Disposal
MFI Furniture Group PLC
22 September 2006
For immediate release 22 September 2006
Proposed disposal of the retail business ('Retail') of MFI Furniture Group Plc
('MFI') and change of name
MFI Furniture Group Plc
Summary
• The Board of MFI Furniture Group Plc today announces that it has reached
an agreement with MEP Mayflower Limited ('the Purchaser') for the disposal
of Retail ('the Disposal'). MEP Mayflower Limited is a company controlled by
Merchant Equity Partners LLP ('MEP').
• Under the terms of the Disposal, the Purchaser will acquire Retail for
the nominal consideration of £1. The shareholders in the Purchaser have
severally agreed to invest a total of approximately £50 million in the
Purchaser on Completion and may invest up to a further £12.0 million in
April 2008. In addition, the Purchaser has undertaken to arrange not less
than £40.0 million of working capital facilities by 31 March 2007.
• The Continuing Group will make a payment of £53.1 million into the
Purchaser's Group on 3 September 2007 and, subject to the Purchaser's
shareholders investing an equal amount, will make a further payment of up to
£12.0 million in April 2008.
• The Continuing Group will pay the Purchaser's Group an estimated £60.6
million on Completion including an estimated £51.9 million in respect of
customer deposits, being payments made by Retail customers in advance of
delivery of their orders.
• The Group has also agreed the terms of certain supply and transitional
service arrangements with the Purchaser.
• The Continuing Group will focus on the growth potential of Howden
Joinery ('Howdens') and its Supply operations, which will become more
closely aligned to meeting Howdens' requirements. Howdens' growth in the
past two years has been restricted by the issues faced by the retail
business. The Board believes there is scope to grow the current portfolio of
362 Howdens depots to over 500 depots in the UK by opening 60 depots next
year, and thereafter at least 40 per annum. The business can further exploit
growth opportunities through expanding the range of products it sells to its
current customers and through broadening its customer base to include
architects and other industry professionals. Following the expiry of supply
arrangements with the Purchaser and Hygena Cuisines, it is expected that
Howdens will become the sole customer of the Supply Business.
• The proposed disposal of Retail will provide management with the
opportunity to focus on accelerating Howdens' roll out plan, while over time
realising the cost and scale benefits of an exclusive supply chain provided
though the Supply Business.
• The Disposal constitutes a Class 1 transaction, and as such is
conditional upon the approval of Shareholders. There will be an
extraordinary general meeting of the Company which is expected to be held on
or about 16 October 2006. If Shareholders vote in favour of the Disposal,
Completion will take place by 23 October 2006. A further extraordinary
general meeting to approve the change of name of the Company to Galiform Plc
is expected to take place on or about 23 October 2006.
• Commenting on the Disposal, Matthew Ingle, Chief Executive of MFI
Furniture Group Plc said:
'Over a number of months, the Board of MFI has considered various options for
the retail business, and has concluded that the disposal of Retail on the terms
agreed is in the best interests of Shareholders. We believe that a restructuring
of Retail within the Group would have considerable operational and financial
risks. Exiting Retail will allow us to focus on the growth potential of the
highly profitable Howden Joinery business and make cost savings and efficiency
gains in the Supply Business. The new owners have agreed to invest significant
sums in Retail and their senior management team are highly experienced
retailers. We wish them well in making a success of Retail.'
This summary should be read in conjunction with the full text of the following
announcement and the Appendices.
Enquiries
Investor Relations
Gary Rawlinson MFI Furniture Group +44 (0) 20 7404 5959 (on 22 September)
+44 (0) 20 7535 1127
+44 (0) 79 8939 7527
Media
Susan Gilchrist Brunswick +44 (0) 20 7404 5959
Fiona Laffan
Anna Jones
Notes for Editors
+-----------------------------+-----------+-----------+-----------+
|MEP Mayflower Limited Funding| MEP | MFI | TOTAL |
+-----------------------------+-----------+-----------+-----------+
|MEP Funding - Sept 06 | £50m | | |
+-----------------------------+-----------+-----------+-----------+
|MFI Funding - Sept 07 | | £53m | |
+-----------------------------+-----------+-----------+-----------+
|Funding on Completion | | £9m | |
+-----------------------------+-----------+-----------+-----------+
| | | | |
+-----------------------------+-----------+-----------+-----------+
|Contingent Funding | | | |
| | | | |
+-----------------------------+-----------+-----------+-----------+
|MEP Funding - April 08 | £12m | | |
+-----------------------------+-----------+-----------+-----------+
|MFI Funding - April 08 | | £12m | |
+-----------------------------+-----------+-----------+-----------+
| | | | |
+-----------------------------+-----------+-----------+-----------+
|Total Funding provided by MEP| £62m | £74m | £136m |
|and MFI | | | |
+-----------------------------+-----------+-----------+-----------+
| | | | |
+-----------------------------+-----------+-----------+-----------+
|Working Capital Facility (1) | | | £40m |
+-----------------------------+-----------+-----------+-----------+
|Total (up to) | | | £176m |
+-----------------------------+-----------+-----------+-----------+
(1) Not less than £40 million to be arranged by the Purchaser by 31 March 2007
Customer deposits to be remitted to the Purchaser's Group are estimated at £52
million
All figures in the table above have been rounded to the nearest million
Retail operates a national network of over 200 showrooms. Kitchens and bedrooms
represented more than 80 per cent of sales in 2005.
For immediate release 22 September 2006
Proposed disposal of the retail business of MFI Furniture Group Plc ('MFI') and
change of name
MFI Furniture Group Plc
1. Introduction
On 17 August 2006 the Board of MFI announced that it was in discussions with
Merchant Equity Partners LLP ('MEP') concerning the possible disposal of MFI's
retail business.
The Board today announces that it has agreed terms for the disposal of Retail to
MEP Mayflower Limited (the 'Purchaser'), a company controlled by MEP.
