Acquisition

Real Good Food Company Plc (The) 20 April 2004 For Immediate Release 20 April, 2004 The Real Good Food Company Plc ('Real Good Food' or 'the Company') Proposed Acquisition of Five Star Fish Limited ('Five Star Fish') and Admission to AIM Introduction and Background The Company announces that it has agreed to acquire the entire issued share capital of Five Star Fish (the 'Target Group') for an aggregate initial consideration of approximately £16.6 million, to be satisfied by the issue of 695,410 new ordinary shares, the payment of approximately £13.7 million in cash and the assumption of Five Star Fish's existing bank borrowing liabilities ('the Acquisition'). In addition, the vendors, the directors and a senior employee of Five Star Fish will be granted options over 465,924 ordinary shares in the capital of the Company at 143.8p per share. Furthermore, deferred consideration may also become payable on the terms set out under the heading 'Principal Terms of the Acquisition' set out below. Under the AIM Rules, the Acquisition is subject to shareholder approval in view of its size. A resolution will be proposed at the Extraordinary General Meeting ('EGM') to be held on 13 May, 2004 which, if duly passed, will result in the existing AIM trading facility being cancelled and a new trading facility being granted contemporaneously. It is anticipated that dealings on AIM in the Enlarged Issued Share Capital will commence on 14 May, 2004 ('Admission'). Prior to completion of the Acquisition, Pieter Totte, Chairman, and John Gibson, Chief Executive, will join the board of Five Star Fish and the Company intends to change its accounting reference date to 31 December to coincide with that of Five Star Fish. Information on Five Star Fish Five Star Fish is a supplier of high quality, added value whitefish products to the food service sector. The directors of Real Good Food ('Directors') believe Five Star Fish holds a market leading position in the frozen food service sector which it achieves by continuously monitoring its quality standards, improving processing techniques, maintaining hygiene standards and developing its staff to achieve these objectives. Background Five Star Fish was incorporated in 1985, commenced trading in 1986 and operates from purpose built premises on the Great Grimsby Business Park. Five Star Fish has historically invested heavily in premises and processing equipment focussed on the supply of food service products. During the last 10 years there has been consolidation in the food service sector. Five Star Fish has adapted to this changing market place by virtue of its investment in premises and processing equipment which have enabled it to consolidate its market leading position in the frozen food service sector. Havelock Seafoods Limited, a competitor, was acquired by Five Star Fish in 1999 and Danny Burton, a director of and shareholder in that company joined Five Star Fish following the acquisition, initially as a production director, and now serves as joint managing director. Another competitor, Tom Darwood, was acquired by Five Star Fish in two tranches, between 2002 and 2003. The Directors believe that Five Star Fish has one of the best catering fish processing units in the UK and operates this with strict processing control resulting in a high quality product while maintaining tight cost control. Five Star Fish is consistently investing in developing its existing lines and bringing new products to the market. Products Five Star Fish differentiates its product range into seven categories: battered, breaded, dusted, formed and speciality products, Individually Quick Frozen fillets and goujons. The majority of its sales are products made from haddock, plaice and cod. Battered Five Star Fish produces a range of battered fish products, including; cod, beer battered cod, haddock fillets and smaller ranges of Alaskan pollock, plaice fillets and battered filleted cod. Breaded Five Star Fish's breaded range includes plaice fillets, cod fillets, haddock fillets, Alaskan pollock fillets, lemon sole fillets and whole boneless plaice. Dusted Dusted products include salmon escalopes, haddock products, salmon goujons and tuna steak. Formed Formed products include fish cakes, sea burgers and fish fillet squares, two rosti products, salmon and dill and Thai cod and other shaped fish products. Speciality Speciality products include boned kippers, vacuum packed hot smoked mackerel, mussels in their shells, salmon fillets in hollandaise sauce, skinless boneless salmon portions, plaice filled with prawns and mushrooms, cod nuggets, fisherman's medley and seafood platter. Individually Quick Frozen Fillets These filleted products include skin on cod fillets, skinless boneless cod fillets, skin on haddock fillets, skinless boneless haddock fillets, plaice fillets, lemon sole fillets, hake fillets and Alaskan pollock and saithe. Goujons Five Star Fish produces goujons of plaice, lemon sole, cod and salmon in lime and coriander. Management John Fenty, chairman of Five Star Fish, aged 43, formed Five Star Fish