Albion Venture Capital Trust PLC : Merger Annou...

JOINT ANNOUNCEMENT 

ALBION VENTURE CAPITAL TRUST PLC ("ALBION VCT")
ALBION PRIME VCT PLC ("PRIME")

27 JULY 2012

RECOMMENDED PROPOSALS TO MERGE ALBION VCT AND PRIME (TO BE COMPLETED PURSUANT TO SECTION 110 OF THE INSOLVENCY ACT 1986)

SUMMARY

The boards of Albion VCT and Prime announced on 16 May 2012 that they had agreed in principle to merge the companies. Both boards are pleased to advise that discussions have now concluded and they are today writing to set out the merger proposals to their respective shareholders for consideration. Both companies are managed by Albion Ventures LLP ("Albion").

The merger will, if effected, result in an enlarged company ("Enlarged Company") with net assets of over £40 million.

The merger will be effected by Prime being placed into members' voluntary liquidation pursuant to a scheme of reconstruction under Section 110 of the Insolvency Act 1986 ("Scheme"). Shareholders should note that the merger by way of the Scheme 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 both sets of shareholders, with the costs being split proportionately based on the merger net asset values. The merger is conditional on the approval of the shareholders of both companies. 

Further proposals will be put to Albion VCT shareholders including resolutions to enable the issuance of shares pursuant to the Scheme, amend its articles of association and to increase distributable reserves. Further details of the proposed resolutions are set out below.

ILLUSTRATIVE TERMS

As an illustration, had the merger been completed on 31 March 2012 (taking into account the interim dividends declared by the companies for the current year ending 31 March 2013 and buybacks and issues of shares in the companies between 31 March 2012 and 16 July 2012), every share in the capital of Prime ("Prime Share") in issue would effectively have been exchanged for 0.8823 new shares in the capital of Albion VCT ("New Albion VCT Shares"). The actual merger ratio will be calculated on 24 September 2012 in accordance with the merger terms, though the boards of Albion VCT and Prime do not expect this to be materially different, unless an unforeseen event (e.g. an exit opportunity in respect of an investment) requires a revaluation of a holding in Albion VCT and/or Prime.

BACKGROUND 

Albion VCT (formerly Close Brothers Venture Capital Trust PLC) was launched in 1996. As at 31 March 2012, Albion VCT had audited net assets of £28.4 million (78.0 pence per share) and, in aggregate, venture capital investments in 31 companies with a carrying value of £25.9 million. The total return to Albion VCT shareholders for every £1 invested as at 31 March 2012 is 197.8p. 

Prime (formerly Albion Protected VCT PLC and before that Close Brothers Protected VCT plc) was launched in 1997. As at 31 March 2012, Prime had audited net assets of £14.7 million (68.0 pence per share) and, in aggregate, venture capital investments in 30 companies with a carrying value of £13.5 million. The total return to Prime shareholders for every £1 invested as at 31 March 2012 is 115.45p 

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, facilitate better liquidity management and, as a result, may be able to maximize investment opportunities and pay a higher level of dividends to shareholders over its life. 

In September 2004, 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 (including other VCTs managed by Albion) have taken advantage of these regulations to create larger VCTs for economic and administrative efficiencies.

With the above in mind, the boards of Albion VCT and Prime entered into discussions to consider a merger of the companies to create a single larger VCT. The aim of the boards of Albion VCT and Prime is to achieve strategic benefits and reductions in the annual running costs for both sets of shareholders and establish a platform from which the investment mandate can be better operated. 

THE MERGER PURSUANT TO THE SCHEME 

Following detailed consideration of the portfolios and the financial position of Albion VCT and Prime, the boards of Albion VCT and Prime have reached agreement on the terms on which to merge Albion VCT and Prime. The mechanism by which the merger will be completed is as follows:

• Prime will be placed into members' voluntary liquidation pursuant to a scheme of reconstruction under Section 110 IA 1986; and
• all of the assets and liabilities of Prime will be transferred to Albion VCT in consideration for the issue of New Albion VCT Shares (which will be issued directly to Prime shareholders).

The merger will be completed on a relative net asset value basis, which will be calculated on the net asset values of each company as at 30 June 2012, adjusted for portfolio valuation movements and other balance sheet movements up to the calculation date of the merger and each company's allocation of the merger costs which will be split proportionately based on the merger net asset values (ignoring merger costs). The merger is conditional upon certain conditions being satisfied as further set out in the circulars being posted to shareholders today. These conditions include the approval by shareholders of Albion VCT and Prime of resolutions to be proposed at their respective general meetings (further details of which are set out below) and the passing of the resolutions to continue the companies as VCTs as contained in the companies' respective annual accounts. 

The merger will result in the creation of an enlarged company and should result in savings in running costs and simpler administration. As both companies have the same investment policies, investment manager and other main advisers, this is achievable without major additional cost or disruption to the companies and their combined portfolio of investments. 