Following the Disposal and subject to Shareholder approval, the Company will be
re-named Galiform Plc.
Under the terms of the Disposal, the Purchaser will acquire Retail for the
nominal consideration of £1. The shareholders in the Purchaser have severally
agreed to invest a total of £49.6 million in the Purchaser on Completion and may
invest up to a further £12.0 million in April 2008. The Purchaser has also
undertaken to arrange bank facilities of not less than £40.0 million by 31 March
2007.
The Continuing Group will pay the Purchaser's Group the sum of £8.7 million on
Completion, reflecting that the date at which the Purchaser will acquire
economic control of Retail is 5 August 2006. In addition, the Continuing Group
will then make a £53.1 million payment into the Purchaser's Group on 3 September
2007 and, subject to the Purchaser's shareholders having made a further
investment of at least an equal amount, a further payment of up to a maximum of
£12.0 million on 2 April 2008.
On Completion, the Continuing Group will remit to the Purchaser's Group an
amount (estimated to be £51.9 million) in respect of customer deposits, being
payments made to the Group by customers of Retail in advance of delivery of
their orders. Cash in respect of such payments is not held by Retail, as all
cash balances are held at group level.
The Group has also agreed terms of certain supply and transitional services
arrangements with the Purchaser as further described below.
In view of the size of the Disposal, the Disposal constitutes a Class 1
transaction for the purposes of the Listing Rules. Completion is therefore
conditional upon the approval of Shareholders, which is to be sought at an
extraordinary general meeting of the Company to be held on or about 16 October
2006.
2. Background to and reasons for the Disposal
The Group's core competence is in kitchens and bedrooms in the UK. Historically,
the business of MFI served retail customers, principally through large
out-of-town stores, which were substantially cheaper to operate than their high
street competition. Customers were satisfied with a relatively narrow range of
good value merchandise usually in ''flat pack'' form produced in the Group's own
factories. Most kitchens and bedrooms were collected from stock at the store and
fitted by customers themselves.
Over the years and in particular the last decade, the UK market for kitchens has
become significantly more sophisticated and the ''Done for You'' (''DFY'')
market, in which customers expect products to be designed, delivered and
installed for them, has become increasingly important. In response to this
trend, the Group has developed its highly successful Howden Joinery trade
business serving principally small builders, whose own customers represent a
significant proportion of the DFY market, without the need for the Group to
provide an extensive home delivery infrastructure or showroom network itself. In
the year ended 24 December 2005, the Group reported sales in respect of Howdens
of £617.8m.
In parallel with the successful development of Howdens, MFI's retail proposition
has become broader and more complicated to execute, encompassing a wider range
of kitchens and options, home delivery and a fitting service.
In 1999-2000, MFI's retail business moved to a home delivery model, removing
stock from its store network, which was expected to reduce distribution costs as
a percentage of sales. MFI's retail strategy (''Every room in the house'') was
to increase its penetration of the UK furniture market, outside its core kitchen
and bedroom categories, principally in sofas, bathrooms, office and dining
furniture. The retail business targeted substantial rises in sales through
introducing new product categories, increasing new product development in
existing categories, improving customer service and reformatting stores (in part
to accommodate the new product categories). Significant sums were invested to
implement this strategy, funded in part by sale and lease backs of Group
properties. At the same time the Group also introduced a new supply chain system
to replace existing systems, which had not been designed to accommodate the
complex requirements of the home delivery model or the range of products sold as
part of the ''Every room in the house'' strategy.
In practice there have been significant difficulties with the new supply chain
system, as a result of which considerable further expense has been incurred on
remedial measures in order to try to improve the performance of the system and
to meet required service levels. The broadening of the retail product range also
did not redress the falling net margins in the core kitchen and bedroom
categories. The costs of operating showrooms, especially rent and rates, have
risen and the retail furniture market has experienced difficult market
conditions. Retail's property costs rose from £71.8 million in 2003 to £95.8
million in 2005. These factors, together with a supply and home delivery
infrastructure scaled for a larger business, led to a substantial decline in the
financial performance of the retail business between 2003 and 2005:
2003 2004 2005
All £ million
Sales 853.5 768.5 741.9
Gross Profit 445.3 370.3 351.3
Total costs (374.1) (376.3) (400.3)
Operating Profit before exceptional 71.2 (6.0) (49.0)
items
Gross Profit as percentage of Sales 52.2% 48.2% 47.4%
Total costs as percentage of Sales 43.8% 49.0% 54.0%
Property costs included in total £71.8m £86.5m £95.8m
costs
During this period, the centralised Group structure operated by the Group led to
a build up of central and other costs for which the business lines were not
directly responsible and which obscured the financial and operational
performance of the business lines, particularly of the retail business.
Since the appointment of Matthew Ingle as Group Chief Executive in October 2005,
the management and strategy of the retail business have been changed and
following the Reorganisation, it is now separately run, managed and accounted
for. This provides clarity and direct responsibility for its revenues and all
attributable costs. The measures announced in February concerning the retail
product offering and in-store service have been implemented and to date, the
business is delivering sales and gross margins in line with management
expectations.
However, notwithstanding these measures, the Board believes the current
financial performance of the retail business is unacceptable and no cost
effective solution to address Retail's property and logistics costs has been
identified. The task of redressing this within the context of the Group remains
extremely challenging in terms of cost, timing, returns and execution risk.
It would also be an extended distraction from the opportunity the Group has to
roll out the proven and successful Howdens model and could adversely affect the
Group's ability to do this. It would also mean potentially foregoing an
opportunity to eliminate or reduce supply overheads and central costs incurred
by the Group, which are necessary to support the retail operations. The Board
believes that, following the expiry of the supply contract summarised below,
such overheads and central costs could be reduced by some £12 million per annum
and that the Group's continuing capital expenditure requirements can also be
reduced. It also believes that there is increasing evidence that the business
models of Retail and Howdens are diverging.
