Disposal

RNS Number : 3053O

Creston PLC

28 June 2010

 



28 June 2010

CRESTON PLC

Proposed Disposal of DLKW

The Board of Creston is pleased to announce that it has entered into a conditional agreement with Lowe, a wholly-owned subsidiary of The IPG Group of Companies Inc., to dispose of the DLKW Group, the Company's advertising business, for a cash consideration of £28 million, subject to certain adjustments. The Disposal is conditional upon the approval of Creston Shareholders.

HIGHLIGHTS

·      Proposed sale of the DLKW Group for a cash consideration of £28 million

·      The DLKW Group is comprised of three trading brands: DLKW (an advertising agency); Dialogue DLKW (a promotional agency); and The Composing Room (a pre-press production company). These companies provide advertising, in-store marketing and design and promotional marketing services to clients in a variety of industries ranging from financial services to retail campaigns

·      Lowe is an international creative advertising and marketing solutions agency, offering television, digital, print, brand and experiential advertising across a variety of sectors

·      The estimated net cash proceeds of £27.6 million will significantly reduce Creston's current level of indebtedness and will provide a strong platform for developing and investing in the Continuing Group going forward

·      The Board unanimously recommends the Disposal and the Directors have irrevocably undertaken to vote in favour of the Disposal Resolution in respect of their own beneficial holdings, which amount in aggregate to 2,277,821 Ordinary Shares and represent approximately 3.71 per cent. of Creston's issued share capital as at 27 June 2010 (the latest practicable date prior to publication of this document)

David Grigson, Chairman, commented:

"The Board believes the disposal of the DLKW Group to be in the best interests of the Company and its shareholders.  It represents an opportunity to obtain greater exposure to the growth areas within insight and communications, and provides management with the opportunity to shape a group that will capture maximum shareholder value in the medium- to long-term."

Don Elgie, CEO, commented:

"This disposal will accelerate our development as a 21st century insight and communications group, able to advise on all the communications challenges clients face across the fast-changing marketing landscape.  The rich combination of our practice areas positions us perfectly, and their more complementary nature will help us realise more of the benefits of working together to the advantage of our clients.

"We will seek to use our strong financial position to achieve optimal growth by continuing to develop our own capabilities, including the launch of start-ups and by selective international expansion when driven by client demand."

Enquiries:

Creston plc                                                            Tel:          [phone]

David Grigson Chairman

Don Elgie, CEO

Barrie Brien, COO/CFO

Investec                                                                Tel:          [phone]

Erik Anderson

David Flin

Carlton Nelson

M:Communications                                                Tel:          [phone]

Elly Williamson

Investec, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for Creston and no one else in connection with the Disposal and this announcement and will not be responsible to anyone other than Creston for providing the protections afforded to clients of Investec nor for providing advice in connection with the Disposal or this announcement or any matter referred to herein.

CRESTON PLC

Proposed Disposal of DLKW

1.       Introduction

The Board of Creston is pleased to announce that the Company has entered into a conditional agreement with Lowe to sell the entire issued share capital of the DLKW Group, its advertising business, for a consideration of £28 million. The consideration is payable in cash on completion.

The Disposal is of sufficient size relative to that of the Group to constitute a Class 1  transaction under the Listing Rules and is therefore conditional upon, inter alia, the approval of Shareholders. Approval of the Disposal is being sought at a General Meeting of the Company to be held at 9.30 a.m. on 13 July 2010 at the offices of Olswang LLP, 90 High Holborn, London, WC1V 6XX. If the Disposal Resolution is passed at the General Meeting on 13 July 2010, then Closing is expected to take place on the following business day.

2.       Information on the DLKW Group

Formed in 2000 and based in London, UK, the DLKW Group was acquired by Creston in 2005 and represents the Group's advertising agency. The group is comprised of three trading brands: DLKW (an advertising agency); Dialogue DLKW (a promotional agency); and The Composing Room (a pre-press production company). These companies provide advertising, in-store marketing and design and promotional marketing services to clients in a variety of industries ranging from financial services to retail. For the year ended March 2010 the DLKW Group recorded revenue of £19.2 million, profit before tax of £3.1 million and had net assets of £1.1 million and gross assets of £11.8 million at the period end. Of the £19.2 million of revenue recorded by the DLKW Group, 26 per cent. was generated from the food and beverage sector, 18 per cent. from the financial services sector and 10 per cent. from consumer products retail.

3.       Background to and reasons for the Disposal

The landscape for the off-line advertising market has gone through major upheaval in the last five years. The evolution and growth of the internet plus the proliferation of digital channels and communication technologies have caused, and are likely to continue to cause, major structural shifts in the marketing services industry.