The board of Albion VCT and Prime consider that this merger will bring a number of benefits to both groups of shareholders through:

•  the creation of a single VCT of a more economically efficient size with a greater capital base over which to spread administration, regulatory and management costs;
•  a reduction in annual running costs for the Enlarged Company compared to the total annual running costs of the separate companies;
• amalgamation of the companies' portfolios, which are substantially the same, for efficient management and administration;
• 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; and
•  enhancing the ability of the Enlarged Company to raise new funds, as well as pay dividends and buy backs in the future.

In addition, the changes announced to the VCT investment limits and size test, in particular the removal of the £1 million per annum investment limit per VCT in an investee company, will reduce the need for co-investment between sister VCTs to participate in larger investments (effective for investments made on or after 6 April 2012). 

Normal annual running costs, including investment management fees, for Albion VCT and Prime are approximately £816,000 and £456,000 respectively (£1,272,000 in aggregate). These annual costs represent approximately 2.9 per cent. of Albion VCT's unaudited net asset value and 3.1 per cent. of Prime's unaudited net asset value, in each case as at 31 March 2012. 

The aggregate anticipated cost of undertaking the merger is approximately £230,000, including VAT, legal and professional fees, stamp duty and the costs of winding up Prime. The costs of the merger will be split proportionately between Albion VCT and Prime by reference to their respective merger net assets (ignoring merger costs). 

On the assumption that the net asset value of the Enlarged Company will remain the same immediately after the merger, annual cost savings for the Enlarged Company are estimated to be approximately £168,000 per annum. This would represent 0.4 per cent. per annum of the expected net assets of the Enlarged Company. On this basis, and assuming that no new funds are raised or investments realised to meet annual costs, the boards of Albion VCT and Prime believe that the costs of the merger would be recovered within 18 months. 

The boards of Albion VCT and Prime believe that the Scheme provides an efficient way of merging the companies with a lower level of costs compared with other merger routes. Although either of the companies could have acquired all of the assets and liabilities of the other, Albion VCT was selected as the acquirer because of its larger size which would have resulted in an increased stamp duty cost if Prime had acted as the acquiring VCT.

INVESTMENT MANAGEMENT AND ADMINISTRATION ARRANGEMENTS 

Albion is the investment manager of Albion VCT and of Prime and also provides administration services to both companies.

In respect of Albion VCT, Albion is entitled to an annual investment management fee of an amount equivalent to 2 per cent. of Albion VCT's net assets and an annual administration fee which amounted to £43,528 for the year ended 31 March 2012 and is increased annually by RPI (in each case exclusive of VAT, if any). 

In respect of Prime, Albion is entitled to an annual investment management fee of an amount equivalent to 1.8 per cent. of the investments and cash held by Prime and an annual administration fee of £27,865 (in each case exclusive of VAT, if any). 

The normal annual running costs of Albion VCT and Prime (including investment management and administration fees due to Albion, directors' remuneration, registrars' fees, stockbrokers' fees, company secretarial fees, auditors' fees and irrecoverable VAT) are capped at an amount equivalent to 3.5 per cent. of the net asset value of the respective company, with any excess being paid by Albion or refunded by a reduction in Albion's respective management and administration fees.

Albion is also entitled to a performance incentive fee from both Albion VCT and Prime, subject to certain criteria being met. The companies will pay Albion an amount equal to 8 per cent. (in respect of Albion VCT and 10 per cent. (in respect of Prime) of any excess above a total return (representing dividends paid and annual growth in net asset value) of 5 per cent. per annum, paid annually in cash. Any shortfall of the target return in one year will be carried forward into subsequent periods and the incentive fee will only be paid once all previous and current target returns have been met. 

Albion will continue to provide investment management services to the Enlarged Company following the merger on the same annual fee basis as is currently in place with Albion VCT, except that Albion VCT and Albion have agreed that the management fee will be reduced from the date the merger becomes effective to an amount equivalent to 1.9 per cent of Albion VCT's net assets. The administration and performance incentive arrangements currently in place with Albion VCT shall also continue unchanged for the Enlarged Company and will automatically cover the enlarged assets and New Albion VCT Shares issued. 

Albion has, subject to the Scheme becoming effective, agreed to terminate the investment management, administration and performance incentive arrangements with Prime with effect from the date the merger becomes effective without notice or penalty. 

THE ALBION VCT BOARD 

The Albion VCT board of directors has four non-executive directors: David Watkins (Chairman), John Kerr, Jonathan Rounce and Jeff Warren. 

The board of Albion VCT and Prime 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 Jonathan Rounce will step down as a director of Albion VCT and that Ebbe Dinesen (a director of Prime) will be appointed as a director of Albion VCT (a proposed director). This will result in reducing the aggregate number of directors from eight across both companies to four for the Enlarged Company resulting, in aggregate, in an annual cost saving of £60,000. 

The directors of Prime have (subject to the Scheme becoming effective) agreed to waive directors' fees in respect of their appointments to Prime from the date the merger becomes effective. Jonathan Rounce, being a director of Albion VCT, has also agreed to terminate his appointment from the date on which the merger becomes effective without compensation. 

