Response to Media Speculation

RNS Number : 8105L

Home Retail Group Plc

13 January 2016

 

Home Retail Group in Advanced Discussions

to sell Homebase for £340m

In response to media speculation, Home Retail Group confirms that it is in advanced discussions for the potential sale of Homebase to Wesfarmers Limited ("Wesfarmers") for a cash consideration of £340 million.  Home Retail Group and Wesfarmers began discussions in September, due diligence commenced under a confidentiality agreement in October, and Wesfarmers provided the Group with a firm offer letter in November.  Wesfarmers has completed its due diligence, and the parties are currently finalising transaction documentation.  However, discussions are ongoing and there can be no certainty that a transaction will be agreed. 

The proposed sale of Homebase follows from a review of the business in 2014, initiated by the Board and the Group's then new chief executive, which introduced a 3-year Productivity Plan that included improving store productivity, closing approximately 25% of the store estate, strengthening customer propositions and accelerating Homebase's digital capabilities.  Significant progress has been made on the Plan since then, including the substantial completion of the programme to close underperforming stores, promotion and range improvements which drove positive trade, significant growth in digital sales, and an energised new leadership.

The Board also believes that a sale to Wesfarmers, a substantial and strong group with an ambitious plan for the development of the business in the UK market, is the right step for all parties.  The sale proceeds of £340m provide good value for shareholders, recognising the improvements made in the Homebase business as a result of the Productivity Plan, and a committed and supportive owner to take the business forward. 

Under the terms being discussed, Wesfarmers would acquire the entire Homebase business, including all stores and dedicated distribution centres.  Product brands owned by the Group, such as Habitat, Schrieber and Hygena will be excluded from the sale, but licensed for use by Homebase for one year. 

John Walden, Chief Executive of Home Retail Group, commented:

"This deal would represent good value for shareholders and a growth opportunity for the Homebase business and its colleagues.  The sale would allow the Group to focus on Argos and its Transformation Plan, with an improved balance sheet and financial position, which I believe represents an even greater opportunity for building long-term shareholder value." 

The cash proceeds of £340m from the proposed transaction would likely be distributed approximately as follows:

Proceeds	£340m
Restructuring, separation and deal costs	c. (£75m)
Contribution to the Group's Defined Benefit Pension scheme	c. (£50m)
Intention to return to shareholders	c. (£200m)
Proceeds retained	c.£15m

The potential transaction would significantly improve the retained Group's overall financial position.  This is illustrated as follows based upon the Group's FY15 actual results, being those for the financial year ended 28 February 2015;

	FY15	Transaction	FY15
	Actual	Impact	Proforma
Cash	£309m	c.£15m	c.£324m
Loan Book	£580m	-	£580m
Balance Sheet position	£889m	c.£15m	c.£904m
Gross leases	(£2,342m)	£1,425m	(£917m)
Total financial position	(£1,453m)	c.£1,440m	c.(£13m)

The potential transaction would have the following estimated impacts on the retained Group's future Profit & Loss account:

·     From FY17 the retained Group's benchmark profit before tax ("PBT") would be reduced due to the sale of the Homebase business, which reported benchmark operating profit of £19.8m in FY15.

·     A Transitional Services Agreement ("TSA") would be implemented to transition, likely over an 18-month period, services provided to Homebase by the retained Group.

o  The retained Group would continue to charge Homebase, under its new ownership, for the provision of services by retained Group shared functions, such as large item home delivery, call centres and information technology.  During FY16, the current financial year, the Group will charge Homebase c.£70m for the provision of these services.

o  Under the TSA, the retained Group would continue to provide these services for a range of periods of time not likely to exceed 18 months.

o  As the components of the TSA expire, the retained Group would likely undertake a cost reduction programme to eliminate as much as possible, the costs of any excess capacity remaining after Homebase no longer requires certain services from the retained Group. 

o  Post this cost reduction programme we currently estimate that approximately £10m of overhead costs from providing services under the TSA would be reabsorbed by the retained Group, assuming the costs cannot be utilised through internal growth or otherwise.

·     Over a period of approximately 18 months, Wesfarmers is likely to require the removal of the Argos digital concessions from Homebase stores, which, in the absence of alternative locations, would result in an anticipated reduction in Argos' benchmark operating profit of c.£10m.

The retained Group's Benchmark PBT is unlikely to be adversely impacted in FY17 due to a combination of income received in respect of the provision of TSA services, together with the phased exit of the Argos digital concessions from Homebase.  However, in the event that the retained Group is unable to absorb surplus overhead capacity remaining after the expiration of the TSA services, through growth or third party utilisation, or the retained Group is unable to replace Argos concessions currently in Homebase stores with alternative locations, the retained Group could incur an adverse Benchmark PBT impact of c.£10m in FY18 and c.£20m from FY19 onward.  The retained Group would look for opportunities over time to mitigate any negative impacts.

Any agreement for the sale of Homebase would be subject among other things to approval by the Home Retail Group board, the syndicate of banks that provide the Group's revolving credit facility of £250m and the Group's shareholders.  A further announcement will be made as appropriate.

Home Retail Group will make its scheduled trading statement tomorrow, 14 January 2016, and will hold a call for investors at 08:30am (London time) tomorrow.

ENDS

Disclosure requirements of the City Code on Takeovers and Mergers (the "Code")

Following the announcement made on 5 January 2016 by J Sainsbury plc. Home Retail Group is in an Offer Period as defined by the Code.

Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror, save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made, can be found in the Disclosure Table on the Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on [phone] if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

Rule 26.1 disclosure

A copy of this announcement will be available on the Company's website at www.homeretailgroup.com/investor-centre by no later than 12 noon (London) time on 14 January 2016.

The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

Further information

This announcement does not constitute an offer to sell or issue or the solicitation of an offer to buy or acquire securities of the Company or any of its affiliates in any jurisdiction or an inducement to enter into investment activity.

This announcement contains statements about Home Retail Group that are or may be forward looking statements. All statements other than statements of historical facts included in this announcement may be forward looking statements. Without limitation, any statements preceded or followed by or that include the words "targets", "plans", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "estimates", "projects" or words or terms of similar substance or the negative thereof, are forward looking statements. Forward looking statements include statements relating to the following: (i) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects; (ii) business and management strategies and the expansion and growth of Home Retail Group's operations and potential synergies resulting from the Transaction; and (iii) the effects of government regulation on Home Retail Group's business.

 

END

 

 

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