Response To Deltic and Ranimul 1 Merger Proposal

RNS Number : 0761T

Revolution Bars Group

09 October 2017

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION.

THIS ANNOUNCEMENT IS NOT AN ANNOUNCEMENT OF A FIRM INTENTION TO MAKE AN OFFER UNDER RULE 2.7 OF THE CITY CODE ON TAKEOVERS AND MERGERS (THE "CODE"). THERE CAN BE NO CERTAINTY THAT SUCH AN OFFER WILL BE MADE.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.  ON PUBLICATION OF THIS ANNOUNCEMENT VIA A REGULATORY INFORMATION SERVICE, THIS INFORMATION WILL BE CONSIDERED TO BE IN THE PUBLIC DOMAIN.

For immediate release

9 October 2017

Response to current merger proposal by The Deltic Group Limited and Ranimul 1 Limited

Further to the announcements of a merger proposal (the "Deltic Merger Proposal Announcement") and a subsequent merger proposal clarification (the "Deltic Clarification Announcement") released on 5 October 2017 by The Deltic Group Limited and Ranimul 1 Limited ("Ranimul" and, together with The Deltic Group Limited, "Deltic"), the Board of Revolution Bars Group plc ("Revolution" or the "Company") has carefully reviewed Deltic's current merger proposal and sets out below its response to those announcements. Any capitalised terms used but not defined in this announcement have the meaning given to them in the Deltic Merger Proposal Announcement.

In the Company's announcement of 15 August 2017, the Company stated that the Board had concerns over both the value and deliverability of a proposed combination of Revolution and Deltic, which envisaged the acquisition of Deltic by Revolution using Revolution's shares as consideration and for the Enlarged Group to remain listed on the Main Market of the London Stock Exchange, with the Deltic management team replacing the Revolution management team.  These concerns remain.

The Board draws the attention of Revolution shareholders to the following key points:

·      The Board does not believe that the merger proposal would create shareholder value for Revolution's existing shareholders in excess of the certain and immediate value represented by the recommended 203p cash offer from Stonegate Pub Group Limited ("Stonegate"), which would be received by Revolution shareholders in early November 2017 if shareholders vote in favour of Stonegate's offer on 17 October 2017.

·      There is no certainty or guarantee that the Deltic management team would be able to deliver either their forecast financial performance or the estimated cost synergies of the Enlarged Group that are presented in the Deltic Merger Proposal Announcement.

·      Deltic's reported cost synergies have been developed without direct involvement from Revolution and Deltic acknowledges that the level of cost synergies might vary with engagement. The Board is of the view that the Company's business operations and financial performance may suffer if the cost synergies are implemented.

·      Deltic's merger proposal would result in much greater indebtedness of the Enlarged Group compared to the current indebtedness of the Company.

·      There is no guarantee that market participants would ascribe a valuation rating to the Enlarged Group that would be sufficient to contribute to a Revolution shareholder return in excess of the certain cash return offered by Stonegate.

·      The merger proposal is not binding and it is the Board's view that a transaction would take several months to complete and in any event would not be completed until the first half of the next calendar year.

·      The Board encourages Deltic to make a cash offer for Revolution rather than continuing to focus on its current merger proposal. 

Commenting on the Offer, Keith Edelman, non-executive chairman of Revolution, said:

"The Board does not believe that the pursuit of a merger with Deltic is in the best interests of the Company or its shareholders and, in the absence of a firm cash offer from Deltic, maintains its unanimous recommendation that shareholders should vote in favour of Stonegate's offer at the Revolution shareholder meetings on 17 October 2017."

The Board has made a considerable effort to ensure that Deltic has been provided with (and continues to have) access to due diligence materials and to Revolution's management team, to enable Deltic to work towards formulating either a merger proposal which would credibly deliver significant value for Revolution shareholders or a cash offer for the Company in excess of the recommended cash offer of 203 pence per Revolution share from Stonegate. Substantial amounts of information have been provided to Deltic in the seven week period since 19 August 2017, when Deltic was first provided with access to due diligence materials by Revolution.

CONCERNS OVER VALUE OF THE MERGER PROPOSAL TO REVOLUTION SHAREHOLDERS

The Board does not believe that the merger proposal would create shareholder value for Revolution's existing shareholders in excess of the certain and immediate value represented by the recommended 203p cash offer from Stonegate, which would be received by Revolution shareholders in early November 2017.

