Octopus Apollo VCT 3 plc : RECOMMENDED PROPOSAL...

Octopus Apollo VCT 3 plc : RECOMMENDED PROPOSALS TO MERGE THE COMPANIES, AN ENHANCED BUYBACK FACILITY, AN OFFER FOR SUBSCRIPTION BY APOLLO 3 AND RELATED MATTERS

JOINT ANNOUNCEMENT

17 AUGUST 2012

OCTOPUS APOLLO VCT 1 PLC ("APOLLO 1")
OCTOPUS APOLLO VCT 2 PLC ("APOLLO 2")
OCTOPUS APOLLO VCT 3 PLC ("APOLLO 3")
OCTOPUS APOLLO VCT 4 PLC ("APOLLO 4")
(TOGETHER THE "COMPANIES" AND APOLLO 1, APOLLO 2 AND APOLLO 4 TOGETHER THE "TARGET VCTS" AND EACH A "TARGET VCT")

RECOMMENDED PROPOSALS TO MERGE THE COMPANIES (TO BE COMPLETED PURSUANT TO SCHEMES OF RECONSTRUCTION UNDER SECTION 110 OF THE INSOLVENCY ACT 1986), AN ENHANCED BUYBACK FACILITY, AN OFFER FOR SUBSCRIPTION BY APOLLO 3 AND RELATED MATTERS

SUMMARY

The boards of the Companies ("Boards") announced on 25 May 2012 that they had agreed terms in principle to merge the four companies. The Boards are pleased to advise that discussions have now concluded and that they are today writing to set out the merger proposals to their respective shareholders for consideration. Each of the Companies is managed by Octopus Investments Limited ("Octopus").

The merger will be effected by the Target VCTs each being placed into members' voluntary liquidation pursuant to schemes of reconstruction under Section 110 of the Insolvency Act 1986 ("Schemes" and each a "Scheme"). Shareholders should note that the merger by way of the Schemes will be outside the provisions of the City Code on Takeovers and Mergers.

The merger will be completed on a relative net asset basis and the benefits shared by each set of shareholders, with the costs being split proportionately based on the merger net asset values. Each Scheme requires the approval of resolutions by the relevant Target VCT's shareholders and Apollo 3 shareholders. However, each Scheme is not conditional on the other Schemes and will proceed independently and irrespective of the other Schemes.  

The merger will, if effected, result in an enlarged company ("Enlarged Company") with net assets of approximately £50 million. Based on the estimated costs of the merger (being £371,600) and the expected annual costs savings for the Enlarged Company (being £288,900), the Boards believe that the costs of the merger would be recovered within 16 months.

Apollo 3 also proposes to provide shareholders with the ability to participate in an enhanced buyback facility ("Enhanced Buyback Facility") and raise further funds pursuant to a top-up offer ("Offer"). Implementation of both requires the approval of resolutions by Apollo 3 shareholders. The Enhanced Buyback Facility and the Offer are not conditional on each other or on the Schemes becoming effective. The Schemes are not conditional on either the Enhanced Buyback Facility or the Offer proceeding.

In addition, Apollo 3 intends to take the opportunity to renew allotment, disapplication of pre-emption rights and share purchase authorities, approve amendments to its articles of association and approve the cancellation of share premium and capital redemption reserves.

Further, Apollo 3 is seeking the approval of its shareholders to enter into related party transactions with Octopus in connection with revised performance incentive fee arrangements and fees in connection with the Enhanced Buyback Facility and the Offer.

Further details of the proposals are set out below. The approval of resolutions in connection with these proposals will be proposed at general meetings of the Companies ("Meetings") being convened as set out in the expected timetable below.

BACKGROUND

Set out below is a summary of historical information of the Companies, together with the latest published NAVs (taken from the unaudited management accounts to 30 April 2012 (which is prior to the payment of dividends and share buybacks after 30 April 2012)), the number of venture capital investments within the portfolios of each company and the respective carrying value of these investments.