In its unaudited interim results for the 24 weeks to 10 June 2006, the Group
announced sales for its retail business of £311.8 million, representing a 25.1
per cent fall on the comparable period in the prior year and an operating loss
of £14.2 million (2005: loss of £0.3 million). For the same period the Group
announced an operating loss of £25.0 million in its Supply Business (2005:
operating loss £17.4 million), which supplies products to Retail and Howdens.
The Board has evaluated the proposed Disposal in the context of the value, costs
and risks of other options for Retail (together with the timetable for
implementing them) which have been under consideration since the initial results
of the Group's strategic review were announced in February 2006. The Board has
concluded that the sale of Retail on the terms of the Disposal is in the best
interests of Shareholders.
3. Information on Retail
Retail comprises the Group's UK retailing operations (other than the Excluded
Assets and Sofa Workshop which do not form part of the Disposal).
Prior to 8 July 2006, the Group's UK retailing operations were legally situated
in MFI UK. On 28 February 2006, the Group announced to the market that the
Group's UK operations would be reorganised into three businesses (retail,
Howdens and supply), which would be separately run, managed and accounted for,
providing clarity and direct responsibility for all revenues and associated
costs of the Group. This reorganisation was carried out on 8 July 2006 and,
among other things, the Group's UK retailing operations were legally transferred
to a separate legal sub group of subsidiaries of MFI.
Retail is one of the UK's largest furniture retailers with a leading share of
the UK furniture and floorcoverings market.
It operates a national network of over 200 showrooms and sells across the whole
range of home furniture, although kitchens and bedrooms represented more than 80
per cent of Retail's sales in the year ended 24 December 2005.
Retail historically achieved strong sales and profitability within the UK
furniture market. However, between 2003 and 2005, a combination of (in differing
degrees) deteriorating market conditions, increased price competition, supply
chain issues, rises in property costs and Retail's own strategy (which impacted
gross margin and operating costs) led to a substantial decline in profitability.
In 2005, Retail's sales totalled £741.9 million and Retail made an operating
loss of £49.0 million and a loss after exceptional items of £132.2 million. The
unaudited gross assets of Retail as at 10 June 2006 were £152.1 million.
4. Information on the Purchaser
MEP Mayflower Limited is a new company which has been formed by Merchant Equity
Partners LLP (''MEP''), a private investment firm which focuses on turning
around retail businesses in the UK and Continental Europe. MEP was established
by Henry Jackson, a former Managing Director and Head of the European Consumer
and Retail Group at Deutsche Bank AG, David Hamid, a former CEO of Halfords
Group plc and director of Dixons Group plc, and John von Sprecklesen, a former
Executive Chairman of Somerfield plc. MEP's strategy involves taking controlling
positions in underperforming businesses within the retail sector and
contributing experienced management expertise to generate profit in these
acquired businesses. The key personnel who will be involved in running Retail
following the Disposal are David Hamid as Chairman and Gary Favell as Chief
Executive Officer, who was formerly CEO of Wyevale Garden Centres plc and Magnet
Ltd. MEP is funded by a number of significant institutional investors.
5. Principal terms of the Disposal
The Disposal is conditional only upon the approval of Shareholders. The Disposal
Agreement will automatically terminate if such condition is not satisfied on or
before 19 October 2006.
Conditional upon Completion of the Disposal Agreement, the Purchaser has agreed
to acquire economic control of Retail from 5 August 2006 (the ''Effective
Date''). The total purchase price payable by the Purchaser for all the shares in
MFI Retail Holdings will be the nominal amount of £1. For this, it has been
agreed that the Purchaser will receive no less than £109.3 million of net
tangible assets. This amount will not be subject to adjustment following
Completion.
The shareholders in the Purchaser have severally agreed to invest a total of
£49.6 million in the Purchaser at Completion and may invest up to a further
£12.0 million in April 2008. The Purchaser has also undertaken to arrange
working capital facilities of not less than £40.0 million by 31 March 2007.
The Continuing Group will pay the Purchaser's Group £8.7 million on Completion,
reflecting that the date at which the Purchaser will acquire economic control of
Retail is 5 August 2006. The Continuing Group will then make a deferred payment
of £53.1 million into the Purchaser's Group on 3 September 2007 provided that
(i) the then directors of Retail Limited (the operating company of Retail and
subsidiary of MFI Retail Holdings) confirm that they have concluded that, at
that time, it is in the best interests of Retail Limited and the creditors of
Retail Limited to continue trading and (ii) the entire £49.6 million invested by
the shareholders of the Purchaser on Completion is still invested in the
Purchaser at the time of payment. This amount, if paid, will not be repayable by
the Purchaser or Retail and will be payable prior to 3 September 2007 in the
event that there is a change of control of the Continuing Group or certain other
events occur in relation to the Continuing Group including a recapitalisation or
on an event of default under the Continuing Group's banking facilities.
The Continuing Group will also make a further deferred payment of up to £12.0
million to the Purchaser's Group on 2 April 2008 provided that (i) the then
directors of Retail Limited (the operating company of Retail and subsidiary of
MFI Retail Holdings) confirm that they have concluded that, at that time, it is
in the best interests of Retail Limited and the creditors of Retail Limited to
continue trading and (ii) the shareholders of the Purchaser have invested an
amount (up to £12.0 million) at least equal to the amount to be paid by the
Continuing Group. Any amount paid by the Continuing Group will not be repayable
by the Purchaser or Retail.
In respect of liabilities for customer deposits outstanding at the Effective
Date, the Company will ensure that the Purchaser's Group receives a payment on
Completion equivalent to the aggregate amount of the liabilities of Retail in
respect of such deposits (estimated to be £51.9 million). From Completion, the
Purchaser undertakes to procure the fulfilment of orders in respect of such
deposits and agrees to indemnify the Company in respect of this obligation. To
the extent a customer order is cancelled, then either Retail prior to
Completion, or the Purchaser from Completion, will refund the relevant cash
deposit to the customer.