The Directors believe that structural change driven by media fragmentation and the impact of the internet and digital channels on media consumption has caused a decline in mainstream mass audience advertising spend. In addition to this, the internet and digital channels have also allowed much greater opportunity for clients to track actual consumer behaviour and to target consumers with personal and relevant marketing messages, compared to the traditional advertising methods of mass communication. This targeting of messages in turn allows greater efficiency in marketing budgets plus more exact measurement of the return on investment for a client. An additional structural change to the industry is that consumers now have greater power over the reputation of a brand or company via channels such as social media, and can also decide when, where and how they want to consume marketing messages.

Due to these fundamental changes, the Board believes that conventional off-line advertising will continue to face significant challenges, regardless of how the economy performs.

In addition to the structural changes affecting the advertising sector, the Board has also considered the investment needs of the DLKW Group together with those of the Insight and Health divisions and of the remaining companies within the Communications division.

The DLKW Group has a largely domestic client base. The Board believes that the next stage of the DLKW Group's growth would be to seek to grow its international operations and client base. It is envisaged that to achieve this desired international growth the business would need offices in several geographies worldwide, requiring a disproportionate amount of investment by Creston. The Board believe that without this further investment in developing the DLKW Group's international operations outlined above, the DLKW Group will face challenges in competing effectively against large advertising agencies which can offer a global service.

The Directors believe that any investment made by Creston in growing the DLKW Group's international operations could be better utilised by the Continuing Group investing in the higher growth areas of market research, healthcare marketing and the remaining communication agencies, where there already is an international client base with a demand for an international footprint.

The consideration of £28 million represents a multiple of 9.0 times the DLKW Group's PBIT for the year to 31 March 2010.

4.       Information on the Continuing Group

The Disposal of the DLKW Group is in line with the Group's previously established focus on "Insight and Communications for the 21st century". Upon completion of the Disposal, there will be no material change in the vision and strategy of Creston, and the Continuing Group will still be structured around the three divisions of Insight, Communications and Health. The Disposal will allow Creston to accelerate its investment in strengthening the Continuing Group and shaping it to allow it to more appropriately meet the needs of the fast-changing 21st century marketplace. The DLKW Group currently sits within the Communications division and post the disposal, neither the division nor Creston will have any communications businesses focused on traditional off-line advertising. The Communications division will still offer communications both within the UK and internationally, but it will not be exposed to the decline in mainstream audiences and the reducing effectiveness of mass-audience advertising. On the contrary, the Directors believe that the division will be exposed to the growth of targeted personalised marketing, which has a greater measurable return on investment.

The estimated net cash proceeds of £27.6 million will significantly reduce Creston's current level of indebtedness and will provide a strong platform for developing and investing in the Continuing Group going forward. As at 31 March 2010 the Group had net debt of £24.9 million. The Continuing Group's development is expected to be through a mixture of acquisitive and organic growth and will be managed over a period of time to ensure appropriate levels of gearing for the Continuing Group.

5.       Principal terms of the Disposal

·          The DLKW Group will be sold to the Purchaser for a total consideration, payable in cash on Closing, of £28 million.

·          The Seller will ensure that the DLKW Group has a minimum aggregate cash balance of £750,000 on Closing.

·          The estimated net cash proceeds are £27.6 million (having deducted advisor fees).

·          The Disposal Agreement contains customary representations and warranties of the Seller and Purchaser.

·          The Disposal is conditional upon the passing of the Disposal Resolution by Shareholders at the General Meeting.

·          A break fee of £280,000 is payable to the Purchaser if Crestondoes not comply with the undertakings given by it in relation to this Circular and the calling of the General Meeting and the Disposal Resolution is not passed.

·          The Directors who are interested in shares have given irrevocable undertakings to the Purchaser to vote in favour of the Disposal Resolution at the General Meeting in respect of their beneficial holdings of Ordinary Shares.

6.          Information on the Purchaser

Lowe is an international creative advertising and marketing solutions agency, headquartered in London, UK with 80 further offices worldwide. Lowe's offering includes television, digital, print, brand and experiential advertising across a variety of sectors such as the automobile industry and the beverage industry. Lowe provides a resource network that enables its customers to work with a number of specialist and communications companies. The company also monitors emerging trends analyses, category specific behaviour and attitudes, consumer behaviour and consumer insights.

The IPG Group of Companies Inc., the ultimate holding company of Lowe, is quoted on the New York Stock Exchange with a market capitalisation of £2.6 billion ($3.9 billion) as at 24 June 2010.

The IPG Group of Companies Inc. is one of the world's largest advertising and marketing services holding companies, comprised of communication agencies around the world that deliver custom marketing solutions on behalf of their clients. These agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and direct marketing, to emerging services such as mobile and search engine marketing. With offices in over 100 countries and approximately 40,000 employees, these agencies develop marketing programs that build brands, influence consumer behaviour and sell products. Revenues are primarily derived from the planning and execution of advertising, marketing and communications programs in various media around the world.