Date of launch Funds raised since launch
(£)
Unaudited net assets (£) NAV per share
(p)
Number of venture capital investments Carrying value of the venture capital investments (£)
Company July 2006 27.1 million 24,457,715 91.4 19 22,720,754
Apollo 1 May 2006 8.8 million 8,121,668 94.9 14 7,265,870
Apollo 2 May 2006 8.8 million 8,120,274 94.9 14 7,265,870
Apollo 4 June 2008 11.5 million 11,234,814 97.7 12 10,507,158

The objective of each of the Companies is the same, that being to invest in a diversified portfolio of UK smaller companies in order to generate income and capital growth over the long-term. The Companies also have the same investment policies.

The separate 'Apollo' named VCTs were originally established so as to provide the ability to access larger deals through co-investment. As a result, 88.4% of the aggregate portfolio across the Companies is represented by venture capital investments held by two or more of the Companies as at 30 April 2012 (representing £42.2 million out of the aggregate £47.8 million of venture capital investments). As the portfolios of the Companies are now materially invested, and due to the changes made to the VCT investment limits and size tests (in particular, the removal of the £1 million investment limit per VCT), the benefit of 'sister' VCTs is now significantly reduced.

VCTs are required to be listed on the premium segment of the Official List, which involves a significant level of listing costs, as well as related fees to ensure they comply with all relevant legislation. A larger VCT should be better placed to spread such running costs across a larger asset base and facilitate better liquidity management and, as a result, may be able to maximise investment opportunities and sustain a higher level of dividends to shareholders over its life.

In September 2004, the Merger Regulations were introduced allowing VCTs to be acquired by, or merge with, each other without prejudicing the VCT tax reliefs obtained by their shareholders. A number of VCTs have taken advantage of these regulations to create larger VCTs for economic and administration efficiencies, as well as to improve portfolio diversification.

With the above in mind, the Boards entered into discussions to merge the Companies to create a single, larger VCT. The aim is to achieve long-term strategic benefits and reductions in the annual running costs for all shareholders.

THE SCHEMES

The mechanism by which the merger will be completed is as follows:

·               each Target VCT will be placed into members' voluntary liquidation pursuant to a scheme of reconstruction under Section 110 of IA 1986; and

·              all of the assets and liabilities of each Target VCT will be transferred to the Company in consideration for the issue of new shares of 10 pence each in the capital of Apollo 3 ("New Apollo 3 Shares") (which will be issued directly to the shareholders of the relevant Target VCT).

In respect of each Scheme, the New Apollo 3 Shares to be issued will be calculated on a relative net asset value basis. The relative net asset values will be the unaudited net asset values of the Companies as at the Calculation Date (this being 26 September 2012), adjusted to take into consideration a company's allocation of the estimated merger costs.

Each Scheme is conditional upon certain conditions being satisfied as further set out in the circulars being posted to shareholders today, including resolutions to be proposed to shareholders of each of the Companies. Each Target VCT will apply to the UKLA for cancellation of the listing of its shares, upon the successful completion of its Scheme, such cancellation is anticipated to take place on 26 October 2012 (the cancellation requiring the approval of the relevant Target VCT's shareholders).

The merger will result in the creation of an enlarged company and should result in savings in running costs and simpler administration. As all of the Companies have the same investment policies, a number of common investments and are managed by Octopus, this is achievable without material disruption to the Companies and their combined portfolio of investments.

The Board considers that the merger will bring a number of benefits to all of the Companies' groups of shareholders through:

·               a reduction in annual running costs for the Enlarged Company compared to the aggregate annual running costs of the separate Companies;

·               the creation of a single VCT of a more economically efficient size with a greater capital base over which to spread annual running costs;

·               participation in a larger VCT with the longer term potential for a more diversified portfolio, thereby spreading the portfolio risk across a broader range of investments;

·               increasing the ability to support follow-on investments and new investments in the future due to the increased size and reduced running costs of the Enlarged Company; and

·               the potential to enhance the ability to pay dividends and buy back shares in the future due to the increased size and reduced running costs of the Enlarged Company, as well as improve liquidity in the secondary market, as it is hoped that a larger vehicle will attract increased interest.

To the extent only one or more of the Schemes are completed, the benefits of the Enlarged Company may not be fully realised (in particular, the annual costs savings would be reduced accordingly).