The Group and the Purchaser have agreed that the Purchaser will, following
Completion and for varying periods of up to five years, sub-let from the
Continuing Group the seven Home Delivery Centres operated by Retail. The
Continuing Group is also retaining 25 properties which have been vacated by the
Group, but for which MFI Properties currently remains head lessee.
The Continuing Group will be entitled to a minimum of five per cent of any sale
proceeds in excess of £300 million where Retail is sold during a five year
period after Completion. The percentage participation rises in steps to 25 per
cent of the excess when the gross proceeds exceed £482 million. Where there is
an IPO of Retail during this period, the Continuing Group will have the right to
subscribe for new equity on equivalent value terms to those on a sale. If the
Purchaser extracts or returns cash from Retail during this period (for example,
under a refinancing or return of capital), any such amounts will reduce the £300
million threshold referred to above.
The Company has given certain warranties and indemnities to the Purchaser in
relation to Retail. Certain indemnities relating, inter alia, to pensions,
employee transfers, property and property liabilities, and the part of the
Reorganisation in relation to Retail are unlimited in amount.
The Company has agreed to certain restrictions on the operation of its
businesses following Completion. These are related to offering employment to
employees of Retail and the Company departing from its business plan which is
not to target retail customers in the UK over the period of the supply agreement
described in paragraph 7 below.
6. Break Fee
As an inducement to the Purchaser's agreement to undertake due diligence and to
commit resources to the proposed transaction, the Company has agreed, inter
alia, that it will pay the Purchaser a total of up to £5 million if certain
events occur which would result in the Disposal not being completed. These
events include the Disposal not being approved by Shareholders.
7. Supply Agreement
The Group and the Purchaser have agreed the terms of a supply agreement whereby
the Continuing Group will supply certain kitchen, bedroom and related appliance
products at the same prices as those charged or allocated on an intra Group
basis to the retail business at the beginning of 2006. The agreement is in
respect of orders made by the Purchaser in the period to 31 March 2008. Further
details of these supply arrangements, and other ancillary arrangements, will be
set out in the Shareholder Circular.
8. Transitional Services
The Group and the Purchaser have agreed terms for the provision of certain IT
and financial services for a period of two years from Completion and for the
provision of logistics services for the period from Completion to 31 March 2008.
The Purchaser will pay for these services on a costs-only basis. In addition,
the Group and the Purchaser have agreed terms for the provision of warranty
claims management services by MFI Financial Services to Howden Joinery. Further
details regarding these arrangements will be set out in the Shareholder
Circular.
9. Financial effects of the Disposal
An unaudited pro forma statement of the profit and loss account of the
Continuing Group for the year ended 24 December 2005 is set out, for
illustrative purposes only, in Appendix A of this announcement. For that year
the Group reported (under UK GAAP) an operating profit before exceptional items
of £7.8 million (£96.2 million operating loss after exceptional and other
items). The illustrative operating profit of the Continuing Group for year ended
24 December 2005, on a pro forma basis and adjusted to reflect the Disposal as
if Completion had occurred on 25 December 2004, was £40.2 million pre
exceptionals. This is after charging £14.9 million of cost under-recoveries and
primary stock losses which were associated with the supply of products to Retail
in that year to the Continuing Group.
The Continuing Group will retain existing obligations for past service benefits
in respect of Retail employees. In the year ended 24 December 2005, the total
Group FRS17 pension finance charge was £8.8 million.
The Group expects, in relation to the Disposal, to incur a net exceptional loss
on disposal of approximately £180 million on an IFRS basis in the current
financial year, representing the value of net assets of Retail to be transferred
to the Purchaser, as adjusted for the terms of the Disposal; adjustments in
respect of the adoption by the Group of IFRS; estimated balance sheet movements
between the Effective Date and Completion; and retained dilapidation provisions
and fixtures and fittings in respect of Excluded Assets.
An unaudited pro forma statement of net assets of the Continuing Group as at 10
June 2006 is set out, for illustrative purposes only, in Appendix A of this
announcement. At that date, the Group had consolidated net assets of £40.6
million. As shown in that statement, the illustrative consolidated net assets of
the Continuing Group as at 10 June 2006, on a pro forma basis and adjusted to
reflect the Disposal as if Completion had occurred at that date, would have been
a liability of £130.5 million.
The balance sheet of Retail includes liabilities in respect of customer deposits
(payments made by customers in advance of delivery of their orders) but not the
cash associated with such orders or the stock necessary to fulfil them. The
Continuing Group will remit to the Purchaser's Group a cash amount in respect of
such customer deposits (as at 5 August 2006). As at 5 August 2006, the value of
such customer deposits is estimated at £51.9 million (compared with £65.3
million as at 10 June 2006). From the cash received in respect of customer
deposits, Retail will pay the Continuing Group (or third parties) for the stock
required to fulfil such orders.
10. Current trends in trading and prospects
Retail
Trading results in Retail since the interim announcement continue to reflect the
weaker market conditions referred to at that time, with gross margin continuing
to perform to management expectations.
The Continuing Group
With regard to the Continuing Group, Howden Joinery continues to make good
progress in line with management expectations. Supply is also performing as
expected. There has, however, been some upward pressure on central costs. In
addition, the Continuing Group will this year include in its 2006 results a 53rd
week of trading, being the week ending 30 December 2006. The Continuing Group
would normally expect to record a modest trading loss during this period.
Overall, the Directors expect the beneficial impact of selling Retail on the
2006 reported results of the Continuing Group to be broadly offset by modest
losses in Sofa Workshop and by the increase in central costs and expected
trading loss for the 53rd week referred to above.
11. Dividends
Following the Disposal, and taking into account the associated financial
commitments, the Directors intend to resume the payment of dividends to
Shareholders as soon as the Continuing Group's financial performance and cash
flows permit.