7.          Use of proceeds and financial effects of the Disposal on the Group

The estimated net cash proceeds arising from the Disposal are expected to be approximately £27.6 million.

In June 2008 Creston agreed a £40 million banking facility, which is made up of an amortising £15 million term loan and a £25 million revolving credit facility. At 31 March 2010 Creston had drawn balances against the term loan and revolving credit facility of £11.6 million and £13.0 million respectively (the £15 million term loan had amortised to £11.6 million by 31 March 2010). In addition, Creston had outstanding acquisition loan note commitments (secured against the revolving credit facility) of £3.1 million and a positive cash balance of £2.8 million.

The cash proceeds from the Disposal of £28.0 million will be used to repay the £11.6 million term loan and repay the balance drawn against the revolving credit facility which, as per the Company's management accounts for 31 May 2010, amounted to £11.0 million.  The Directors' intention is to hold the remaining balance of the Disposal proceeds on deposit.  An accrual in respect of the advisor fees associated with the Disposal of £0.4 million will be recognised and settled from available cash reserves post Disposal.

Following the Disposal, Creston's pro-forma debt will be reduced from £24.9 million as at 31 March 2010 to approximately £0.6 million.

The £11.6 million term loan will be cancelled leaving the Group with the £25 million revolving credit facility which will remain available until 31 March 2012.

Under the terms of the revolving credit facility, if the balance of the Disposal proceeds after repaying the term loan are not reinvested within six months from the date of the Disposal, then the revolving credit facility will be reduced by the Disposal proceeds received and not already applied to the term loan. Accordingly, if there was no reinvestment of the Disposal proceeds within this period, the revolving credit facility would be reduced to approximately £9.0 million, which would remain in place until 31 March 2012.

It is Creston's intention to use some or all of the £25 million revolving credit facility to fund further investment in the Continuing Group and further acquisitions which fit with Creston's future strategy, however, there is no certainty there will be any reinvestment within the six months.

As a result of the Disposal, a loss on disposal of approximately £3.2 million, plus an adjustment for the net assets of the DLKW Group at Closing, will be included in Creston's 2011 results. At 31 March 2010 Creston held assets (goodwill and intangible assets) in respect of the DLKW Group valued at £30.8 million. Creston will receive net proceeds of £27.6 million which will generate the loss of £3.2 million mentioned above. The Directors expect the Disposal to be dilutive to earnings per share.

Had the Disposal taken place on 31 March 2010, when the net assets of the DLKW Group were £1.1 million, a total loss on disposal of £4.3 million would have been recognised.  Therefore, the Group's Net Assets would have reduced from £95.9 million to £91.6 million.

8.       Current trading and prospects

On 28 June 2010 Creston announced its preliminary results for the twelve months ended 31 March 2010. This announcement contained the following statement:

 "On a macro level, we believe the economy will show only modest growth over the coming 12 months. On a micro level, the same advantages that have allowed the Group to outperform its sector during a challenging year position it well for a return to growth. The final quarter of the year saw an increase in new business for the companies in our Communications Division, which had suffered from a sector-wide decline in new business during the first half of last year. The spend by our blue chip clients has held up strongly and is likely to continue to support performance in the year ahead.

We remain well placed to gain further market share as conditions improve, with our integrated offer and rapidly evolving digital capabilities delivering the solutions that clients demand. The new financial year has started in line with management's expectations. We are currently ahead of the same period last year and have been boosted by a number of high profile new business wins." 

9.       Recommendation

The Board, having been so advised by Investec, is of the opinion that the Disposal is in the best interests of the Company and Shareholders as a whole.  In providing advice to the Board, Investec has taken into account the Board's commercial assessments.

Accordingly, the Board unanimously recommends that Shareholders vote in favour of the Disposal Resolution to be proposed at the General Meeting, as the Directors who are interested in shares have irrevocably undertaken to do in respect of their own beneficial holdings, which amount in aggregate to 2,277,821 Ordinary Shares and represent approximately 3.71 per cent. of Creston's issued share capital as at 27 June 2010 (the latest practicable date prior to publication of this document).

Shareholders should read the whole of the circular to be sent to them and not just rely on the summarised information set out in this announcement.