The aggregate anticipated cost of undertaking the merger is approximately £371,600, including VAT, legal and professional fees, stamp duty and the costs of winding up the Target VCTs. The costs of the merger will be split proportionately between the Companies by reference to their respective merger net assets (ignoring merger costs). Each of the Companies will be responsible for its allocation of the estimated merger costs whether or not a particular Scheme is approved and becomes effective. The Boards believe that the Schemes provide an efficient way of merging the Companies with a lower level of costs compared with other merger routes. Apollo 3 was selected as the acquirer being the largest of the Companies (and hence resulting in a lower amount of stamp duty being payable) and the most mature.

On the assumption that the net assets of the Enlarged Company will remain the same immediately after the merger, the reduction in the annual running costs (ignoring annual management fees, performance incentive fees and exceptional items) for the Enlarged Company is estimated to be at least £288,900 per annum, in particular, through the reduction in directors' and advisers' fees, audit fees, secretarial fees, printing costs and listing fees, as well as other fixed costs. This reduction would represent approximately 0.6% per annum of the expected net assets of the Enlarged Company. On this basis, and assuming that no new funds were to be raised or investments realised to meet annual costs, the Board and the Target VCTs' Boards believe that the costs of the merger would be recovered within 16 months.

As an illustration, had the merger been completed on 30 April 2012, the number of New Apollo 3 Shares that would have been issued  for each existing Target VCT share held are as follows:

  • Apollo 1: 1.037649 New Apollo 3 Shares for every share held in Apollo 1 

  • Apollo 2: 1.037459 New Apollo 3 Shares for every share held in Apollo 2 

  • Apollo 4: 1.068556 New Apollo 3 Shares for every share held in Apollo 4  

The illustrations have not been adjusted for the payment of dividends or shares bought back by the Companies after 30 April 2012.

ENHANCED BUYBACK FACILITY

The board of Apollo 3 has agreed to offer to its shareholders (including shareholders who will roll across to Apollo 3 as part of the merger process) the opportunity to participate in the Enhanced Buyback Facility. The terms of the Enhanced Buyback Facility are set out in the Apollo 3 prospectus ("Prospectus") which accompanies the circulars being sent out to the shareholders of the Companies today.

·             Apollo 3 shall offer (pursuant to a tender offer) to all UK Apollo 3 shareholders (including shareholders following the merger) on the register on 1 October 2012 to purchase up to 50% of the issued Apollo 3 share capital as at that date.

·              Shareholders eligible to participate may tender some or all of their existing holding of Apollo 3 shares, such Apollo 3 shareholders:

o              being entitled to sell up to a basic entitlement (this being up to 50% of their holding on the register on 1 October 2012, rounded down to the nearest whole Apollo 3 share); and

o              being able to tender additional Apollo 3 shares that may be sold to the extent that other Apollo 3 shareholders do not participate up to the maximum amount available (any such excess to be allocated pro rata to the amount number of Apollo 3 shares tendered, subject to the discretion of the Apollo 3 board).

·             The purchase will be subject to the participating Apollo 3 shareholder agreeing to reinvest all of the proceeds of sale in the purchase of New Apollo 3 Shares.

·             The purchase will be completed at a price equal to the most recently published net asset value per Apollo 3 share at the time of purchase.

·             The reinvestment will be completed at a price equal to the most recently published net asset value per Apollo 3 share at the time of allotment, divided by 0.95 (representing the costs of providing the facility, referred to below).

·             Allocations of New Apollo 3 Shares under the reinvestment will be rounded down and fractions will not be allotted.

·              Financial intermediaries will receive a commission of an amount equal to 2.5% of their client's reinvestment (which may be waived and reinvested for additional New Apollo 3 Shares purchased on behalf of their client as part of the Enhanced Buyback Facility) and annual trail commission.

Octopus will be paid an administration fee of 5% of the gross proceeds raised through the issue of New Apollo 3 Shares (ignoring reinvested commission) from which all costs and expenses will be paid (including initial intermediary commission but excluding annual trail commission). Any costs above this, excluding annual trail commission, will be met by Octopus.

