Posting of Response Circular

RNS Number : 1776F

API Group PLC

18 February 2015

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF THAT JURISDICTION

18 February 2015

API Group plc ("API" or the "Company")

Publication of a circular to shareholders in response to the unsolicited cash offer for the Company by Cedar 2015 Limited ("Cedar")

The Independent Board of the Company (comprising Mr. Andrew Turner and Mr. Andrew Walker (the "Independent Board")) confirms that it has today posted a circular to shareholders (and, for information only, to persons with information rights and participants in the API Share Plans) setting out the Independent Board's response to the offer document posted by Cedar on 4 February 2015 in relation to its unsolicited cash offer for the Company (the "Circular"). The text of the letter from the Interim Chairman of the Company (set out in full within the Circular) is reproduced below.

Documents published on the website

Copies of the Circular will be available, subject to certain restrictions relating to persons resident in restricted jurisdictions, on the Company's website at  http://www.apigroup.com/ by no later than 12 noon (London time) on 19 February 2015.

The Independent Board is also announcing that, in accordance with Rule 26.3 of the Code, the Company's website has been updated to include the written consent of Numis Securities Limited to the inclusion in the Circular of its name in the form and context in which it appears

Terms and expressions used in this announcement shall, unless the context otherwise requires, have the same meanings as given to them in the Circular.

Letter from Mr. Andrew Turner, Interim Chairman of API Group plc

To API Shareholders and, for information only, to persons with information rights and participants in the API

Share Plans

Dear API Group Shareholder,

Response to Unsolicited Offer

1. Introduction

On 22 January 2015, Cedar Bidco, an indirect subsidiary of Steel, announced its firm intention (pursuant to Rule 2.7 of the Code) to make a cash offer of 60 pence per API Share to acquire the entire issued and to be issued ordinary share capital of API not already owned by Steel and its subsidiary undertakings. Full terms and conditions of the Offer were subsequently published by Cedar Bidco on 5 February 2015.

The purpose of this letter is to set out the Independent Board's view on the Offer and to explain the issues that the Independent Board believes Shareholders should consider when deciding whether or not to accept. Shareholders should read the Circular in its entirety and not rely only on the matters set out in this paragraph 1 when making their assessment.

Prior to the announcement by Cedar Bidco on 22 January 2015, there were no discussions relating to the Offer between Cedar Bidco and the Board, nor between their respective advisers.

The Independent Board believes that the Offer, at its current price, may not represent full value for the Company and the potential returns for Shareholders which may be generated from the Board's current plans for the business. On the other hand, the Offer provides Shareholders with the opportunity for an immediate and certain cash exit and, since Cedar Bidco has already secured acceptances giving it 62 per cent. of the API Shares, the alternative is to remain as minority Shareholders in a company controlled by Cedar Bidco, which may subsequently be taken private should Cedar Bidco acquire sufficient additional shares to carry a special resolution cancelling API's admission to trading on AIM.

Amongst the elements of value which the Offer may be failing to recognise is the potential to rationalise the Group's foil manufacturing operations in the US, reducing operating costs and releasing land and property assets for disposal. The Independent Board considers that an up-to-date valuation of the Rahway Property may have a bearing on its overall view of the Offer price and could influence the merits of the case for accepting or not accepting the Offer. The Independent Board has, therefore, commissioned a valuation report and is reserving its position on the merits of the Offer until after that report has been received.

NO ACTION RECOMMENDED AT PRESENT:

In the circumstances, and having regard to the matters set out in paragraph 5 of this letter, the Independent Board and Numis cannot yet form a conclusive view as to whether or not the terms of the Offer are fair and reasonable. Consequently, the Independent Board does not believe that it is appropriate to provide Shareholders with a definitive recommendation at this time and therefore recommends that Shareholders take no action at present.

The Independent Board intends to review its recommendation to Shareholders in conjunction with the valuation report on the Rahway Property, which it intends to publish as soon as possible.

In considering the Offer, Shareholders should have regard to their personal circumstances and the matters set out in paragraph 5 of this letter. Shareholders should be aware that the Offer is currently unconditional in all respects but remains open for acceptance until further notice. As prescribed by the Code, under Rule 31.2, Cedar Bidco must provide 14 days' notice before the Offer is closed for acceptance and, pursuant to Rule 31.4 of the Code, the earliest date when the Offer could be closed is 19 March 2015, provided such notice is given by Cedar Bidco on 5 March 2015 (being the First Closing Date).