ALBION VCT CHANGES TO ITS ARTICLES AND SHARE ISSUE AND BUYBACK AUTHORITIES

Under CA 2006, all provisions contained in a company's memorandum of association were, from 1 October 2009, deemed to be contained in the articles. As a result, from 1 October 2009, Albion VCT has been limited as to the amount of Shares it can issue by reference to its authorised share capital of £34,000,000. In order to allow the Directors to issue the New Albion VCT Shares pursuant to the Scheme and for the purpose of further issues, the Directors propose to amend the Articles by removing such authorised share capital provisions. Albion VCT shareholder approval (pursuant to an ordinary resolution) is required to make this amendment.

In order to implement the merger, the Albion VCT board will need to be authorised to issue New Albion VCT Shares pursuant to the Scheme. 

Albion VCT also proposes at its general meeting on 17 September 2012 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 Albion VCT following the merger. These are general annual authorities taken each year.

CANCELLATION OF CAPITAL, THE SHARE PREMIUM ACCOUNT AND THE CAPITAL REDEMPTION RESERVE

The Albion VCT board considers it to be in the interest of shareholders to enhance Albion VCT's ability to support the future payment of dividends by, subject to the approval of the Court, restructuring Albion VCT's balance sheet by means of the cancellation and extinction of 49 pence of the amount paid up or credited as paid up in respect of the nominal value of its issued shares. In addition, the Albion VCT Board considers it prudent to take the opportunity also to seek approval of shareholders at the Albion VCT general meeting on 17 September 2012 of the cancellation of the share premium account and the capital redemption reserve (subject to the sanction of the Court).

 The sums set free by the proposals above would create further distributable reserves to fund distributions to shareholders and buybacks, to set off or write off losses and for other corporate purposes of Albion VCT. If Albion VCT shareholders approve the relevant resolution proposed at the Albion VCT general meeting, the Albion VCT board intends to apply to Court to sanction the cancellations (which is not conditional on the merger being completed). It is expected that the completion of the cancellations will take place before the end of the year, though each such cancellation might be undertaken independently. 

EXPECTED TIMETABLE

Albion VCT Annual General Meeting	11.00 am 17 September 2012
Albion VCT General Meeting	12.00 noon 17 September 2012
Prime Annual General Meeting	2.30 pm 17 September 2012
Prime General Meeting	3.30 pm 17 September 2012
Prime register of members closed	24 September 2012
Calculation date for the Scheme	after 5.00 pm 24 September 2012
Suspension of listing of Prime shares	7.30 am 25 September 2012
Prime Second General Meeting	10.30 am 25 September 2012
Effective date for the transfer of assets and liabilities of Prime to Albion VCT and issue of New Albion VCT Shares	25 September 2012
Announcement of results of the meetings and completion 'of the Scheme (if applicable)	25 September 2012
Admission of and dealings in the New Albion VCT Shares issued pursuant to the Scheme to commence	26 September 2012
CREST accounts credited with New Albion VCT Shares	26 September 2012
Certificates for New Albion VCT Shares dispatched	3 October 2012
Cancellation of the Prime share listing	8.00 am 24 October 2012

DOCUMENTS AND APPROVALS

Albion VCT shareholders will receive a copy of a circular convening the Albion VCT general meeting to be held on 17 September 2012 (together with the Albion VCT prospectus and Albion VCT annual report for the year ended 31 March 2012) at which Albion VCT shareholders will be invited to approve resolutions in connection with the Scheme, amending its articles of association, the renewal and increase of the authority to issue and repurchase shares and cancel capital and reserves.

Prime shareholders will receive a circular convening the Prime first general meeting on 17 September 2012 and the Prime second general meeting on 25 September 2012 (together with the Albion VCT prospectus and Prime annual report for the year ended 31 March 2012) at which Prime shareholders will be invited to approve resolutions in connection with the Scheme.

Copies of the Albion VCT prospectus and the circulars for Albion VCT and Prime have been submitted to the UK Listing Authority and will be shortly available for download both from Albion's website (www.albion-ventures.co.uk) and the national storage mechanism (www.morningstar.co.uk /uk/NSM). Copies of the companies' annual reports can also be downloaded from the same sites.

Investment Manager, Administrator and Company Secretary for Albion VCT and Prime
Albion Ventures LLP
Patrick Reeve/Henry Stanford
Telephone: [phone]

Solicitors to Albion VCT and Prime
SGH Martineau LLP
Kavita Patel/Robert Newman
Telephone: [phone] 

Sponsor to Albion VCT
BDO LLP
John Stephan/Susan Jarram
Telephone: [phone]

The directors and proposed director of Albion VCT accept responsibility for the information relating to Albion VCT and its directors and proposed director contained in this announcement. To the best of the knowledge and belief of such directors and proposed director (who have taken all reasonable care to ensure that such is the case), the information relating to Albion VCT and its 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 Prime accept responsibility for the information relating to Prime 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 Prime 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 Albion VCT and Prime and for no one else in connection with the matters described herein and will not be responsible to anyone other than Albion VCT and Prime for providing the protections afforded to clients of SGH Martineau LLP or for providing advice in relation to the matters described herein.

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

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This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients.

The owner of this announcement warrants that:
(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: Albion Venture Capital Trust PLC via Thomson Reuters ONE

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