The net effect for participating Apollo 3 shareholders is that they will 'substitute' 1,000 existing Apollo 3 shares with 950 New Apollo 3 Shares (plus any New Apollo 3 Shares issued pursuant to reinvested commission), the small reduction in the value of the investment holding representing the costs of implementing the Enhanced Buyback Facility, with the reinvestment qualifying for upfront income tax relief of up to 30%.

The Enhanced Buyback Facility is conditional on the approval of resolutions by Apollo 3 shareholders and the extent to which it will be implemented is further conditional on Apollo 3 having sufficient reserves to effect the purchase of shares pursuant to the Enhanced Buyback Facility.

The Enhanced Buyback Facility will open on 1 October 2012 (with, as mentioned above, an Enhanced Buyback Facility record date for participation of 1 October 2012, i.e. after the Schemes are expected to become effective and New Apollo 3 Shares have been issued to Target VCT shareholders) and will close on 30 November 2012. The board of Apollo 3 may amend or extend (as applicable) these dates at their discretion.

THE OFFER

The board of Apollo 3 has decided to take the opportunity to raise up to £20 million through the Offer. The board of Apollo 3 may, in their absolute discretion, decide to increase the Offer to raise up to a further £10 million if there proves to be excess demand from investors, subject to a maximum of 35 million New Apollo 3 Shares being offered pursuant to the Offer. This will provide Apollo 3 shareholders and new investors with the opportunity to invest in Apollo 3 and benefit from the tax reliefs available to qualifying investors in VCTs. The terms of the Offer are set out in the Apollo 3 Prospectus.

New Apollo 3 Shares issued under the Offer will be at an offer price equal to the most recently published NAV of an Apollo 3 share, divided by 0.95 to take into account Offer costs of 5% and rounded up to the nearest 0.1p per share.

Octopus will act as promoter to the Offer and be paid a commission of 5% of the gross proceeds raised through the issue of New Apollo 3 Shares (ignoring reinvested commission) from which all costs and expenses will be paid (including initial intermediary commission but excluding any permissible annual trail commission). Any costs above this, excluding any permissible annual trail commission, will be met by Octopus.

The Offer is conditional on the approval of resolutions by Apollo 3 Shareholders. The Offer will open on 1 October 2012.

INVESTMENT MANAGEMENT AND ADMINISTRATION ARRANGEMENTS

Octopus is the investment manager of all of the Companies and also provides administration and secretarial services to all of the Companies.

In respect of Apollo 3, Octopus receives an annual investment management fee of an amount equal to 2% of the net assets of Apollo 3 at the end of the preceding accounting period (plus any applicable VAT), an annual administration and accounting fee equal to 0.3% of the net assets of Apollo 3 at the end of the preceding accounting period (plus applicable VAT) and an annual company secretarial fee of £5,000 (plus VAT). These fee arrangements will continue to apply to the Enlarged Company but will be across the enlarged net assets. The existing annual expense cap on normal running costs of an amount equal to 3.3% of the net assets will also continue in respect of the Enlarged Company.

The board of Apollo 3 and Octopus have agreed, subject to approval of the shareholders of Apollo 3, to replace the existing performance related incentive fee arrangements for Apollo 3 with revised arrangements. Under the revised arrangements, Octopus will be entitled to an annual performance related incentive fee in each accounting period commencing on or after 1 February 2012, subject to the Total Return being 100p at the end of the relevant period. The amount of the fee will be equal to 20% by which the Total Return as at the end of the relevant period exceeds the Overall Hurdle Return (and payable in respect of each share in issue at the end of the relevant period).

For these purposes, Total Return means NAV per Apollo 3 share plus dividends paid per Apollo 3 share since launch and the Overall Hurdle Return means the greater of the:

  • Base Rate Hurdle Return - which means the Total Return as at 31 January 2012 increased by the cumulative annual weighted average of the Bank of England base rate (measured daily) to the end of the relevant period; and  

  • High Watermark Hurdle Return - which means the highest level of Total Return as at the end of the accounting period commencing on 1 February 2012 or any subsequent accounting period. 