12. The Continuing Group
Following the Disposal, the core business of the Continuing Group will be
Howdens which principally serves small builders, whose own customers represent a
significant proportion of the DFY market. Its strategy is founded upon providing
a value-added product that requires skilled installation and which is available
for immediate collection from the depot. Howdens' staff develop strong local and
personal relationships with their regular customers who benefit from trade
accounts and confidential discounts.
This strategy has proved highly successful. Since foundation in 1995, Howdens
has developed into a business with more than 360 depots, supplying around 30
kitchen ranges, bedrooms and joinery products to a core customer base which
numbered around 175,000 customer accounts by 2005. Historically, Howden depots
have shown substantial year on year growth in sales for a number of years from
opening and depots are targeted to be profitable from the second year of
operation and recoup depot opening costs within four years. Net operating
margins benefit from a substantially lower level of property costs than retail
operations. In addition, Howdens does not need to operate an extensive home
delivery structure, with its associated cost.
In its interim results announcement for the 24 weeks to 10 June 2006, the Group
reported sales in respect of Howdens of £272.9 million and an operating profit
of £50.9 million. Following the Disposal the Continuing Group will be able to
focus its resources more efficiently in order to capitalise on the growth
potential of Howdens.
The Directors believe there is significant scope to expand the current Howdens
depot network to at least 500 depots and expand the customer base. MFI plans to
open around 60 depots in 2007 and at least 40 per annum thereafter. These new
depots would either be located in areas where presence is lacking or would add
capacity and coverage at existing depot locations. The Directors also expect to
continue the current trialling of depots in France.
At the same time, Howdens plans to increase sales to its existing customer base
by management of the product portfolio and adding new products where
appropriate. The broadening of the customer proposition beyond the ''small
builder'' will aim to attract a wider spectrum of the building market, including
more specialised and higher end customers e.g. architects and other building
professionals.
The Supply Business has established itself as, and will continue to be, an
effective manufacturing and sourcing operation, with strong supplier
relationships. In the short term, Supply will continue to provide manufactured
and sourced products to Retail and Hygena Cuisines. However, once these interim
contracts come to an end, Howdens will become the sole customer of the Supply
Business.
The Board believes that this will allow Supply to realise scale benefits and
cost savings through its supply chain by supplying a single customer with fewer
product ranges but higher volumes, and that this in time will provide Howdens
with a key competitive advantage.
13. Change of name
Pursuant to the terms of the Disposal Agreement, the Company has undertaken that
following Completion, and subject to Shareholders approving the Disposal, the
name of the Company will be changed to Galiform Plc. Completion is not
conditional on this change of name but if Shareholders do not approve the change
of name at the extraordinary general meeting to be convened for this purpose,
the Company will be required to convene an extraordinary general meeting every
two months, at which a change of name is proposed, until the resolution is
carried.
14. Extraordinary General Meetings
A circular will be sent to MFI shareholders as soon as practicable setting out
further details of the Disposal and the change of MFI's name and convening
extraordinary general meetings to approve the Disposal and the change of MFI's
name. The extraordinary general meeting to approve the Disposal is expected to
be convened for on or about 16 October 2006 and the meeting to approve the
change of name is expected to be convened for on or about 23 October 2006.
The Company has agreed with the Purchaser to hold two extraordinary general
meetings instead of dealing with approval of the Disposal and the approval of
the associated change of name in one meeting. The Purchaser has requested two
meetings to ensure, given the notice periods required for the necessary
resolutions (14 days in respect of the resolution to approve the Disposal and 21
days in respect of the resolution to approve the change of name), that approval
of the Disposal and therefore Completion of the Disposal happens as soon as
practicable after the first extraordinary general meeting and, in any event, no
later than 23 October 2006.
Enquiries:
MFI
Mark Robson, Chief Financial Officer +44 (0) 20 7535 1110
Gary Rawlinson, Investor Relations +44 (0) 20 7535 1127
+44 (0) 79 8939 7527
Brunswick, public relations advisers to MFI
Susan Gilchrist +44 (0) 20 7404 5959
Fiona Laffan
Anna Jones
Dresdner Kleinwort, financial advisers to MFI
David Barclay +44 (0) 20 7475 9253
MEP
Henry Jackson +44 (0) 20 7647 7300
Rothschild, financial advisers to MEP
Richard Page +44 (0) 20 7280 5000
Bell Pottinger, public relations advisers to MEP
Stephen Benzikie +44 (0) 20 7861 3879
The Company will be having discussions with analysts and investors concerning
the contents of this announcement. To assist in this process the Company may use
presentation materials which are available on the Company's website at http://
www.mfigroup.co.uk.
This announcement is for information purposes only and does not constitute an
offer or an invitation to acquire or dispose of any securities or investment
advice in any jurisdiction.
Dresdner Kleinwort Limited, which is authorised and regulated by the Financial
Services Authority, is acting for MFI and for no one else in connection with the
Disposal or the contents of this announcement and will not be responsible to
anyone other than MFI for providing the protections afforded to clients of
Dresdner Kleinwort Limited, or for affording advice in relation to the Disposal
or the contents of this announcement.
N M Rothschild & Sons Limited, which is authorised and regulated by the
Financial Services Authority in the United Kingdom, is acting for MEP and no one
else in relation to the Disposal or the contents of this announcement and will
not be responsible to anyone other than MEP for providing the protections
afforded to clients of N M Rothschild & Sons Limited nor for providing advice in
relation to the proposed transaction.
It is possible that this announcement could or may contain forward-looking
statements that are based on current expectations or beliefs, as well as
assumptions about future events. These forward-looking statements can be
identified by the fact that they do not relate only to historical or current
facts. Forward-looking statements often use words such as anticipate, target,
expect, estimate, intend, plan, goal, believe, will, may, should, would, could
or other words of similar meaning. Reliance should not be placed on any such
statements because, by their very nature, they are subject to known and unknown
risks and uncertainties and can be affected by other factors that could cause
actual results, performance or events, and MFI's plans and objectives, to differ
materially from those expressed or implied in the forward-looking statements.