The Board considers that Deltic's investment proposition, which focuses on late night entertainment with significant reliance on high volumes, is inconsistent with the strategy of premium cocktails and food offering and extending trading throughout the day that Revolution has pursued both before and since its IPO in 2015:

A merger of the two businesses would result in a significant increase in concentration of Enlarged Group revenue from predominantly late night entertainment, such as large nightclubs and student-led operations, which the Board regards as inherently volatile due to the nature of its customer base and trading patterns.  The Board's view is that this is a fundamental misalignment of the two business models, which have different customer propositions.  The Board considers that this would pose a significant risk to the market's assessment of value and strongly rebuts Deltic's belief that the merger proposal is exactly the type of transaction which Revolution's stated IPO strategy was intended to implement.

The Board notes the cost headwinds facing the wider sector and the uncertain macro-economic environment:

The Board has previously highlighted that the Company has experienced the well-publicised sector cost headwinds facing the industry, specifically increases in wage costs (triggered by the National Minimum/Living Wage) and the new apprenticeship levy, as well as the above-inflation increase in general business rates. The Board notes that Deltic has also cited the cost headwinds facing the sector as one of the reasons behind its own financial performance in its most recently ended financial year.  The Board would expect that these headwinds are likely to affect both the Company's business and Deltic's business in the current periods and in the medium term.

The Board notes that the underlying EBITDA and underlying EBITDA margin of Deltic declined in the year ended February 2017. This is in contrast to Deltic's projected financial performance in future periods:

Whilst past performance is not necessarily indicative of the future, a solid track record of historic financial performance is an indicator that the market uses in attributing a valuation to a listed company.  Revolution is proud that it has delivered 16 consecutive quarters of like-for-like sales growth and the Board believes that the Company is well-positioned to continue this trend.  The Board notes that the Deltic Merger Proposal Announcement states that Deltic's Adjusted EBITDA is forecast to return to growth in the year ending February 2018 and that Deltic is forecasting to return to accelerating growth in the year ending February 2019 as a result of a pipeline of potential sites and expansion opportunities.  Were this underlying EBITDA growth and underlying EBITDA margin improvement to be delivered, it would be in contrast to the year ended February 2017, in which Deltic's underlying EBITDA and underlying EBITDA margin both declined¹.

The Board draws the attention of Revolution shareholders to the detail of the Ranimul Profit Forecast for the year ending 24 February 2018 and the Ranimul Long Term Forecasts for each of the financial years ending February 2019 to February 2021:

Appendix 1 of the Deltic Merger Proposal Announcement includes the Ranimul Profit Forecast for the year ending 24 February 2018 (on which KPMG LLP has reported) and the Ranimul Long Term Forecasts for each of the financial years ending February 2019 to February 2021 inclusive (on which KPMG LLP was not required to report, but in respect of which the directors of Ranimul have provided a confirmation).  The Board draws the attention of Revolution shareholders to the disclosures made in that appendix and, in particular, to the bases of preparation and principal assumptions described in detail in each of sections 1 and 2 of that appendix.

Deltic's reported cost synergies have been developed without direct involvement from Revolution and Deltic acknowledges that the level of cost synergies might vary with engagement:

Deltic forecasts that the Enlarged Group should benefit from approximately £6.8 million of currently identified pre-tax cost synergies and approximately £0.9 million of pre-tax financing synergies.  Appendix 2 of the Deltic Merger Proposal Announcement contains a statement of the estimated cost synergies arising from the merger proposal and reports on that statement from each of Deloitte LLP and Stifel Nicolaus Europe Limited. The Board draws the attention of Revolution shareholders to the disclosures made in that appendix and, in particular, to the bases of belief and the acknowledgment by Deltic that the cost synergies have been developed without direct involvement from Revolution and, therefore, that it is anticipated that the level of cost synergies might vary with engagement.

The Board is of the view that the Company's business operations and financial performance may suffer if the cost synergies were implemented:

The Board believes that the actions which would have to be taken to achieve the cost synergies envisaged in the Quantified Financial Benefits Statement would be likely to have a negative impact on the revenue and, therefore, the profitability of the Revolution business. Some of the cost synergies envisaged would entail diminishing business functions considered essential in supporting both the like-for-like growth and the margins of the business. The Board believes that the forecasts underestimate the significant disruption that will result from seeking to achieve synergies of such a scale relative to the size of the two businesses. It is possible that the impact of such disruption on the Company might have knock-on effects on the other business operations of the Enlarged Group, including the Deltic part of the business, as management attention would likely be diverted to attempt to ensure the integration of the Revolution business.

