Signing of Heads of Terms
Equest Investments Balkans Ltd
26 February 2008
26 February 2008
EQUEST INVESTMENTS BALKANS LTD
('EIB' or the 'Company')
Signing of Heads of Terms with Equest Capital Management Limited
Introduction
Equest Investments Balkans Ltd today announces the signing of non-binding Heads of Terms (the 'Heads of Terms') with,
inter alia, Equest Capital Management Limited ('ECML' or the 'Investment Manager'), its investment manager, relating to
proposed changes to the structure of the management of the Company.
Under the Proposals, EIB is to be transformed from an externally managed fund structure to an internally managed
holding company structure. The Proposals include internalising the key management team within the Investment Manager as
the executive management of the Company and acquiring the Investment Manager's operating platform for EIB in London,
Sofia, Bucharest and Belgrade. The annual management fee of 2.5% per annum currently payable by EIB to ECML will
terminate and be replaced by new compensation arrangements and restricted equity and warrants under a new four year
service agreement. EIB will also establish a new long-term incentive plan ('LTIP') in relation to performance of the
management with effect from 1 January 2008.
Background
On 13 December 2007, the board of directors (the 'Board') of the Company announced that it was evaluating a number of
strategic options including changing the structure of the Company from an externally managed fund to more of an
internally managed holding company structure, whilst retaining the Company's Investment Manager as the operative
management of the Company.
Following consultations with a number of key shareholders representing a majority of the Company's shares, and with the
Company's advisers, the Board entered into discussions with the Investment Manager in order to seek to align more
closely the interests of shareholders and the Investment Manager. The Board believes that the internalisation of the
management of the Company will ensure the most effective means by which the Company manages its existing investments
and the delivery of shareholder value.
The Proposals are expected to benefit the strategic development of EIB. The Company is seeking to continue its growth
across the South East European region as an active and concentrated holding company owning, managing and developing its
principal holdings in retail (including TechnomarketDomo), waste management & infrastructure (including Novera) and
select property developments (including the Borovets resort development). Furthermore the Proposals and other
associated changes outlined below are expected to improve the Company's access to debt finance and lead to improved
analyst coverage of the Company.
The Proposals
The Board believes the benefits of the Proposals include:
Key management of the Investment Manager (being Kari Haataja, Petri Karjalainen and Georgi Krumov) will become
executives of the Company and commit to devote substantially all of their time to the Company with service contracts
for an initial term of four years renewable on an annual basis, thereafter. It is expected that certain of the key
managers will join the board of the Company in an executive capacity;
Acquisition of the EIB management team, operating platform and rights of use for the Equest brand name in the South
East European region;
EIB's annual management fee (currently Euros 5.76 million per annum) will be terminated with effect from 1 January 2008
and replaced with service agreements and a technical support agreement, which will, it is expected, provide cost
savings of approximately 50 per cent. of the current annual management fee to the shareholders of EIB;
Additional cost savings to shareholders over time from the termination of contracts with other third party service
providers associated with a fund structure including administrators and custodians; and
Key management of the Investment Manager agreeing not to raise any new external funds to be managed by the Key
Management team, but with a carve out for continuing with their existing obligations to Equest Balkan Properties PLC
and for other non-competing businesses.
In return for terminating the existing management arrangements, the Investment Manager will receive shares in the
Company representing 5% of the Company's issued share capital, (on a fully diluted basis) and will be granted warrants
to purchase, for nil consideration, shares representing approximately 3% of the Company's issued share capital, on a
fully diluted basis. Any shares issued to the Investment Manager as part of the Proposals will be subject to lock in
arrangements and exercise of the warrants will be subject to the conditions outlined in the Appendix to this
announcement.
The Proposals are subject to the negotiation of detailed agreements and implementation will be subject to the approval
of shareholders in general meeting, which, is expected to be held in April 2008.
Further details of the Heads of Terms in connection with the Proposals are set out in the Appendix to this
announcement.
Listings
At present the ordinary shares of the Company are listed for trading on the Irish Stock Exchange and on the AIM market
of the London Stock Exchange. Should the Proposals be implemented, the Irish Stock Exchange has confirmed that the
structure of the Company following implementation would be such that the Company will no longer comply with the rules
relating to the Investment Funds section of the Irish Stock Exchange Listing requirements. Accordingly, implementation
of the Proposals will be conditional upon de-listing of the Company's shares from the Irish Stock Exchange.