In providing advice to the Independent Board, Numis has taken into account the commercial assessment of the Independent Board.

2. The Offer

Under the terms of the Offer, Shareholders are entitled to receive:

for each API Share                                             60 pence in cash

valuing API's existing issued and to be issued ordinary share capital at approximately £46 million.

Cedar Bidco announced on 9 February 2015 that the offer had exceeded its acceptance condition of 62 per cent. and has been declared unconditional in all respects. Cedar Bidco has stated that the Offer will remain open for acceptance until further notice. Pursuant to Rule 31.2 of the Code, Cedar Bidco must provide 14 days' notice before the Offer is closed for acceptance and pursuant to Rule 31.4 of the Code, the earliest date when the Offer could be closed is 1.00 pm (London time) on 19 March 2015, provided such notice is given by Cedar Bidco on 5 March 2015 (being the First Closing Date).

3. Information on API

API Group is a leading manufacturer and distributor of foils, films and laminates used to enhance the visual appeal of products and packaging and to help customers communicate brand values and authenticity. API has a trading history going back over 90 years, including more than 30 years as an independent, publicly traded company.

API Group's global operations employ more than 500 people in over 15 locations, dedicated to providing high quality, innovative materials and solutions for use in a wide range of applications including consumer packaging, printed media and secure documents.

The Group has four operating divisions by which it reports its financial and operating results: Laminates, Foils Europe, Foils Americas and Holographics.

API foils, films and laminates are used to add metallic and holographic finishes and effects to labels, cartons, containers and closures for many of the world's leading consumer brands in premium sectors such as alcoholic drinks, confectionary, tobacco, perfumery, cosmetics and healthcare. Holographics provides a full range of anti-counterfeit solutions for the protection of branded goods as well vouchers & tickets, ID documents, licences, tax stamps, financial cards and currency.

4. Current trading and outlook

API announced its interim results for the six months to 30 September 2014 on 3 December 2014, when it was reported that operating profits before exceptional items were down by 19.8 per cent. compared to the prior year's interim results to £2.8 million on revenues 0.9 per cent. lower at £56.4 million. Results were impacted by a decline in demand for metallic pigment product at Foils Americas, a market segment which had grown strongly over the previous three years. This decline more than offset the progress made in eliminating prior year losses at Holographics.

The Board's outlook statement released along with the interim results stated that the Group was so far experiencing tough trading conditions in the second half, with the outlook for profits for the financial year as a whole down on previous expectations. Progress at Foils Europe was being held back by sluggish markets on the Continent and the benefit from a slow recovery in metallic pigment orders at Foils Americas was expected to be partly offset by a seasonally weaker second half for graphics foils. Third quarter sales at Holographics were expected to drop below breakeven level, although there was the prospect for the shortfall to be recovered in the final quarter with the start-up of shipments on two new supply contracts. It was reported that Laminates was continuing to experience strong order levels on established supply agreements; although the impact on profits was expected to be diluted by a less favourable sales mix.

In the ensuing two months, the Group has continued to face tough trading conditions, such that the outlook for the full year is now at the lower end of the Independent Board's range of expectations.

Beyond the current financial year, the recovery in US metallic pigment volumes is expected to continue and both the US and European foils businesses should benefit from recent new product launches and investments in new, more efficient capacity and additional technical capabilities. Based on new equipment, there is also the opportunity for in-sourcing certain requirements currently bought from third party suppliers. Holographics results are expected to benefit from the full year impact of the recently-acquired supply contracts and Laminates is aiming to at least sustain its already strong trading performance, underpinned by the re-pricing of a key product line which has adversely impacted margins during the last twelve months. Considering the opportunities for improvement, the Independent Board has a good level of confidence in the Group's plan to deliver on its expectations for the financial year ending 31 March 2016.

5. Arguments for and against accepting the Offer

The Independent Board sets out the following matters, which they believe, having been so advised by Numis,

Shareholders might wish to consider when deciding whether or not to accept the Offer. In providing advice to API, Numis has relied upon the commercial assessment of the Independent Board.