in 1985. He has overseen the rapid growth of Five Star Fish since that date, working as chairman on a full time basis. Roy Mathews, joint managing director of Five Star Fish, aged 64, has worked in food manufacturing for 46 years, mainly with a large publicly quoted company. He trained as a work study practitioner where he gained knowledge of accounting and cost accounting. He then moved into production and also gained some selling experience as a sales representative for two years. He joined Five Star Fish in 1988 and has concentrated his efforts on developing the commercial activities of Five Star Fish. Danny Burton, joint managing director of Five Star Fish, aged 43, joined Five Star Fish in 1999 as a result of the acquisition by Five Star Fish of Havelock Seafoods Limited, where he was Managing Director. His early career was with a major fish company, where he gained extensive experience in all aspects of fish processing as well as purchasing raw material. He moved to Havelock Seafoods Limited as a director, becoming managing director and a shareholder. Andrew Smith, finance director of Five Star Fish, aged 35, joined Five Star Fish in 1999 after qualifying as a certified chartered accountant. Prior to joining Five Star Fish, he was in practice with its auditors, where he audited Five Star Fish's accounts for eight years. Since joining Five Star Fish, he has played a major role in its acquisition strategy and is responsible for the accounting and reporting functions of the Five Star Fish group. Bill Ridgway, Sales and Marketing Director, aged 46, joined Five Star Fish in 1994. Prior to joining Five Star Fish he worked as a general manager of William Jackson & Sons Plc (a Hull based food service company trading under the name of Tryton Foods) between 1988 and 1994. Financial History Year Ended 31 December 2001 2002 2003 £ £ £ Turnover 16,514,046 17,043,144 19,081,896 Gross Profit 6,550,874 6,994,379 7,559,385 Gross Margin % 39.67% 41.04% 39.62% Operating Profit* 2,310,000 2,166,697 2,608,730 Operating Margin % 13.99% 12.71% 13.67% *before non-trading expense adjustments Current Trading of Five Star Fish Sales in the first two months of the current financial year are slightly below Five Star Fish's management expectations owing to the recent poor weather, an increase in consumer spending during the festive season and a subsequent decline in spending in the new year. This has been mitigated by improvements in gross margin as a result of favourable raw material prices and efficiencies achieved in product processing. Sales by Five Star Fish during March and the gross margin for the first quarter are ahead of budgeted levels. During the second quarter Five Star Fish's management team expects to gain several new significant customers and for the financial performance of Five Star Fish to improve as a result. At present, the cost of raw material supplies, particularly cod and haddock, is very favourable and Five Star Fish's management team has taken steps to secure cod supplies on favourable terms for the remainder of the financial year so that further margin improvements can be achieved. Background to and reasons for the Acquisition The Company was incorporated in February 2003 to build, through acquisition and organic growth, a food group focused upon the supply of chilled, frozen and ambient products to food retailers and the food services market. The Board recognised that an opportunity existed to acquire companies or businesses which are considered to be non-core operations of larger food groups and private companies which require investment in management or infrastructure. In July 2003 the Company completed the acquisitions of Hayden's Bakeries Limited, Eurofoods Plc, Cool Fresh Distribution Limited and Cakes.co.uk Limited. On 26 September, 2003 the Company's ordinary shares were admitted to trading on AIM following a placing of 1,090,909 Ordinary Shares at 110 pence per share to raise £1.2 million (before expenses). Following admission to AIM, the Company raised a further £10 million (before expenses) in December 2003 by way of a placing of 7,407,407 Ordinary Shares at 135 pence per share. At the time of the latter placing the Directors were aware of a number of companies which represented potential acquisitions and following the receipt of the placing funds have been actively considering those opportunities which meet the criterion set out above. Following their deliberations, the Board selected Five Star Fish as their preferred acquisition target and appointed advisers to commence legal and financial due diligence. Following the completion of this due diligence, the Board consider that Five Star Fish possesses qualities which justify the Board's recommendation of the Acquisition to Shareholders. The key qualities can be summarised as follows: • Five Star Fish has strong operating cashflow; • The Acquisition will enable Real Good Food to consolidate its position in the food service sector. In addition, Five Star Fish's expertise in this sector will complement certain of the Company's existing activities in