The revised performance related incentive fee, if approved, will be calculated and payable annually.

These revised arrangements are not conditional on the merger becoming effective nor are they conditional on the Enhanced Buyback Facility or the Offer being implemented (or vice versa).

Octopus has, subject to the relevant Scheme becoming effective, agreed to terminate the investment management, administration and performance incentive arrangements with the relevant Target VCT with effect from the date the relevant Scheme becomes effective without notice or penalty.

THE APOLLO 3 BOARD

The Boards have considered what the size and future composition of the Enlarged Company's board should be following the merger and it has been agreed that Tony Morgan shall step down as chairman of Apollo 3, but will continue as a director of Apollo 3, and Rob Johnson will step down as a director of Apollo 3. Murray Steele (chairman of Apollo 4) and Christopher Powles (a director of Apollo 4) will then be appointed as directors of Apollo 3, with Murray Steele being appointed as chairman of Apollo 3. Matt Cooper will continue as a director of Apollo 3 and, as he is also currently a director of Apollo 1 and Apollo 2, he will bring recent knowledge and experience of these Target VCTs to the Enlarged Company.

The directors of the Target VCTs have (subject to their respective Schemes becoming effective) agreed to waive their directors' fees from the relevant Scheme becoming effective and Rob Johnson's appointment to Apollo 3 will terminate without compensation.

APOLLO 3 CHANGES TO ITS ARTICLES, RENEWAL OF SHARE ISSUE AND BUYBACK AUTHORITIES AND CANCELLATION OF SHARE CAPITAL AND RESERVES

Apollo 3 intends to renew and increase its authorities to issue shares (having disapplied pre-emption rights) for general purposes and make market purchases of shares reflecting the increased share capital of Apollo 3 following the merger and the Offer (assuming maximum subscription).

Apollo 3 also proposes to seek the approval of its shareholders to cancel further share premium and capital redemption reserves, subject to the sanction of the Court.

In addition, Apollo 3 proposes to seek the approval of its shareholders to amend its articles of association to (i) revoke the share capital limit implied into its articles of association under the Companies Act 2006 (which continues to impose a restriction on the amount of share capital Apollo 3 can issue), (ii) delete the statement of the authorised share capital of the Company as at the date the articles of association were adopted and (iii) provide for a new article permitting the name of Apollo 3 to be changed by way of a board resolution (the intention being to change the name of Apollo 3 to Octopus Apollo VCT plc following the merger).

RELATED PARTY TRANSACTIONS

In connection with the Enhanced Buyback Facility and the Offer, Apollo 3 intends to enter into the administration fee and promotion fee arrangements with Octopus (as detailed above). Apollo 3 also intends to enter into the revised performance related incentive fee arrangements with Octopus (also as detailed above).

Octopus is regarded as a related party pursuant to the Listing Rules of the UK Listing Authority by virtue of it being the investment manager of the Company. Shareholder approval is, therefore, required under the Listing Rules of the UK Listing Authority to enter into these transactions.

Octopus is one of the UK's leading fund management companies with more than £2.7 billion under management (as at 31 May 2012). Octopus has more than 200 Staff, including over 50 investment professionals, and has twice been voted as one of the 'Top 100 Small and Medium-Sized Companies to Work For' in the Sunday Times.

EXPECTED TIMETABLES

The Schemes

Apollo 3 General Meeting 10.00 a.m. 19 September 2012
Apollo 1 First General Meeting 10.30 pm 19 September 2012
Apollo 2 First General Meeting 11.00 pm 19 September 2012
Apollo 4 First General Meeting 11.30 pm 19 September 2012
Target VCTs' register of members closed 26 September 2012
Calculation date for the Schemes after 5.00 pm 26 September 2012
Suspension of listing of Target VCT' shares 7.30 am 27 September 2012
Apollo 1 Second General Meeting 10.00 pm 27 September 2012
Apollo 2 Second General Meeting 10.30 pm 27 September 2012
Apollo 4 Second General Meeting 11.00 pm 27 September 2012
Effective date for the transfer of assets and liabilities of the Target VCTs' to Apollo 3 and issue of New Apollo 3 Shares 27 September 2012
Announcement of results of the meetings and completion of the Schemes (as applicable) 27 September 2012
Admission of and dealings in the New Apollo 3 Shares issued pursuant to the Schemes to commence 28 September 2012
CREST accounts credited with New Apollo 3 Shares 28 September 2012
Certificates for New Apollo 3 Shares dispatched 5 October 2012
Cancellation of the Target VCTs' share listing (if applicable) 8.00 am 26 October 2012

