. The terms of this new agreement will
otherwise be substantially the same as those currently applicable for VCT 1 and
VCT 3..
The existing performance incentive arrangements described above will remain
broadly unchanged save that the High Watermark, the Target Return and the
cumulative Shortfall will be adjusted to amounts representing the weighted
average performance of VCT 1 and VCT 3 as follows:
* The High Watermark of 100p per VCT 1 Share will be replaced with an amount
equal to the average issue price per VCT 1 Share in issue following the
merger (calculated as the weighted average of the respective issue prices
of the shares in issue in VCT 1 and VCT 3).
* The Target Return of annual dividends of 6p per VCT 1 Share (index linked
from the third accounting period) will be adjusted to an average dividend
hurdle per VCT 1 Share in issue following the merger (calculated as the
weighted average of the respective target returns for VCT 1 and VCT 3).
* The cumulative Shortfall to the date of the merger will be deemed to be an
amount per VCT 1 Share equivalent to the average shortfall per VCT 1 Share
in issue following the merger (calculated as the weighted average of the
respective cumulative shortfall for VCT 1 and VCT 3).
The aim of the adjustments is to equalise the existing VCT 1 and VCT 3
performance incentive entitlements within the Enlarged Company. The
arrangements following the merger will be solely with Matrix Private Equity as
Matrix Group Limited has agreed to waive any entitlement by agreeing to the
termination of the VCT 3 performance incentive agreement. Both Boards believe
that these revised performance incentive arrangements going forward reflect a
fair and proportionate amalgamation of the arrangements which currently apply
to the two companies.
The revised performance incentive arrangements ("Revised Performance Incentive
Arrangements"), which are being entered into with Matrix Private Equity, a
`related party' of VCT 1 under the Listing Rules, constitute a related party
transaction requiring the approval of VCT 1 shareholders pursuant to the
Listing Rules.
The Revised Performance Incentive Arrangements will, therefore, only be entered
into if the merger becomes effective and subject to VCT 1 shareholder approval.
MATRIX PRIVATE EQUITY
Matrix Private Equity, created by a merger between GLE Development Capital
Limited and Matrix Private Equity Limited, is the private equity arm of Matrix
Group Limited and manages funds primarily through a range of VCTs raised from
private investors. Total funds under management are circa £120 million across
six funds with the portfolio of equity investments in companies currently
numbering forty.
Matrix Private Equity specialises in backing management buy outs and takes a
partnership approach to investing, working alongside ambitious, entrepreneurial
management teams wishing to buy businesses. Equity investments, typically up to
£7 million, are made in UK privately owned companies across a broad range of
industries and sectors, helping entrepreneurial management teams to achieve
substantial gains for all shareholders. Matrix Private Equity often works with
a highly experienced operating partner who has direct management experience and
a wide range of contacts. Matrix Private Equity is recognised as one of the
most experienced teams and active investors in this segment of the private
equity market.
DIVIDENDS
Both VCT 1 and VCT 3 have declared interim dividends for the year ended 31
December 2009 of 5.0p per VCT 1 Share and 4.0p per VCT 3 Share. These dividends
have been declared as interim dividends in respect of the relevant company for
the year ended 31 December 2009, rather than final year end dividends, so that
they can be paid prior to the merger being completed.
VCT 1 BOARD CHANGES
Christopher Moore is currently a director of Matrix Income & Growth 4 VCT plc,
another VCT managed by Matrix Private Equity. It is intended that Christopher
Moore will take over as chairman of Matrix Income & Growth 4 VCT plc and for
these purposes he will need to be an independent director (common directors
across VCTs managed by the same investment manager will no longer be regarded
as independent under the Listing Rules) and was proposing to resign as a
director of VCT 1 in September 2010. In addition, the size and future
composition of the Enlarged Company's Board has been considered. It has been
concluded that a board of three directors would be more cost effective going
forward. in light of the merger, and subject to it becoming effective,
Christopher Moore has agreed to bring his resignation as a director of VCT 1
forward and resign following the merger becoming effective.