other parts of this market; • Five Star Fish's future growth will be facilitated by being part of a larger, broader based food group; • The Directors anticipate synergies will be achieved in the areas of production, administration, project management and distribution and measures will be put in place to maximise these following completion of the Acquisition; and • In the longer term, the Directors of Real Good Food intend to apply Five Star Fish's processing expertise across the manufacturing activities of Real Good Food in order to further improve operating margins. The Directors also expect to be able to develop cross selling opportunities through the customer base of the Enlarged Group. Principal Terms of the Acquisition The Company is proposing to acquire the entire issued share capital of Five Star Fish for an initial aggregate consideration of approximately £16,600,000 payable as to £13,719,218 in cash, the assumption of Five Star Fish's estimated borrowing liabilities as at 31 January, 2004 of £1,903,782 and the balance to be satisfied by the issue of new Ordinary Shares, which will rank pari passu in all respects with the existing Ordinary Shares. In addition, the vendors, the directors and a senior employee of Five Star Fish will be granted options over 465,924 ordinary shares in the capital of the Company at 143.8p per share. Furthermore, the vendors may receive deferred consideration up to a maximum of £4,000,000, to be satisfied in cash. The calculation of the deferred consideration is dependent upon the adjusted profit before interest and taxation of the Target Group ('EBIT') for each of the two years ending 31 December, 2005. The deferred consideration is calculated as follows: a further payment will be due to the vendors equal to 6 times EBIT for the year ending 31 December, 2004 less £17,000,000 as adjusted pursuant to the terms of the Acquisition Agreement (up to a maximum deferred consideration of £3,000,000). where EBIT for the year ending 31 December, 2004 exceeds £3,333,333 and EBIT for the year ending 31 December, 2005 exceeds the previous years EBIT, then a further payment will be due to the vendors equal to 6 times the amount by which EBIT for the year ending 31 December, 2004 exceeds £3,333,333 (up to a maximum deferred consideration of £1,000,000). A further payment will be made to the vendors, as a deferred working capital adjustment, of a sum not exceeding £1,081,886 in cash to reflect the excess working capital in the Target Group as at 31 January 2004. The initial cash consideration will be satisfied as to £8,000,000 from the Company's existing cash resources and the balance from banking facilities which are currently being negotiated. Any deferred consideration payable will be satisfied from operating cash flows and such banking facilities. The Acquisition agreement is conditional, inter alia, on the passing of a resolution to be proposed at the EGM, confirmation of lending facilities from the Company's bankers to finance the Acquistion being obtained and Admission. Current Trading of the Company Haydens Bakeries Sales to major customers, Waitrose and Marks & Spencers, were ahead of the Board's expectations in the weeks leading up to Christmas, with a record level being achieved in the last full week before the holiday period. Since the start of the year the Company has taken steps to bring labour costs in line with expected sales volumes and significant progress has been made in raw material control. In addition, capital expenditure budgeted for the first quarter of 2004 is expected to improve operating margins further. The outlook for volumes in the medium term is positive as specific developments with the Company's largest customers are expected to come on stream in the spring and summer of this year. The acquisition of 19 additional stores by Waitrose as part of the sale of Safeway stores by Morrison, announced as representing 20 per cent. additional floor space for Waitrose, will significantly impact upon sales during the remainder of 2004. During March 2004, Haydens Bakeries also received confirmation of new product listings with Marks & Spencer. Weekly turnover is currently running at £280,000 which represents an increase of 38 per cent. compared with the first week of January and is ahead of the Board's expectations. Eurofoods/Cool Fresh While sales to the Company's largest customer Caffe Nero are in line with the Board's expectations, Eurofoods has agreed to terminate a supply contract 3 months ahead of its planned termination date in order to replace those sales with sustainable higher margin business, which has now started to flow through. Weekly turnover is currently running at £128,000 which represents an increase of 68 per cent. compared with the first week of January and is in line with management expectations. In addition, in February and March 2004, new business has been agreed which is expected to generate further annualised sales in excess of £3 million: this would represent an increase in weekly turnover of an additional £60,000. The Company has appointed an