Deltic's merger proposal would result in much greater indebtedness of the Enlarged Group compared to the current indebtedness of the Company:

The Board notes that Deltic considers that one of the key highlights of the merger proposal is that the Enlarged Group is expected to be financed conservatively, with gearing no higher than 1.5x Adjusted EBITDA. This would be a much greater level of indebtedness than the Company has at present.  Since the time of its IPO, the Company has either been ungeared or lowly geared and the Board has received consistent feedback from shareholders that, due to its size and the cyclical nature of the business sector within which it operates, this has been a key investment consideration and an important factor that has underpinned the valuation rating given by the market to Revolution.  The Board notes that the greater indebtedness of the Enlarged Group suggested in Deltic's merger proposal is not conservative when compared to Revolution's current and historic indebtedness and is likely to be taken into account by market participants in ascribing a market valuation to the Enlarged Group.

The Board also draws the attention of shareholders to the Deltic Clarification Announcement.  This announcement acknowledged errors in the Deltic Merger Proposal Announcement, which was released earlier the same day.  One of the errors made by Deltic was in relation to an erroneous exclusion of the Ranimul Loan from the disclosure of the level of net debt.  Deltic has now restated this net debt line item.

¹ Underlying EBITDA is defined in the Ranimul 1 Limited accounts for the financial year ended 25 February 2017 as underlying operating profit before taxation, depreciation, amortisation and one-off venue launch costs.

Deltic has stated its intention to repay a £22.3 million loan to Deltic shareholders, to be funded by leveraging the balance sheet of the Enlarged Group:

The Board notes that Deltic has included as a condition precedent to its merger proposal that the Ranimul Loan would be refinanced with senior debt, at commercial rates of interest.  The Ranimul Loan is described by Deltic as a £22.3 million shareholder loan (as at 25 February 2017) with an 8% coupon.  The Board notes that this proposal entails the repayment of a £22.3 million loan to Deltic shareholders by leveraging the balance sheet of the Enlarged Group.

There is no certainty or guarantee that the Deltic management team would be able to deliver either their forecast financial performance or the estimated cost synergies of the Enlarged Group that are presented in the Deltic Merger Proposal Announcement:

Deltic has provided significant detail in the Deltic Merger Proposal Announcement, including a number of reports.  The Board has drawn the attention of Revolution shareholders to certain parts of the merger proposal and the appendices that contain those reports.  The Board has also offered its views and opinions on certain parts of Deltic's merger proposal that it deems noteworthy or of concern with respect to potential value creation for Revolution shareholders.  Fundamentally, the Board notes that there is no certainty or guarantee that the estimated cost synergies can be delivered and therefore of what the future financial performance of the Enlarged Group would be. In assessing the merits of Deltic's merger proposal, the Board would encourage shareholders to use their own judgement to risk-weight the merger proposal in line with their own assessment of the potential risks.

There is also no guarantee that market participants would ascribe a valuation rating to the Enlarged Group that would be sufficient to contribute to a Revolution shareholder return in excess of the certain cash return offered by Stonegate:

If Revolution shareholders approve the recommended cash offer from Stonegate at the Revolution shareholder meetings on 17 October 2017, the consideration to be paid to Revolution shareholders is expected to settle early next month.  This is in contrast to the merger proposal outlined by Deltic, where there is no guarantee of the valuation rating that the Enlarged Group would trade at in the medium term.  Market participants will ascribe a valuation rating to the Enlarged Group based on their own assessment of a range of factors, which in this situation might include company-specific factors (such as business model, corporate strategy, historic and expected financial performance, the extent of delivery of estimated cost synergies, dividend policy and capital structure, including levels of debt) as well as external factors (such as the macro-economic environment and political and social policy). Furthermore, the Board notes that, in order to compare value against the near term cash on offer from Stonegate, each Revolution shareholder would also need to take into account their own individual perspective on the risk-adjusted time value of money with respect to both the discounting of the medium term capital value of their shareholding and any dividends paid by the Enlarged Group in the intervening period.

