House Of Fraser PLC

Proposed Joint Venture,etc

HOUSE OF FRASER PLC
13 July 1999

 
 
                      HOUSE OF FRASER PLC
              ('House of Fraser' or 'the Group')
                               
             PROPOSED £172.7 MILLION JOINT VENTURE
      WITH THE BRITISH LAND COMPANY PLC ('British Land')
                               
                               
House  of Fraser today announced that it is proposingto enter
into a transaction comprising the sale of 15 department stores
to BL Fraser, a joint venture company to be jointly controlled
by  House  of Fraser and British Land.  These properties  will
then  be  leased back to House of Fraser.  The transaction  is
conditional upon the approval of House of Fraser shareholders.
 
 Under the agreement :
 
-     Fifteen House of Fraser stores, primarily freehold, will
  have been sold to BL Fraser and leased back for terms of  40
  years each.
 
-    House of Fraser will receive £147.1 million in cash.
  
-     House  of  Fraser shareholders will retain a substantial
  interest  in  the properties sold and hence a share  of  any
  future appreciation on their value.
 
-    The Group is now ready to implement the next phase of its
  strategy  for growth and the cash received will be  used  to
  accelerate the supporting capital expenditure and to  reduce
  borrowings substantially.
 
The  transaction will enable the Group to address  all  stores
requiring  refurbishment.   This covers  23  stores  and  will
include  a  comprehensive refurbishment of DH Evans in  Oxford
Street  and  a  major redevelopment of the Army  and  Navy  in
Guildford.
 
The store refurbishment programme will build on the success of
the new trading format that has been established in the recent
refurbishments of the Kensington (Barkers), Leeds and  Glasgow
stores and in the new Nottingham and Bluewater stores.
 
If  the  funds  made available were solely applied  to  reduce
borrowings,  the  transaction,  excluding  one-off  costs  and
income,   would  be  expected  to  be  approximately  earnings
neutral.  However, after taking account of the investment over
time  of  the funds received, the Directors believe  that  the
transaction  will  provide  the opportunity  to  significantly
enhance earnings per share in subsequent periods.
 
John  Coleman, Chief Executive of House of Fraser, said today:
'Today,  House of Fraser enters a new era in its strategy  for
growth.  We now have the ability and resources to ensure  that
all  stores match our high standards.  In addition,  House  of
Fraser shareholders will benefit from any appreciation in  the
value of the joint venture properties.
 
'The  success of our new trading format and the private  label
brands we have introduced, combined with our state of the  art
Supply  Chain system, means that thisrefurbishment  programme
should generate strong growth and returns.
 
'This  is  an  exciting  opportunity to  develop  further  the
Group's portfolio of stores and improve shareholder value.'
 
The  House of Fraser properties acquired by BL Fraser, all  of
which  are  freehold,  or freehold and  long  leasehold,  are:
Camberley (Army & Navy); Cardiff (Howells); Carlisle (House of
Fraser);   Chichester  (Army  &  Navy);  Darlington   (Binns);
Doncaster (Binns); Grimsby (Binns); Guildford (Army  &  Navy);
Hull  (Hammonds);  Leamington Spa  (House  of  Fraser);  Leeds
(House  of  Fraser);  Lincoln (Binns); Middlesbrough  (Binns);
Perth   (Frasers);  and  Plymouth  (Dingles).   These   stores
represent  1.9  million square feet of space in aggregate  and
approximately  28  per cent of the Group's total  net  trading
space.
 
 
 
 
Further Inquiries:
 
House of Fraser PLC                     Ludgate Communications
John Coleman - Chief Executive          David Simpson
David Adams - Finance Director          Mike Tate
Tel: 0171 963 2427                      Tel:0171 253 2252
 
 
 
PROPOSED JOINT VENTURE WITH BRITISH LAND
 
 
1.   Introduction
 
House  of  Fraser  is  proposing to enter into  a  transaction
comprising  the sale of 15 department stores to BL  Fraser,  a
joint  venture company to be jointly controlled  by  House  of
Fraser and British Land.  These properties will then be leased
back to House of Fraser.
 
As  a  result of the transaction, House of Fraser will receive
£147.1 million in cash whilst retaining a substantial interest
in   the   Properties,  thereby  benefiting  from  any  future
appreciation  in their value jointly with British  Land.   The
Group is now ready to implement the next phase of its strategy
for  growth  and the cash received will be used to  accelerate
the  supporting capital expenditure programme  and  to  reduce
borrowings.
 