Definitions

The following definitions apply throughout this document, unless the context requires otherwise:

Board                                                                 the board of directors of Creston

business day                                                    any day, other than a Saturday, Sunday or public or bank holiday, on which banks are generally open for business in the City of London

Creston or Company                                     Creston plc, a company incorporated in England and Wales with registered number 210505 whose registered office is at 30 City Road, London, EC1Y 2AG

Creston Share Schemes                                the EMI Scheme, the Sharesave Scheme, the Unapproved
Plan and the LTIP

Closing                                                               the completion of the Disposal in accordance with the
terms of the Disposal Agreement

Closing Date                                                     the date of completion of the Disposal in accordance with
the terms of the Disposal Agreement

Companies Act 2006                                        the Companies Act 2006, as amended

Continuing Group                                            Creston and its subsidiaries, excluding the DLKW Group

CREST                                                               the relevant system (as defined in the Regulations) in respect of which Euroclear is the Operator (as defined in the Regulations)

DLKW                                                                DLKW Limited, a company incorporated in England and Wales with registered number 01286253 whose registered office is at 30 City Road, London, EC1Y 2AG

DLKW Group                                                    Newincco and its wholly owned subsidiary, DLKW,
Dialogue DLKW and The Composing Room

Dialogue DLKW                                               Dialogue DLKW Limited, a company incorporated in
England and Wales with registered number 04973749

Directors                                                            the members of the board of directors of Creston

Disclosure and Transparency Rules            the disclosure and transparency rules made by the Financial Services Authority in its capacity as the UK Listing Authority under the Financial Services and Markets Act 2000, and contained in the UK Listing Authority's publication of the same name

Disposal                                                             the proposed disposal of the DLKW Group pursuant to the Disposal Agreement

Disposal Agreement                                       the agreement for the sale and purchase of the entire issued share capital of Newincco, Dialogue DLKW and The Composing Room dated 25 June 2010 between (1) the Seller (2) the Purchaser (3) Creston and (4) The IPG Group of Companies Inc.

Disposal Resolution                                         the ordinary resolution to approve the Disposal set out in
the Notice of General Meeting

EMI Scheme                                                     the Creston plc Enterprise Management Incentive Scheme

Euroclear                                                           Euroclear UK & Ireland Limited, the operator of CREST

Executive Creston Director                             an executive director of Creston

Form of Proxy                                                  the form of proxy accompanying this document for use by
Shareholders in connection with the General Meeting

General Meeting                                             the general meeting of the Company convened by the Notice of General Meeting to be held at 9.30 a.m. on 13 July 2010 at the offices of Olswang LLP, 90 High Holborn, London WC1V 6XX or any reconvened meeting following any adjournment thereof

Group                                                                 Creston and its subsidiaries, including the DLKW Group

Investec                                                             Investec Bank plc whose registered office is at 2 Gresham Street, London, EC2V 7QP and registered number is 489604

Listing Rules                                                     the rules and regulations made by the Financial Services Authority in its capacity as the UK Listing Authority under the Financial Services and Markets Act 2000, and contained in the UK Listing Authority's publication of the same name

London Stock Exchange                                London Stock Exchange plc

Long Stop Date                                                31 July 2010

LTIP                                                                    the Creston plc Long Term Incentive Plan

Newincco                                                          Newincco 996 Limited, a company incorporated in
England and Wales with registered number 7258457

Non-Executive Creston Director                    a non-executive director of Creston

Notice of General Meeting                             the notice of General Meeting set out at the end of the circular to Creston shareholders

Ordinary Shares                                               ordinary shares of 10 pence each in the capital of the
Company

PBIT                                                                   profit before interest and tax

PwC                                                                   PricewaterhouseCoopers LLP, whose registered office is at 1 Embankment Place, London, WC2N 6RH and registered number is OC303525

Purchaser or Lowe                                          Lowe & Partners Limited a company incorporated in
England and Wales with registered number 00680779

Register of Members                                       the register of members of Creston

Regulations                                                       the Uncertificated Securities Regulations 2001 (SI 2001
No.3755)

Sale Shares                                                      the entire issued share capital of Newincco, Dialogue
DLKW and The Composing Room

Seller                                                                 DLKW Holdings Limited, a company incorporated in
England and Wales with registered number 03904314

Shareholders                                                    holders of Ordinary Shares, and Shareholder shall be
construed accordingly

Sharesave Scheme                                        the Creston plc 2004 Sharesave Scheme

subsidiary and subsidiary undertaking        have the meanings given to them in the Companies Act 2006

The Composing Room                                   The Composing Room Limited, a company incorporated in
England and Wales with registered number 01828303

UK or United Kingdom                                    the United Kingdom of Great Britain and Northern Ireland

UK Listing Authority                                        the Financial Services Authority acting in its capacity as the competent authority for listing purposes under Part VI of the Financial Services and Markets Act 2000

Unapproved Plan                                            the Creston plc Unapproved Share Option Plan

References to "£" and "p" or "pence" are to pounds sterling and pence being the lawful currency of the United Kingdom.

Headings are included in this announcement for convenience only and do not affect its interpretation.

All references to legislation in this document are to English legislation unless the contrary is indicated. Any reference to any provision of any legislation shall include any amendment, modification, re-enactment or extension thereof.

Words importing the singular shall include the plural and vice versa, and words importing the masculine gender shall include the feminine or neutral gender.

 

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