The Enhanced Buyback Facility

Enhanced Buyback Facility record date 1 October 2012
Enhanced Buyback Facility opens 1 October 2012
Enhanced Buyback Facility closes noon on 30 November 2012
Purchase of existing Apollo 3 shares and issue of New Apollo 3 Shares 4 December 2012
Announcement of the results 4 December 2012
Admission of and dealings in New Apollo 3 Shares issued commence 5 December 2012
Certificates for New Apollo 3 Shares issued dispatched 12 December 2012

The Offer

Offer opens 1 October 2012
Allotment of New Apollo 3 Shares monthly
Admission of and dealings in New Apollo 3 Shares issued commence 3 business days following allotment
Certificates for New Apollo 3 Shares issued dispatched 10 business days following allotment
Offer closes noon on 5 April 2013

DOCUMENTS AND APPROVALS

Apollo 3 shareholders will receive a copy of a circular convening the Apollo 3 general meeting to be held on 19 September 2012 (together with the Apollo 3 Prospectus) at which Apollo 3 shareholders will be invited to approve resolutions in connection with the proposals.

Target VCTs' shareholders will receive a joint circular convening the Target VCTs' first general meetings on 19 September 2012 and the Target VCTs' second general meetings on 27 September 2012 (together with the Apollo 3 Prospectus) at which Target VCTs' shareholders will be invited to approve resolutions in connection with their relevant Scheme.

Copies of the Apollo 3 Prospectus, the Apollo 3 circular and the joint Target VCTs' circular have been submitted to the UK Listing Authority and will be shortly available for download both from Octopus' website (www.octopusinvestments.com) and the national storage mechanism (www.morningstar.co.uk/uk/NSM).

For further information, please contact:

Investment Manager and Administrator for the Companies
Octopus Investments Limited
Paul Daniells/Tracey Spevack
Telephone: 0800 316 2295

Solicitors to the Companies
SGH Martineau LLP
Kavita Patel/Robert Newman
Telephone: 0800 763 2000

Sponsor to Apollo 3
Matrix Corporate Capital LLP
Jonathan Becher
Telephone: 0203 206 7000

The directors and proposed directors of Apollo 3 accept responsibility for the information relating to Apollo 3 and its directors and proposed directors contained in this announcement. To the best of the knowledge and belief of such directors and proposed directors (who have taken all reasonable care to ensure that such is the case), the information relating to Apollo 3 and its directors and proposed directors contained in this announcement, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information.

The directors of Apollo 1 accept responsibility for the information relating to Apollo 1 and its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to Apollo 1 and its directors contained in this document, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information.

The directors of Apollo 2 accept responsibility for the information relating to Apollo 2 and its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to Apollo 2 and its directors contained in this document, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information.

The directors of Apollo 4 accept responsibility for the information relating to Apollo 4 and its directors contained in this announcement. To the best of the knowledge and belief of such directors (who have taken all reasonable care to ensure that such is the case), the information relating to Apollo 4 and its directors contained in this document, for which they are solely responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information.

SGH Martineau LLP are acting as legal advisers for the Companies and for no one else in connection with the matters described herein and will not be responsible to anyone other than the Companies for providing the protections afforded to clients of SGH Martineau LLP or for providing advice in relation to the matters described herein.

Matrix Corporate Capital LLP, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as sponsor for Apollo 3 and no one else and will not be responsible to any other person for providing the protections afforded to customers of Matrix Corporate Capital LLP or for providing advice in relation to any matters referred to herein.




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(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.

Source: Octopus Apollo VCT 3 plc via Thomson Reuters ONE

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