By virtue of its size, the transaction is conditional upon the
approval of Shareholders.
 
 
2.   Summary ofthe Transaction
 
BL  Fraser is at present a wholly-owned subsidiary of House of
Fraser  (Stores) Limited ('Stores').  In contemplation of  the
transaction, on 14 June 1999, BL Fraser acquired  six  stores,
('the Existing Properties') from Stores for a consideration of
£59.9  million, satisfied by the issue to Stores  of  998  'A'
Shares and 250,000 'C' Shares at par, and the balance of £59.7
million  as intercompany debt to be repaid on completion.   In
addition, Stores has acquired a freehold interest in  part  of
the  Leeds  store  for £1.4 million which was previously  held
under lease.
 
In the transaction :
 
i)   British  Land will subscribe for 1,000 'B' Shares  in  BL
     Fraser and £39.0 million of Loan Notes (£15.1 million  on
     a short term basis representing value added tax), in each
     case for cash at par; and
 
ii)  BL   Fraser  will  acquire  nine  further  stores   ('the
     Additional  Properties') from the Company and Stores  for
     £112.8 million.
 
As  a result of the transaction, BL Fraser will cease to be  a
wholly-owned  subsidiary of Stores, and  will  become  jointly
controlled  by  Stores and British Land who  will  have  equal
voting rights and be represented by two Directors each.
 
The  cash for the purchase of the properties at completion  by
BL  Fraser  will  be  provided from the  funds  subscribed  by
British Land, as described above, and funds drawn down under a
new secured bank loan to be provided by Eurohypo to BL Fraser.
 
The Existing Properties and the Additional Properties will  be
leased  back to House of Fraser, in each case for  an  initial
term of 40 years.  The Properties have been valued by Healey &
Baker  at  £172.7 million and the Directors consider that  the
value  to  House  of Fraser of the transaction  justifies  the
price received by it.
 
As  a  result of the transaction, House of Fraser will receive
from BL Fraser £170.9 million, of which £147.1 million will be
in  cash, £23.6 million in Loan Notes (ignoring £15.1 million,
being its share of Loan Notes subscribed on a short term basis
for  the purposes of funding value added tax) and £0.2 million
in shares.  A further £1.8 million retention will be forwarded
to House of Fraser following the completion of agreed repairs,
making £172.7 million in total.
 
The total estimated net annual rent payable by House of Fraser
and receivable by BL Fraserwill be £12,881,895.
 
 
3.   Benefits of the Transaction
 
The  Group's strategy covers the three key areas of developing
its store portfolio, improving its product offer and upgrading
its supply chain.
 
A  new trading format has been successfully established at the
Leeds,  Nottingham, Kensington, Glasgow and Bluewater  stores,
and will be implemented in new store openings at Reading, High
Wycombe and Maidstone.  Three new private label brands, Linea,
Fraser   and   Platinum  Collection,  have  been  successfully
developed.   It  is  the  Directors'  intention  to  introduce
further  private  labels  in the near  future.   Finally,  the
design  and  implementation phase of the Group's major  supply
chain  initiative  has  been  successfully  completed.    This
significantly  improves the Group's merchandise  planning  and
control, and introduces crucial replenishment systems.
 
The  Group  is  now ready to implement the next stage  of  its
strategy  for  growth.  Therefore, the Directors believe  that
there  are  compelling reasons for undertaking the transaction
at this time.  The transaction will :
 
i)   provide access to additional financial resources, thereby
     facilitating the acceleration of key capital projects;
 
ii)  reduce substantially the Group's borrowings;
 
iii) enhance the Group's property management ability by  means
     of access to British Land's expertise; and
 
iv)  ensure  the  Group  benefits from  any  potential  future
     appreciation in the value of the Properties, through  the
     Group's equity interest in BL Fraser
 
On  the  assumption  that the transaction  took  place  on  30
January 1999, the Group's most recent financial year end,  but
excluding  the subsequent application of the funds, pro  forma
net assets would have been £248.3 million.
 
If  the  funds  made available were solely applied  to  reduce
borrowings,  the  transaction,  excluding  one-off  costs  and
income,   would  be  expected  to  be  approximately  earnings
neutral.  However, after taking account of the investment over
time  of  the funds received, the Directors believe  that  the
transaction  will  provide  the opportunity  to  significantly
enhance future earnings per share in subsequent periods.
 