There are several factors which could cause actual results to differ materially
from those expressed or implied in forward-looking statements. Among the factors
that could cause actual results to differ materially from those described in the
forward-looking statements are delays in obtaining, or adverse conditions
contained in, regulatory approvals, changes in economic conditions, competition
and industry restructuring, changes in interest or tax rates, changes in energy
market prices, changes in laws, regulations or regulatory policies, developments
in legal or public policy doctrines, currency fluctuations, technological
developments, the failure to retain key management, or the availability, key
timing and success of future acquisition opportunities. Each forward-looking
statement speaks only as of the date of the particular statement.
MFI undertakes no obligation to revise or update any forward-looking statement
contained within this announcement, regardless of whether those statements are
affected as a result of new information, future events or otherwise, save as
required by the Listing Rules, the rules of the London Stock Exchange or by law.
APPENDIX A
FINANCIAL INFORMATION ON RETAIL
1. NATURE OF FINANCIAL INFORMATION
The following financial information has been extracted without material
adjustment from the consolidation schedules which support the consolidated
audited accounts of MFI for the years ended 27 December 2003, 25 December 2004
and 24 December 2005 and the consolidated unaudited financial statements of the
Group for the 24 weeks ended 10 June 2006.
The group adopted International Financial Reporting Standards (''IFRS'') for the
first time in its reporting for the 24 weeks ended 10 June 2006. This involved
the restatement of comparative amounts for the year ended 24 December 2005. The
profit and loss information in paragraph 2 of Appendix A is presented under UK
GAAP. The balance sheet information in paragraph 3 of Appendix A is presented in
accordance with IFRS as at 10 June 2006 and UK GAAP as at 24 December 2005.
The financial information contained in paragraphs 2 and 3 of this Appendix A
does not constitute statutory accounts for any company within the meaning of
Section 240 of the Act. The statutory accounts for the Group in respect of each
of the last three financial years have been delivered to the Registrar of
Companies. The auditors' reports in respect of those statutory accounts for the
three years were unqualified and did not contain statements under Section 237(2)
or (3) of the Act. Deloitte & Touche LLP were the auditors of MFI in respect of
the three years ended 24 December 2005.
2. PROFIT & LOSS ACCOUNTS FOR THE THREE YEARS ENDED
24 DECEMBER 2005
The profit and loss accounts for Retail under UK GAAP, prepared on the basis set
out above and the notes below, were as follows:
2003 (3) 2004 2005
All £ million
Sales 853.5 768.5 741.9
Cost of Sales (408.2) (398.2) (390.6)
Gross profit 445.3 370.3 351.3
Selling and Distribution costs (344.4) (347.3) (363.0)
Administration costs (7.7) (6.0) (11.3)
Depreciation (22.0) (23.0) (26.0)
Total costs (374.1) (376.3) (400.3)
Operating Profit/loss before
exceptional items 71.2 (6.0) (49.0)
Exceptional items (2) - (18.5) (83.2)
Operating profit after exceptional
items (1) 71.2 (24.5) (132.2)
Notes:
(1) The group operates a central treasury function and corporate taxes are
calculated on a statutory basis. Consequently a meaningful allocation of costs
such as interest and taxes cannot be made to Retail.
(2) Exceptional items comprised the following:
2003 (3) 2004 2005
All £ million
Supply chain disruption and
restructuring costs - (16.3) (4.7)
Redundancies - (2.2) (0.4)
Structural guarantee dispute
settlement - - (35.7)
UK stores impairment - - (42.4)
- (18.5) (83.2)
(3) 2003 is not restated for FRS17, which was adopted by the Group in 2005.
(4) Prior to the Reorganisation, certain corporate headquarter costs and supply
overheads were charged to Retail and were therefore reflected in its results.
Since the Reorganisation these are no longer charged to Retail and therefore are
not reflected in the profit and loss accounts for Retail in respect of the three
years ended 24 December 2005 presented in this paragraph. These costs are
presented here for information purposes only and were as follows:
2003 (3) 2004 2005
All £ million
Corporate headquarter costs 12.5 12.5 12.5
Supply overheads 12.8 6.2 19.2
25.3 18.7 31.7
(5) The profit and loss accounts for Retail comprise the financial results of a
sub-group of subsidiaries of MFI Group including MFI Retail Holdings, Retail
Limited, MFI Properties and MFI Financial Services including the Excluded
Assets. The Continuing Group will be retaining the Excluded Assets following the
Disposal and accordingly, as set out in Note 3(ii) of paragraph 5 of Appendix A
of this document, the Continuing Group will retain the corresponding net rental
obligation.
(6) Operating profit/loss is after charging net property costs comprising rental
payments and rates in each of three years as follows:
2003 (3) 2004 2005
All £ million
Net property rentals 53.2 60.4 67.2 *
Rates and other costs 18.6 26.1 28.6
71.8 86.5 95.8
*In the year ended 24 December 2005, net rentals payable by Retail includes
£15.8 million in respect of leases for which the Company has guaranteed the
performance of MFI Properties as tenant.
3. STATEMENTS OF NET ASSETS AS AT 24 DECEMBER 2005 AND 10 JUNE 2006
The combined net assets of Retail, prepared under IFRS at 10 June 2006 and UK
GAAP at 24 December 2005 on the basis set out above and the notes below, were as
follows:
As at As at
24 December 10 June
2005 2006
All £ million All £ million
ASSETS
Non-Current Assets
Tangible assets 89.7 83.4
89.7 83.4
Current Assets
Stocks 36.3 38.4
Debtors 21.2 30.3
57.5 68.7
Total assets 147.2 152.1
LIABILITIES
Current Liabilities
Trade creditors (14.9) (11.5)
Other tax and social security - -
Other creditors (2.6) (2.9)
Deferred income - customer deposits (17.6) (65.3)
Accruals and other deferred income (51.1) (72.0)
(86.2) (151.7)
Non-Current Liabilities
Long term provisions (1.2) (1.3)
(1.2) (1.3)
Total Liabilities (87.4) (153.0)
Net Assets/ Liabilities 59.8 (0.9)
Notes:
(1) Retail net assets exclude any liability in respect of the Group FRS17
pension deficit as the pension deficit is only recognised in the consolidated
accounts of MFI Furniture Group Plc.