CONCERNS OVER DELIVERABILITY OF THE CURRENT MERGER PROPOSAL

Deltic's merger proposal is not binding and it is the Board's view that it would take several months to implement and in any event would not be completed until the first half of the next calendar year:

The merger proposal outlined by Deltic would require a material amount of further due diligence and negotiation and would also require the preparation of detailed transaction documentation (including, in addition to a sale and purchase agreement and related documentation, a prospectus and Class 1 circular, which would need to be drawn up in accordance with the UKLA's Listing Rules and the Code).  The Board believes that it would take at least several weeks to reach even a conditional binding agreement.  Consequently, it is the Board's view that the merger proposal outlined by Deltic would take several months to implement and, in any event, would not be completed until the first half of the next calendar year.  Additionally, as its proposal is not binding, Deltic would be able to withdraw or change the terms of the proposed merger at any time, even subsequent to the recommended cash offer from Stonegate lapsing.  In this respect, the Board draws the attention of Revolution shareholders to the reservations set out on page 10 of the Deltic Merger Proposal Announcement and, in particular, to the guidance from Deltic that the number of Revolution shares to be issued as consideration under the current merger proposal, and the value of the current merger proposal as implied by the merger ratio, may be subject to change.

Deltic has clarified that the execution of the merger proposal would, in fact, require the publication of a prospectus.  The detailed disclosures required in that prospectus would involve significant preparation time.  Deltic estimated in its clarification that its anticipated timetable to complete the merger would be approximately one month longer and that there would be some incremental cost:

The Board draws the attention of shareholders once more to the Deltic Clarification Announcement released by Deltic on 5 October 2017, which acknowledged errors in the earlier Deltic Merger Proposal Announcement.  One of the errors made by Deltic was in relation to a statement that the merger proposal would not require a prospectus to be issued.  Deltic clarified that a prospectus would, in fact, be required under section 85(2) of the Financial Services and Markets Act 2000, on the basis that the merger proposal would require Revolution to issue ordinary shares equivalent to more than 20% of the number of its ordinary shares already admitted to trading on the main market for listed securities of the London Stock Exchange.  Deltic estimated in its clarification that its anticipated timetable to complete the merger would be approximately one month longer and that there would be some incremental cost.  The Board notes that it is possible that the additional time to prepare and publish the required prospectus could be more than the one month estimated.

The Deltic management team is relatively unfamiliar with Revolution's premium branded daytime and evening bar and food operations:

Deltic has stated that, following completion of the proposed merger, the Enlarged Group would be run by the current Deltic management team.  Whilst the Board recognises the significant experience of the Deltic management team in nightclub operations (including through the former Luminar business), the Board considers that the relative unfamiliarity of Deltic's management team with Revolution's business model may impede the delivery of the expected future operational and financial performance of the Revolution part of the Enlarged Group, which would continue to represent a very significant part of the Enlarged Group's operations. The Board considers that this delivery could be further impeded by the impact of the actions taken to achieve the estimated cost synergies, in particular the headcount reductions and central costs rationalisation. The Board understands from its engagement with Deltic that the vast majority of the estimated cost synergies would pertain to the Revolution part of the Enlarged Group.

The Board draws the attention of Revolution shareholders to the fact that the management of the Enlarged Group in a listed company environment would require a deep and experienced management pool of senior and middle management in order to maximise the likelihood of delivering the forecast operational and financial performance of both the Revolution and Deltic businesses, as well as the estimated cost synergies.  The Board notes that Deltic has chosen to provide Revolution shareholders with the summarised biographies of only three individuals within its management team that it proposes will run the Enlarged Group.

CONCLUSION

The Board does not believe that the pursuit of a merger with Deltic is in the best interests of the Company or its shareholders and, in the absence of a firm cash offer from Deltic, maintains its unanimous recommendation that shareholders should vote in favour of Stonegate's offer at the Revolution shareholder meetings to be held on 17 October 2017:

This is principally due to the Board continuing to believe that there are significant areas of uncertainty associated with both the proposed value and deliverability of Deltic's current merger proposal, in particular the unpredictability of whether and when it would ever deliver value to the Company's shareholders. This contrasts with the firm and recommended cash offer for the Company made by Stonegate which, if supported by shareholders on 17 October 2017, will deliver a certain cash return in early November 2017 to Revolution's shareholders at a premium of approximately 62.4% to the closing price per Revolution share on 28 July 2017.  Consequently, the Board has encouraged Deltic to focus on making a cash offer for Revolution rather than continuing to focus on its current merger proposal.  The Board will remain fully engaged with both Stonegate and Deltic in the coming days. 