5.1 Arguments for accepting the Offer

The Offer represents a premium of 27.7 per cent. to the closing price of 47 pence per API Share on 21 January 2015 (the day prior to the announcement of Cedar Bidco's offer) and a premium of 22.6 per cent. to the average Closing Price over the three month period ended 21 January 2015. The Offer, therefore, presents Shareholders with a near term opportunity for a cash exit at a premium to the prevailing share price and a release from the risks and uncertainties that have affected, and may continue to affect, the value and marketability of API Shares.

As described in paragraph 4 above, trading has been weak in the current financial year and interim results to

30 September 2014 were significantly below those achieved in the previous two six month periods. Whilst the

Independent Board expects an improvement in trading conditions in the year ahead, there is no guarantee that this will be achieved. By the nature of the business in which the Group is engaged, visibility of future revenues is limited and the performance of Laminates, Holographics and Foils Americas depend to a large extent on the decisions and fortunes of a limited number of key customers over which the Group has limited influence. Foils

Europe will continue to face challenges associated with the economic stagnation in the Eurozone and any operational or strategic improvements initiated by management carry a degree of execution risk. Longer term, Laminates may come under pressure from regulatory developments affecting its most important market sector, tobacco. Whilst the recent decision of the UK government to introduce standardised packaging of cigarettes has limited direct impact, the adoption of standardised packaging in additional jurisdictions would reduce Laminates' future addressable market and could materially damage the profitability of that division.

API was subject to a formal sale process, between 26 September 2012 and 13 February 2013 following the publication of open letters from Steel and Wynnefield, proposing that an auction be initiated with the aim of securing a general offer for the Group. In due course, the Directors received a number of indicative proposals and potential acquirers were provided with access to management and detailed due diligence information. However, the process was terminated when the Directors concluded that there was little prospect of securing a price which would be sufficiently attractive to Shareholders. Of particular relevance is the Independent Board's belief that the price required to secure a sale would likely have been below the value of the current Offer. The Independent Board believes that a significant factor which prevented the formal sale process from delivering best value for Shareholders was the Group's UK defined benefit pension liability. At current valuation levels, pension obligations impose practical limitations on certain types of corporate transaction and consequently reduce the range of potential buyers which might find the acquisition of API attractive. Since the cessation of the formal sale process, with the exception of the Offer, there has been no substantive approach on behalf of any other potential party wishing to instigate discussions with a view to making an offer for API.

The Offer has met the acceptance condition stated by Cedar Bidco in the Offer Document and has become unconditional in all respects. Shareholders retaining their stake will find themselves to be investors in a company controlled by a single shareholder with a stake of at least 62 per cent. Without recourse to other Shareholders, Cedar Bidco will be able to propose and pass any ordinary resolution at a legally constituted general meeting of the Company, allowing it to determine the membership of the board of directors, and through board appointments (and subject always to the directors' obligations to act in accordance with the Companies Act), potentially the strategy and operation of the Group, as well as the Company's policy on dividend payments. It is possible that Cedar Bidco's strategy and policies may differ from the Board's current intentions and its priorities may be at variance with other Shareholders who, even acting collectively, will have limited scope for influencing the affairs of API by the exercise of their voting rights.

Furthermore, Cedar Bidco may gain control over more than 75 per cent. of voting rights of the Company as a result of the Offer, or may do so at some point in the future as a result of further API Share acquisitions which, having already secured majority control, would not then trigger an obligation to make a general offer for the remaining Shares. A stake of 75 per cent. would enable Cedar Bidco to propose and pass special resolutions, including a resolution to cancel the admission of API Shares to trading on AIM. In its Offer Document, Cedar Bidco has indicated its intention to take API private should it be successful in acquiring the requisite share of voting rights.

The Independent Board believes that any further concentration of the Shareholder base is likely to reduce the liquidity and marketability of API Shares. Once the Offer is concluded, even if the Company's Shares continue to be traded on AIM, the market price may return to its pre-Offer level or below and there is no guarantee that Shareholders will have another opportunity to sell at or above the current Offer price in the near future or at all. In addition, if API's admission to trading on AIM were cancelled, notwithstanding that certain Shareholders may then be compelled to sell their API Shares, there would almost certainly be a further reduction in liquidity and minority shareholders would also lose the benefit of the regulatory protection afforded to them under the AIM Rules.