VCT 1 SHARE ISSUE AND BUY-BACK AUTHORITIES AND CANCELLATION OF THE SHARE
PREMIUM ACCOUNT
In order to implement the merger, VCT 1 will need shareholder authority to
issue New VCT 1 Shares pursuant to the Scheme the Company also proposes to
renew its authorities to issue New Shares (having disapplied pre-emption
rights) following the merger and make market purchases of its own shares. In
addition, as the merger will create new share premium from the issue of New
Shares Shareholder authority to cancel additional share premium to create
(subject to court sanction) further distributable reserves is also being
requested. The special reserve to be created following court sanction may be
used to fund distributions to Shareholders and buy-backs, to set off or write
off losses to and for other corporate purposes of the Company.
DOCUMENTS AND APPROVALS
VCT 1 shareholders will receive a copy of a circular convening the VCT 1
extraordinary general meeting to be held on 12 March 2010 (together with the
VCT 1 prospectus and annual report and accounts for VCT 1 for the year ended 31
December 2009) at which VCT 1 shareholders will be invited to approve
resolutions in connection with the Scheme, the Revised Performance Incentive
Arrangement, renew share issue and share repurchase authorities and approve the
cancellation of VCT 1's share premium account.
VCT 3 shareholders will receive a circular convening the VCT 3 first
extraordinary general meeting on 12 May 2010 and the VCT 3 second extraordinary
general meeting on 20 May 2010 (together with the VCT 1 prospectus and annual
report and accounts for VCT 3 for the year ended 31 December 2009) at which VCT
3 shareholders will be invited to approve resolutions in connection with the
Scheme.
Copies of the VCT 1 annual reports and accounts for the year ended 31 December
2009, the VCT 3 annual reports and accounts for the year ended 31 December
2009, the prospectus and the circular for VCT 1 and the circular for VCT 3 have
all been submitted to the UK Listing Authority and will be shortly available
for inspection at the UK Listing Authority's Document Viewing Facility which is
situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Telephone: 0207 066 1000
Investment Manager for VCT 1 and VCT 3
Matrix Private Equity Partners LLP
Mark Wignall
Telephone: 020 3206 7000
Administrator for VCT 1 and VCT 3
Matrix Private Equity/Matrix-Securities Limited
Robert Brittain / Sarah Penfold
Telephone: 020 3206 7000
Solicitors to VCT 1 and VCT 3
Martineau
Kavita Patel
Telephone: 0870 763 2000
Sponsor to VCT 1
Charles Stanley Securities
Ben Johnston / Jen Boorer
Telephone: 020 7953 2000
The directors of VCT 1 accept responsibility for the information relating to
VCT 1 and its directors and proposed directors contained in this announcement.
To the best of the knowledge and belief of such directors (who have taken all
reasonable care to ensure that such is the case), the information relating to
VCT 1 and its directors contained in this announcement, for which they are
solely responsible, is in accordance with the facts and does not omit anything
likely to affect the import of such information.
The directors of VCT 3 accept responsibility for the information relating to
VCT 3 and its directors contained in this announcement. To the best of the
knowledge and belief of such directors (who have taken all reasonable care to
ensure that such is the case), the information relating to VCT 3 and its
directors contained in this document, for which they are solely responsible, is
in accordance with the facts and does not omit anything likely to affect the
import of such information.
Martineau are acting as legal advisers for VCT 1 and VCT 3 and for no one else
in connection with the matters described herein and will not be responsible to
anyone other than VCT 1 and VCT 3 for providing the protections afforded to
clients of Martineau or for providing advice in relation to the matters
described herein.
Charles Stanley, which is authorised and regulated in the United Kingdom by the
Financial Services Authority, is acting as sponsor for VCT 1 and no one else
and will not be responsible to any other person for providing the protections
afforded to customers of Charles Stanley or for providing advice in relation to
any matters referred to herein.
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