The Company notes that, in accordance with the statement made by the Takeover Panel on 21 September 2017, and unless the Panel Executive consents otherwise, Deltic must, by 5.00pm on 10 October 2017, either announce a firm intention to make an offer for Revolution under Rule 2.7 of the Code or announce that it does not intend to make an offer for Revolution.  In the event that Deltic announces that it does not intend to make an offer for Revolution, Deltic and any person(s) acting in concert with it will, except with the consent of the Panel Executive, be bound by the restrictions contained in Rule 2.8 of the Code in respect of any offer or merger proposal for six months from the date of such announcement.

The Board has recommended the cash offer from Stonegate and notes that the shareholder meetings in relation to the recommended cash offer from Stonegate will take place on 17 October 2017, with the transaction expected to become effective on 23 October 2017 if shareholders approve it.  Revolution shareholders are, therefore, encouraged to lodge their votes in favour of the recommended cash offer as soon as possible.  Further information in relation to the recommended cash offer is set out in the scheme document published by Revolution on 20 September 2017 and in the supplementary circular published by Revolution on 3 October 2017.

Enquiries:

Revolution
Keith Edelman Mark McQuater Mike Foster	[phone]
Numis (Revolution's Financial Adviser)
Stuart Ord Oliver Cardigan Mark Lander	[phone]
Instinctif (Revolution's PR Adviser):
Matthew Smallwood	[phone]

No profit forecasts or estimates

Other than the Ranimul Profit Forecast and the Ranimul Long Term Profit Forecasts, no statement in the Deltic Merger Proposal Announcement is intended as a profit forecast or estimate for any period and no statement in the Deltic Merger Proposal Announcement should be interpreted to mean that earnings or earnings per ordinary share, for Ranimul, Deltic or Revolution, respectively, for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per ordinary share for Ranimul, Deltic or Revolution, respectively.

Quantified Financial Benefits Statement

Statements of estimated cost savings and synergies relate to future actions and circumstances which, by their nature, involve risks, uncertainties and contingencies. As a result, the cost savings and synergies referred to in the Quantified Financial Benefits Statement in the Deltic Merger Proposal Announcement may not be achieved, may be achieved later or sooner than estimated, or those achieved could be materially different from those estimated.

No statement in the Quantified Financial Benefits Statement, or the Deltic Merger Proposal Announcement generally (other than the Ranimul Profit Forecast and the Ranimul Long Term Profit Forecasts), should be construed as a profit forecast or interpreted to mean that the Enlarged Group's earnings in the first full year following the merger, or in any subsequent period, would necessarily match or be greater than or be less than those of Revolution and/or Ranimul and/or Deltic for the relevant preceding financial period or any other period.

Rounding

Certain figures included in this announcement have been subjected to rounding adjustments.

Further information

Numis Securities Limited ("Numis"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting as financial adviser and broker exclusively for Revolution and no one else in connection with the matters set out in this announcement and will not regard any other person as its client in relation to the matters in this announcement and will not be responsible to anyone other than Revolution for providing the protections afforded to clients of Numis, nor for providing advice in relation to any matter referred to herein. This announcement is not intended to and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy or an invitation to purchase or subscribe for any securities or the solicitation of any vote in any jurisdiction.

As at the date of this announcement, Revolution has 50,000,000 ordinary shares of 0.1 pence each in issue and admitted to trading on the London Stock Exchange. Revolution currently holds no ordinary shares in treasury. Revolution's International Securities Identification Number ("ISIN") is GB00BVDPPV41.

Revolution's legal identifier number is 213800QG159LSTF5IH69.

Publication on website

In accordance with Rule 26.1 of the Code, a copy of this announcement will be made available (subject to certain restrictions relating to persons resident in certain restricted jurisdictions), free of charge, on Revolution's website at www.revolutionbarsgroup.com by no later than 12.00 noon on the business day following this announcement.  Neither the contents of such website nor the content of any other website accessible from hyperlinks on such website is incorporated into, or forms part of, this announcement.

Disclosure requirements of the Code

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

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

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purposes of Rule 8.3.  Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosure must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

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

 

END

 

 

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