5.2 Arguments against accepting the Offer

Whilst the Offer represents a premium to the closing price immediately prior to the announcement on 21 January 2015, the Offer price is at a discount of 10.3 per cent. to the average price over the prior 18 months. API's shares have had a closing price above the Offer price on 382 of the 505 trading days between the cessation of its formal sale process on 13 February 2013 and 21 January 2015. API's share price has been impacted by three downgrades to API's trading outlook since 7 April 2014 and as a consequence, immediately prior to the announcement of the Offer, API's shares were trading at close to their lowest level in three years.

As described in paragraph 4, the Independent Board expects an improvement in the Group's trading performance in the year ahead, including a partial recovery in sales to metallic pigment customers in the US and the roll-through of new supply contracts at Holographics. Longer term prospects should benefit from the management focus and investment which has been applied towards building competitiveness and resilience in the respective businesses' market positions. Specific to Foils Europe, prospects may be enhanced by a leading competitor's recent announcement of the proposed closure of its sole European foils manufacturing plant. This is likely to accentuate API Group's service advantage from its integrated European supply chain.

Whilst the performance of Laminates has been consistent over recent years, trading at the other three divisions has been subject to considerable variability. With the successful execution of its current strategies, the Independent Board would expect to see greater consistency across the portfolio of businesses. If all four divisions were to concurrently replicate their best performances from the last three years, the Group's overall operating results would be materially improved.

By the end of the current financial year, the Group expects to have invested in excess of £15 million in fixed assets over a three year period, more than double depreciation of approximately £7 million. Significant capital projects include upgrading Holographics' manufacturing facility and strengthening that division's proposition in the security and authentication market, the roll out of a new enterprise resource planning IT system and major new equipment to increase production capacity in both the US and UK Foils businesses. The Independent Board expects the benefits from these investments to be realised in future years, driving growth in sales and profitability.

In addition to potential improvements in the Group's operating performance described above, there may be further value that is not reflected in the Offer Price. Specifically, Foils Americas operates from a 210,000 square foot manufacturing facility in Rahway, New Jersey, located on 26.4 acres of freehold real estate, of which approximately 16.4 acres is understood to be useable for development purposes. The Directors have recently considered a plan to consolidate US foil production at Foils Americas' other manufacturing site in Lawrence, Kansas, which would enable the Rahway Property to be vacated and sold. The Independent Board believes that the net proceeds from the property sale may be sufficient to fund the cash costs of relocating production, including investment in new equipment and facilities in Lawrence. Notwithstanding the complexity and execution risk involved, the project should yield substantial savings in operating costs and materially contribute to the Group's profit improvement objectives. There may also be a cash surplus arising from the property sale, especially if the land could be sold for residential development purposes. The Independent Board does not believe that the Offer reflects any substantial value upside from the potential US manufacturing consolidation. In order to provide greater certainty on this point, the Independent Board is seeking an up-to-date valuation, the results of which it intends to publish as soon as it is available.

6. The Independent Board's Views on the Effect of the Implementation of the Offer on API's Interests,

Employees and Locations

The Code requires the Independent Board to give its views on the effect of the Offer on API's interests, including, specifically, employment, and its views on Cedar Bidco's strategic plans for API and their likely repercussions on employment and the locations of the Group's places of business. In fulfilling its obligations under the Code, the Independent Board can only comment on the details provided in the Offer Document.

The Independent Board notes that Cedar Bidco has declined to outline any detailed or considered strategic plans

for API following completion of the Offer, save for its intention to conduct an assessment of the medium and long term prospects of each of API Group's four divisions together with consideration of a site restructuring in the US which may involve the consolidation of operations and the disposal of excess property assets. It is stated that this review may take between three and six months to complete and may impact on employment and the location of API Group's places of business.

Given the lack of detail provided by Cedar Bidco, the Independent Board is unable to comment on the effect of Cedar Bidco's plans on API's interests.

7. Conclusion

The Independent Board believes that there are important arguments for and against accepting the Offer, as set out above, which Shareholders should consider carefully before making any decision. In order to ensure that Shareholders are provided with relevant and full information and the best possible advice from the Independent Board, a valuation report has been commissioned in respect of the Rahway Property. The results of this valuation will be published as soon as possible, at which time the Independent Board will reconsider whether a definitive recommendation should be made to Shareholders.