(2) The Group operates a central treasury function and corporate taxes are
calculated on a statutory entity basis. Consequently a meaningful allocation of
costs such as interest and taxes cannot be made to Retail.
(3) The combined net assets of Retail comprise the assets of a sub-group of
subsidiaries of MFI Group including MFI Retail Holdings, Retail Limited, MFI
Properties and MFI Financial Services including the Excluded Assets. The
Continuing Group will be retaining the Excluded Assets following the Disposal,
and accordingly, as set out in Note 3(i) of paragraph 6 of Appendix A of this
document, the Continuing Group will retain the tangible assets associated with
the Excluded Assets.
(4) The accruals and deferred income balance at 10 June 2006 includes accruals
for property lease incentives and stepped rent in accordance with IFRS. The
impact of adopting IFRS resulted in an increase in accruals and deferred income
in respect of property costs of £15.8m at 10 June 2006, compared to the
equivalent treatment under UK GAAP. The adoption of IFRS also reduces the value
of long leaseholds by £3.2 million.
PRO FORMA FINANCIAL INFORMATION FOR THE CONTINUING GROUP
4. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information for the Continuing Group set out below has
been prepared to illustrate the effect on the profit and loss account and
unaudited statement of consolidated net assets of the Group of the Disposal if
it had occurred on 25 December 2004 (in the case of the profit and loss account)
and the unaudited 10 June 2006 (in the case of the unaudited net assets
statement). The pro forma financial information is for illustrative purposes
only and because of its nature, it addresses a hypothetical situation and does
not, therefore, represent the Continuing Group's actual financial position or
results. The pro forma financial information has been prepared on the basis set
out in the notes below.
5. PRO FORMA PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED
24 DECEMBER 2005
The pro forma profit and loss account for the Continuing Group under UK GAAP,
prepared on the basis set out above and the notes below is as follows:
Pro forma
Retail(2) Disposal(3) Continuing
Group(1) Adjustments Adjustments Group
All £ million
Sales 1,418.9 (741.9) - 677.0
Cost of Sales (706.4) 390.6 (14.9)(i) (330.7)
Gross profit 712.5 (351.3) (14.9) 346.3
Selling & Distribution costs (629.6) 389.0 (1.7)(ii) (242.3)
Administrative costs (75.1) 11.3 - (63.8)
Total Costs (704.7) 400.3 (1.7) (306.1)
Operating Profit 7.8 49.0 (16.6) 40.2
Share of operating loss of joint
venture (1.5) - - (1.5)
Discontinued operations 4.2 - - 4.2
Exceptional items (106.7) 83.2 - (23.5)
Operating Profit after
Discontinued operations,
Exceptional items and Share of
operating loss of joint venture (96.2) 132.2 (16.6) 19.4
Notes:
(1) The consolidated profit and loss account information of the Group for the
year ended 24 December 2005 has been extracted, without material adjustment,
from the audited financial statements of the Group for that year prepared under
UK GAAP.
(2) The profit and loss account for Retail for the year ended 24 December 2005
has been extracted, without any material adjustment, from the profit and loss
accounts for Retail as set out in paragraph 2 of Appendix A of this document.
(3) Disposal adjustments represent adjustments that in the reasonable opinion of
the Directors would have had a continuing impact on the Continuing Group if the
Disposal had been effective on 25 December 2004, including:
(i) Under-recoveries in costs and primary stock losses totalling £14.9 million
in respect of products supplied to Retail which were previously recognised in
Retail but are now charged to the Continuing Group. In 2003 and 2004 these costs
were £10.3 million and £12.6 million respectively.
(ii) Net rent payable in respect of the Excluded Assets as described in Note 5
in paragraph 2 of Appendix A of this document, and that will be retained by the
Continuing Group.
(4) No adjustment has been made to the unaudited proforma statement to reflect
the trading results of the Group or Retail since 24 December 2005, nor any other
event or transaction since that date including any costs in respect of
restructuring which may be incurred.
(5) No adjustment to the pro forma profit and loss statement above has been made
for estimated costs of the transaction borne by the Continuing Group of £10.5
million or for the onerous lease provision of £12.0 million which is included in
the net asset decrease of the £12.9 million as described in note 3(v) of
paragraph 6 of Appendix A also borne by the Continuing Group relating to the
HDCs which from part of the Excluded Assets.
6. PRO FORMA NET ASSETS STATEMENT AS AT 10 JUNE 2006
The unaudited pro forma net assets of the Continuing Group, prepared under IFRS
at 10 June 2006 and on the basis set out above and the notes below, are as
follows:
Group Retail Disposal Pro-forma
Adjustments Adjustments Continuing
Group
All £ million
ASSETS
Non-Current Assets
Other intangible assets 3.6 - - 3.6
Tangible assets 178.0 (83.4) 1.6(i) 96.2
Investments 9.1 - - 9.1
Deferred tax 94.6 - - 94.6
285.3 (83.4) 1.6 203.5
Current Assets
Stocks 147.1 (38.4) - 108.7
Debtors 150.0 (30.3) - 119.7
Investments 3.8 - - 3.8
Cash 139.7 - (74.0)(ii) 65.7
440.6 (68.7) (74.0) 297.9
Assets held for sale 14.7 - - 14.7
Total Assets 740.6 (152.1) (72.4) 516.1
LIABILITIES
Current Liabilities
Trade creditors (96.9) 11.5 - (85.4)
Corporation tax (3.9) - - (3.9)
Other tax and social security (36.0) - - (36.0)
Other creditors (14.4) 2.9 (63.6)(iii) (75.1)
Deferred income - customer deposits (65.3) 65.3 - -
Accruals and other deferred income (122.6) 72.0 (11.1)(iv) (61.7)
(339.1) 151.7 (74.7) (262.1)
Non-Current Liabilities
Bank Loans (52.1) - - (52.1)
Long term provisions (2.6) 1.3 (12.9)(v) (14.2)
Deferred tax (7.0) - - (7.0)
Other creditors - - (12.0)(vi) (12.0)
Gross pension liability (295.6) - - (295.6)
(357.3) 1.3 (24.9) (380.9)
Liabilities directly associated with
assets classified
as held for sale (3.6) - - (3.6)
Total Liabilities (700.0) 153.0 (99.6) (646.6)
Net Assets/ Liabilities 40.6 0.9 (172.0) (130.5)
Net Assets before gross pensions
liability 336.2 0.9 (172.0) 165.1
Notes:
(1) The consolidated net assets of the Group as at 10 June 2006 have been
extracted, without material adjustment, from the unaudited interim results
statement, dated 20 July 2006.
