Guinness Peat Group PLC
23 March 2001
The Chairman
PERRY GROUP PLC
Cambridge House
Bluecoats Avenue
Hertford
Hertfordshire
SG14 1PB
Dear Sir
SALE FOR £100,000 OF OPTION OVER £33.9m MOTOR DIVISION ('THE
OPTION')
Guinness Peat Group plc ('GPG') is the largest shareholder in
Perry Group plc ('Perry'), with 4.4m shares, which represents
some 16.7% of its issued capital.
We have considered the transaction proposed in the Circular to
Shareholders and thank you for giving us the opportunity of
discussing it with you.
We now write to set out the reasons why IT IS INCONCEIVABLE THAT
THE PROPOSED TRANSACTION IS IN THE BEST INTERESTS OF
SHAREHOLDERS.
1. Transaction in effect an Option
You have described the proposed transaction as a 'Disposal
of the Motor Division'. THIS IS NOT THE ECONOMIC SUBSTANCE.
In reality, it amounts to the sale for £100,000 of an option
over Perry's £33.9m Motor Division. This is a miserly sum
since the Option is, undoubtedly, worth a multiple of this.
2. Not a Clean Exit
Despite your statement that you have taken a strategic
decision to exit Motors, the proposed transaction does not
provide a clean exit and instead leaves Perry with exposure
of at least £4.5m, (over and above its equity investment of
£6m) to the future performance of the Motor Division.
3. Risk substantially Retained
Notwithstanding your assertions to the contrary, the
structure of the transaction is such that Perry retains
substantially all the equity risk and a considerable amount
of financing risk but, in direct contrast, has a derisory
level of upside.
4. Inappropriate Timing
Due to publicity associated with 'rip-off' Britain, delays
in the impact of recent government initiatives being felt
and the difficulties experienced in the Motor Industry in
the last year, we cannot conceive of a worse time to have
attempted the sale of the Motor Division. The result is a
transaction which destroys millions of pounds in shareholder
value.
5. Manageable Debt Position
You state that, if the transaction is not approved by
Shareholders, 'the Group may be required to seek the
renegotiation of its banking covenants ..'. We do not
dispute that Perry's debt requires careful management.
However, the covenant position seems to us to be largely of
Perry's own creation - in particular due to its decision to
sell the Motor Division at the bottom of the market.
Perversely a non-recourse financial structure along the
lines of the proposed transaction would be an elegant
solution, retaining all the upside inherent in the Motor
Division and refinancing Perry's debt facilities at the same
time.
6. Future Management of Motor Division
Since the proposed managers of the option vehicle are
already employed by Perry, the future management of the
Motor Division is not at issue.
PUT SIMPLY, THE PROPOSED OPTION IS AN EXCEPTIONAL DEAL FOR THE
MANAGERS - IT IS A HEADS THEY WIN, TAILS PERRY LOSES SITUATION.
Remedies
If the Board remains determined to pursue an urgent restructure
of Perry's exposure to the Motor Division, there seem to us to be
two obvious remedies for the inadequacies of the proposed
transaction:
a) Restructure the transaction into a funding which is non-
recourse to Perry, but using a similar structure. This
would retain the upside of the Motor Division for Perry
whilst involving no greater risk than the proposed option.
b) Renegotiate the option being granted to the two managers so
that shareholders are offered a pro rata participation.
Under this alternative shareholders would benefit directly
from the upside whilst Perry would retain the same risk and
return from the deal.
Conclusion
Both the suggested remedies will require an adjournment of the
EGM on Monday. IN THE ABSENCE OF THIS, OR SOME OTHER
SATISFACTORY PROPOSAL, GPG WILL HAVE NO HESITATION IN VOTING
AGAINST THE RESOLUTION TO BE PROPOSED.
Yours faithfully
Guinness Peat Group plc
Blake A Nixon
Executive Director
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