Having regard to the matters set out in paragraph 5 of this letter, the Independent Board and Numis cannot yet form a conclusive view as to whether or not the terms of the Offer are fair and reasonable. Consequently, the Independent Board does not believe that it is appropriate to provide Shareholders with a definitive recommendation at this time and therefore the Independent Board recommends that Shareholders take no action at present.

The Independent Board intends to review its recommendation to Shareholders in conjunction with the publication of its valuation report on the Rahway Property, which it intends to publish as soon as possible.

In considering the Offer, Shareholders should have regard to their personal circumstances and the matters set out in paragraph 5 of this letter. Shareholders should be aware that the Offer is currently unconditional in all respects but remains open for acceptance until further notice. As prescribed by the Code, under Rule 31.2, Cedar Bidco must provide 14 days' notice before the Offer is closed for acceptance and, pursuant to Rule 31.4 of the Code, the earliest date when the Offer could be closed is 19 March 2015, provided such notice is given by Cedar Bidco on 5 March 2015 (being the First Closing Date).

In providing advice to the Independent Board, Numis has taken into account the commercial assessment of the Independent Board.

Yours sincerely

Andrew Turner

Interim Chairman of the Board of API Group Plc

For further information:

API Group plc
Andrew Turner, Group Chief Executive	Tel: [phone]
	www.apigroup.com

Numis Securities (Financial Adviser and Broker)
James Serjeant Nick Westlake Jamie Lillywhite	Tel: [phone] www.numis.com

Cairn Financial Advisers (Nominated Adviser)
Tony Rawlinson / Avi Robinson	Tel: [phone]
	www.cairnfin.com

Media enquiries:

Abchurch
Henry Harrison-Topham / Quincy Allan	Tel: [phone]
[e-mail]	www.abchurch-group.com

Important information

Numis Securities Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for API and no one else in connection with the Offer and this Announcement and will not be responsible to anyone other than API for providing the protections afforded to clients of Numis Securities Limited nor for providing advice in connection with the Offer or any matter referred to herein.

Cairn Financial Advisers, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for API and no one else in connection with the Offer and this Announcement and will not be responsible to anyone other than API for providing the protections afforded to clients of Cairn Financial Advisers nor for providing advice in connection with the Offer or any matter referred to herein.

This Announcement has been prepared for the purpose of complying with English law and the City Code on Takeovers and Mergers and the information disclosed may not be the same as that which would have been disclosed if this Announcement had been prepared in accordance with the laws of jurisdictions outside the United Kingdom.

Notice to overseas shareholders

The ability of API shareholders who are not resident in and citizens of the United Kingdom to accept the Offer (if made) may be affected by the laws of the relevant jurisdictions in which they are located or of which they are citizens.  Persons who are not resident in the United Kingdom should inform themselves of, and observe, any applicable legal or regulatory requirements of their jurisdictions. 

The release, publication or distribution of this announcement in jurisdictions other than in the United Kingdom may be restricted by law and therefore any persons who are subject to the laws of any jurisdiction other than the United Kingdom should inform themselves about, and observe, any applicable requirements. 

Copies of this announcement will not be, and must not be, mailed or otherwise forwarded, distributed or sent in, into or from any jurisdiction where the publication or distribution of such documentation is restricted. Persons receiving this announcement (including, without limitation, custodians, nominees and trustees) must not distribute, mail or send it in or into any jurisdiction where the publication or distribution of such documentation is restricted.

Publication on website & hard copies

A copy of this Announcement will be made available, free of charge subject to certain restrictions relating to persons resident in Restricted Jurisdictions, at http://www.apigroup.com by no later than 12 noon (London time) on the Business Day following the date of this Announcement.

Neither the content of the website referred to in this Announcement nor the content of any websites accessible from hyperlinks on the Company's websites (or any other websites) is incorporated into, or forms part of, this Announcement.

You may request a hard copy of this announcement by contacting Company Secretary, Claire Chadwick, on [phone]. You may also request that all future documents, announcements and information in relation to the Offer be sent to you in hard copy form by contacting Company Secretary, Claire Chadwick, on [phone].

 

END

 

 

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