(2) The net assets of Retail as at 10 June 2006 have been extracted without
material adjustment, from the statement of net assets for Retail as at 10 June
2006 as set out in Paragraph 3 of Appendix A of this document.
(3) Disposal adjustments reflect the effect of the Disposal pursuant to the
Disposal Agreement as if completion had taken place on that day.
(i) Tangible assets have increased by £1.6 million being the amount of fixtures
and fittings associated with the Excluded Assets, and accordingly, as set out in
Note 3 of paragraph 3 of Appendix A, will be retained by the Continuing Group.
(ii) Cash has been reduced by £74.0 million being £65.3 million of customer
deposits (excluding VAT) as at 10 June 2006 and a cash payment of £8.7 million
to the Purchaser, payable on Completion.
(iii) Current liabilities have been increased by (£63.6 million) representing
the net amount which is contracted to be payable to Retail on 3 September 2007
(£53.1 million) and the estimated costs of the transaction borne by the
Continuing Group (£10.5 million).
(iv) Net assets have decreased by £11.1 million as the Continuing Group will
retain the liability for deferred rent reviews yet to be settled in respect of
properties occupied by Retail (£8.6 million) and will retain dilapidation
provisions relating to the Excluded Assets (£2.5 million).
(v) Net assets have decreased by £12.9 million in respect of onerous lease
provisions relating to the Excluded Assets.
(vi) Non current liabilities have been increased by £12 million representing the
amount which is contracted to be payable to Retail in April 2008.
(4) No adjustment has been made to the unaudited pro forma statement to reflect
the trading results of the Group or Retail since the balance sheet date, nor any
other event or transaction since that date, including any provisions in respect
of restructuring costs which may be incurred.
APPENDIX B
DEFINITIONS
The following definitions apply throughout this announcement, unless the context
requires otherwise:
Act the Companies Act 1985, as amended
Board or Directors the board of directors of MFI
Completion the completion of the Disposal in
accordance with the Disposal Agreement
Continuing Group MFI and its subsidiary undertakings (as
defined in the Act), excluding Retail
Disposal the proposed disposal by MFI of Retail
pursuant to the Disposal Agreement
Disposal Agreement the agreement relating to the sale by MFI
of Retail
Dresdner Kleinwort Dresdner Kleinwort Limited
Effective Date 5 August 2006
Excluded Assets 25 properties which have been vacated by
the Group but for which MFI Properties
remains head lessee, and seven Home
Delivery Centres which are currently
occupied by the Group and for which MFI
Properties remains head lessee. These 32
properties do not form part of the
Disposal. The seven Home Delivery Centres
are to be sub-let for varying periods of
up to five years to the Purchaser
FRS 17 Financial Reporting Standard 17 -
Retirement Benefits
FSMA Financial Services and Markets Act 2000
Howdens or Howden Joinery Howden Joinery Limited, a subsidiary of
MFI
Hygena Cuisines Hygena Cuisines S.A.
IAS 19 International Accounting Standard 19 -
Employee Benefits
IFRS International Financial Reporting
Standards
Listing Rules the listing rules made by the Financial
Services Authority in exercise of its
functions as competent authority pursuant
to Part VI of the FSMA
London Stock Exchange London Stock Exchange Plc
MFI Financial Services MFI Financial Services Limited, a company
which is part of Retail
MFI Group or the Group MFI and its subsidiary undertakings (as
defined in the Act), including Retail
MFI or the Company MFI Furniture Group Plc
MFI Properties MFI Properties Limited, a company which is
part of Retail
MFI Retail Holdings MFI Retail (Holdings) Limited, a company
which is part of Retail
MFI UK MFI UK Limited, a subsidiary of MFI
Ordinary Shares the ordinary shares of 10p each in the
capital of the Company
Prospectus Rules the prospectus rules made by the Financial
Services Authority in exercise of its
functions as competent authority pursuant
to Part VI of the FSMA
Purchaser MEP Mayflower Limited
Purchaser's Group the Purchaser, its subsidiary undertakings
and parent undertaking (each as defined in
the Act) from time to time
Reorganisation the intra Group reorganisation carried out
on or around 8 July 2006 pursuant to which
MFI reorganised its three core businesses
into separate legal sub groups.
Retail a sub group of subsidiaries of MFI
including MFI Retail Holdings, Retail
Limited, MFI Properties and MFI Financial
Services and their businesses and assets
(including the MFI HYGENA and SCHREIBER
brands) but excluding the Excluded Assets
Retail Limited MFI Retail Limited, a company which is
part of Retail
Shareholders the holders of Ordinary Shares and
'Shareholder' shall be construed
accordingly
Shareholder Circular the Class 1 circular to Shareholders to
contain details on the Disposal and change
of name
Supply Business or Supply the manufacturing and supply business of
MFI
UK GAAP UK Generally Accepted Accounting
Principles
This information is provided by RNS
The company news service from the London Stock Exchange