In addition, as previously discussed, the Board will pursue a listing of the Company's shares on the regulated stock
exchanges of Sofia and/or Bucharest. All of the investments of the Company are concentrated in this region and, since
its launch in 2004, the Company and the Investment Manager have enjoyed strong brand recognition in the region. The
Board may bring forward proposals to approve these listings at the same time that approval is sought for the Proposals.
The planned IPO of TechnomarketDomo is currently expected to be undertaken in the second quarter of 2008, on the Sofia
and/or Bucharest Stock Exchanges, which will further increase the profile of the Company within the region.
Commenting on these strategic developments, John Carrington, chairman of EIB, said:
'The Proposals will provide EIB with direct access to the significant investment resources, expertise and brand value
of Equest within South Eastern Europe. The transition represents a significant step in the transformation of EIB to an
internally managed active investment group focused on leveraging the potential of South Eastern Europe across several
key sectors'.
For further information please contact:
Equest Partners Limited Petri Karjalainen + 44 20 7240 7600
Naomi Kora
Collins Stewart Europe Limited Hugh Field + 44 20 7523 8350
Financial Dynamics Ed Gascoigne-Pees + 44 20 7831 3113
Nick Henderson
APPENDIX
SUMMARY OF THE HEADS OF TERMS
The Heads of Terms, which are not legally binding, provide that the Company shall undertake the following actions for
the purpose of implementing the Proposals:
1. EIB shall enter into a service agreement (the 'Service Contract') with Equest Capital Limited ('ECL'), the
parent company of ECML, for an initial term of fours years, renewable on an annual basis thereafter. The Service
Contract will contain provisions whereby ECL shall procure the provision of the services of Petri Karjalainen, Kari
Haataja and Georgi Krumov (the 'Executives') and other senior managers to EIB. The Executives shall devote
substantially all of their professional time and attention (whether as managers or directors of Company) to the affairs
of the Company and shall be subject to customary restrictive covenants. The compensation arrangements under the Service
Contract shall be in line with remuneration arrangements that are customary for senior executives operating similarly
situated companies. In addition, during a transition period, ECL will provide 'back office' logistics necessary for
EIB's day to day operations under a technical services agreement (the 'Technical Services Agreement') for an annual fee
representing ECL's actual cost of providing the services without any profit to ECL.
It is expected that the Service Contract and the Technical Services Agreement will cost no more than 50 per
cent. of the annual management fee currently payable to ECML.
2. The Company shall put into place a new long term share incentive plan ('LTIP') that will entitle the
Executives to be awarded shares in the Company. Such LTIP is expected to offer participation on comparable economics to
the existing performance arrangements with ECML i.e. 20% of excess performance over a hurdle rate. The LTIP will
incentivise the Executives based on a balance of NAV growth and long term share price performance over the closing NAV/
share price on 31 December 2007. The LTIP will be structured to provide transparent alignment of interests between the
Executives and the Company's shareholders. Shares issued under the LTIP will be issued within 90 days of the end of
each annual performance period and shall be subject to lock-up arrangements.
3. In the light of the proposed changes, EIB shall terminate the existing investment management agreement
between ECML and the Company (the 'Investment Management Agreement') in consideration for the issue by EIB to ECL of:
941,540 ordinary shares of no par value representing 5% of the issued share capital of EIB on a fully diluted basis
(the 'Consideration Shares'); and
warrants entitling ECL to purchase for nil consideration 564,925 ordinary shares of no par value representing 3% of the
issued share capital of EIB on a current fully diluted basis (the 'Warrants'). The Warrants will be exercisable at any
time after the expiry of 12 months from 1 January 2008 on the condition that the last reported NAV for EIB immediately
prior to the exercise of the Warrants is not less than the reported NAV as at 31 December 2007 (for the avoidance of
doubt excluding the Consideration Shares).
In addition, the current investment advisory agreement between the Company, the Investment Manager and Equest Partners
Limited will also be terminated.
Lock-up arrangements will be put into place in respect of the Consideration Shares and the Warrants to reflect ECL's
long-term commitment to the success of EIB.
This announcement has been issued through the Companies Announcement Service of
The Irish Stock Exchange.
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