experienced divisional managing director to this division who, while progressing with the cost control programme initiated by the Board since the acquisition in July 2003, has already generated a number of new business opportunities. Seriously Scrumptious Following the closure of the old sites in Glastonbury and the commissioning of the new factory nearby, the Board has focused on rationalising the customer base and the product range of this division. This has now been completed and management changes have been implemented. The new team is now refocusing the business and workforce towards those product ranges that generate the highest margins. The Directors expect to receive final technical approval from the British Retail Consortium later this month. This will allow the unit to act as a production facility for major retailers and is expected to lead to increased sales from the group's customer base and provide cross-selling opportunities throughout the Company's divisions. Directors and Senior Management of the Group Directors Pieter Willem Totte (Non-executive Chairman), aged 53, has considerable knowledge of the food sector and has acted as a corporate finance adviser in a large number of transactions within the food industry over the last 20 years and more recently has been retained as an adviser to various companies operating in the food sector including Glisten Plc, Finsbury Food Group Plc and Napier Brown Holdings Limited. John Frederick Gibson (Chief Executive), aged 52, has spent his entire working life in the food industry. He has been employed in both sales and operational roles for a number of the UK's leading food producers including Grand Metropolitan, Unigate Plc (renamed Uniq Plc) and Muller UK Limited. Since 1998 he has worked as chief executive officer or chief operating officer for a number of smaller unquoted and publicly quoted companies including Elizabeth the Chef Limited and S Daniels Plc, several of which have been in turnaround situations. He has also worked with several companies which have been engaged in acquisitive expansion programmes. James Campbell Mitchell (Non-executive Director), aged 54, was formerly managing director of Eurofoods and Nicholas & Harris Limited (the former holding company of Eurofoods). He has over 30 years of experience in the food sector during which time he has established trading links with many of the major retailers. He has a strong management background with companies who specialise in the manufacture of high quality cakes, prestige bakery goods and allied products and is recognised as one of the leading developers of the quality celebration cake market in the UK. Senior Management Lee Camfield (Financial Controller), aged 36, qualified as a management accountant in 1991. He has held a number of financial appointments with food manufacturing companies including Coca-Cola & Schweppes Beverages Limited, The Cheese Company Limited, H.J Heinz Limited and more recently Golden West Foods Limited. Positions held have included group financial controller, finance controller and business planning and development manager. Andrew Pocock (Divisional Managing Director Eurofoods/Cool Fresh), aged 43, has spent all of his working life in the catering trade. He has held various positions including catering and camp services manager for a major American petrol chemical company in Sudan and Gabon and cost accountant with the Sheraton Gulf Chain of hotels in Qatar and Bahrain. In 1988 he set up the The Sandwich Box Limited, a supplier of sandwiches and freshly prepared food, where he grew annual sales to approximately £6 million before selling the business in 2000 to Go Foods Limited. Following the disposal he remained a director of Go Foods Limited before joining the Company in February 2004. Irrevocable Undertakings The Company has received irrevocable undertakings from certain Directors and Menton Investments Limited to vote in favour of the resolutions to be proposed at the EGM in respect of an aggregate of 2,511,567 existing Ordinary Shares representing 19.84 per cent. of the existing Ordinary Shares. Recommendation The Directors believe that the Acquisition is fair and reasonable, is in the best interests of the Company and the shareholders and unanimously recommend that you vote in favour of the resolutions to be proposed at the EGM as they intend to do in respect of their aggregate shareholdings of 761,567 existing Ordinary Shares, representing approximately 6.02 per cent. of the existing Ordinary Shares. Copies of the document will shortly be posted to shareholders and are available from the offices of John East & Partners Limited, Crystal Gate, 28-30 Worship Street, London EC2A 2AH. Further Enquiries The Real Good Food Company Plc Pieter Totte, Chairman Tel: 01428 644009 John Gibson, Chief Executive Tel: 01380 733100 J M Finn & Co. Sam Smith Tel: 020 7628 9688 John East & Partners Limited Simon Clements Tel: 020 7628 2200 This information is provided by RNS The company news service from the London Stock Exchange
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