 
4.   Application of funds made available
 
The  proceeds received by House of Fraser will be  applied  as
follows:
 
i)   Acceleration of existing capital programme
 
     The transaction will provide the funding for the Group to
     accelerate  the  next  stage of  its  capital  investment
     programme, by :
     
     -    comprehensively refurbishing DH Evans in Oxford Street at
       an estimated cost of £12.0 million.  This is a prime location
       and it is anticipated that this refurbishment will revitalise
       the store, leading to a significant uplift in sales and
       profitability, similar to that experienced at Barkers of
       Kensington following its refurbishment;
 
     -    redeveloping the Army & Navy store in Guildford at an
       estimated cost of £14.0 million.  This major redevelopment
       will both extend and fully refurbish the store, allowing the
       Group to maximise the potential of one of its best locations;
       and
       
     -    a further programme of refurbishment.  It will provide
       the  Group with £24.0 million which, combined with  the
       available funds from ongoing cash flows, will enable it to
       address all stores requiring refurbishment investment.  The
       level of investment will vary from a full refurbishment to a
       low cost upgrade, depending on the existing condition of the
       store and its trading potential.  This refurbishment programme
       will cover 21 stores.
 
ii)  Repayment of existing finance facility
 
     In  addition  to overdraft facilities, the  Group  has  a
     Banking  Agreement that provides it with a £100.0 million
     term loan and a £125.0 million revolving credit facility.
     Currently,  £90.0 million remains outstanding  under  the
     term loan.
     
     Following  completion, the amount outstanding  under  the
     term  loan will be repaid in full and the £125.0  million
     revolving  credit facility will be refinanced.   To  this
     end,  the  Group has entered into an agreement with  HSBC
     for  the  provision  of a new £125.0  million  five  year
     revolving  creditfacility, conditional  on  shareholder
     approval  of the transaction.  The terms of this facility
     are  similar to those of the existing Banking  Agreement.
     This  new  facility is unsecured and fully  underwritten.
     In   consultation  with  the  Company,  HSBC  intends  to
     syndicate   the  facility  to  further  banks   following
     completion.
 
 
5.   Leases
 
i)   Term

  The  leases  are  for a contractual term of  40  years  from
  completion.   The tenant has an option to renew  each  lease
  for a further term of 35 years.
  
ii)  Rent review
 
  Rent reviews are set to occur on every fifth anniversary  of
  the  completion.   With effect from each  review  date,  the
  principal yearly rent payable by the tenant is to be (a) the
  principal   yearly  rentpayable  immediately  before   the
  relevant  review date or (b) the open market rental  of  the
  demised  premises at the relevant review date, whichever  is
  the  greater, with a minimum rent after the first and second
  rent review dates of the initial rent increased by three per
  cent per annum compounded annually.
  
iii) Removal of individual properties
 
  If  House  of Fraser wishes to cease to trade at a property,
  it  can  serve  notice  to  surrender  its  lease  for  that
  property.   BL  Fraser  may accept  the  surrender  and  the
  property will then be marketed and sold.
 
  If  BL Fraser does not accept the surrender, House of Fraser
  may require BL Fraser to sell the property to it.  If such a
  sale  is  made,  House of Fraser must cease trading  at  the
  property within nine months of the purchase being completed.
  
 
6.   Current trading
 
An  update  on  current trading was published  at  the  Annual
General Meeting of House of Fraser on 8 June 1999, and covered
performance  over  the first 18 weeks of the  year.   At  that
stage, total sales for the business were ahead of last year by
0.7 per cent, within which like-for-like sales were 1 per cent
lower.   The like-for-like sales performance for the 23  weeks
to 10 July 1999 remains in line with this.
 
The  announcement of the interim results for  the  six  months
ending 31 July 1999 will be made on 29 September 1999.
 
The  Directors have no reason to believe, in light  of  recent
trading, that the Company will not report satisfactory results
for the current financial year.
 
 
7.   Extraordinary General Meeting
 
An  EGM,  at which an ordinary resolution seeking approval  of
the transaction will be proposed to shareholders, will be held
at 9.00am on 30 July 1999 at the Millennium Conference Centre,
Harrington Gardens, London  SW7 4LH.
 
 
 
House  of  Fraser will hold a briefing for analysts at  9.45am
for  10.00am  at  Warburg Dillon Read,  1/2  Finsbury  Avenue,
London, EC2M 2PA.