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Heywood Williams Grp (HYWD)

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Thursday 01 October, 2009

Heywood Williams Grp

Proposed Capital Restructurin

RNS Number : 0162A
Heywood Williams Group PLC
01 October 2009
 



1 October, 2009


Heywood Williams Group PLC


Proposed Capital Restructuring



Introduction

Heywood Williams announces today that it has reached agreement with its UK Banking Syndicate on the terms of a proposed debt and share capital restructuring, including a proposed cancellation of the admission of its Ordinary Shares to the Official List and to trading on the London Stock Exchange's market for listed securities.


Key Points

The Restructuring is designed to put in place an appropriate long term capital structure to enable the Group to trade through the current adverse economic conditions and to have the capability grow as its markets recover.  The Board believes that the proposed Restructuring represents the only available route to achieving a long term sustainable capital structure for the benefit of all stakeholders in the current market conditions.  


The key terms of the Restructuring are:


  • A debt for equity exchange of £21 million of existing bank debt;

  • A £6 million increase in the Group's committed facilities from the UK Banking Syndicate to £45 million;

  • Agreement with the Group's UK independent Pension Trustee to defer deficit repair contributions, on an affordability basis, until 2014;

  • Immediately following the Restructuring, the UK Banking Syndicate and its Board representative will together hold 80% of the Company's issued share capital on a fully diluted basis, with existing Shareholders holding 10% and, as a requirement of the Restructuring, the executive members of the Board and certain other members of the senior management also holding 10%; and

  • Cancellation of admission of Ordinary Shares to the Official List and to trading on the London Stock Exchange's market for listed securities.

The proposals are conditional upon, amongst other things, Shareholder approval being obtained at a General Meeting to approve all the resolutions associated with the proposed Restructuring of Heywood Williams. The General Meeting has been convened for 11.00 am on 20 October and will be held at the offices of Pinsent Masons LLP at 3 Hardman StreetManchester M3 3AU.



Roger Boyes, Chairman of Heywood Williams, said:


'The Board believes that the proposed Restructuring and related proposals present the best prospects for securing a significantly improved financial structure for the Group and the continuing support of its UK Banking Syndicate, upon which the Group is dependent for its ability to trade.'


Board Recommendation

The proposed long term capital structure and associated restructuring is designed to address the adverse impact of the current major market downturns on Heywood Williams' indebtedness and associated interest costs, whilst retaining the possibility of delivering value to Shareholders in the future. It will also remove any capital repayments until 2013 and UK pension deficit repair contributions until 2014, which is expected to further enhance cash flow generation. Furthermore, the Restructuring will provide appropriate headroom at peak drawings and, as such, sufficient working capital should be available to meet the increased demand as the Group's markets recover. As a result of all these actions, the credit profile of the Group is expected to be enhanced with regard to suppliers and customers alike.  


The Board has considered and explored a range of strategic alternatives in conjunction with its advisers. The Board has concluded that the proposed Restructuring represents the only available route to achieving a long term sustainable capital structure for the benefit of all stakeholders in the current market conditions.


It is important to note that the Board believes that failure to approve the Restructuring proposals would immediately have material and very detrimental consequences for the Group. In such circumstances it is highly unlikely that the Ordinary Shares would retain any value.


Consequently, the Board strongly recommends that Shareholders vote in favour of the Restructuring proposals announced today.


For further information, please contact:





Contacts:

Heywood Williams Group PLC

Robert Barr, Chief Executive

Mike Richards, Finance Director


Tel: 01422 328 850



Financial Dynamics 

Tel: 020 7831 3113


Jon Simmons/Sophie Moate


Rothschild

Ed Welsh

Chris Alonso

    



Tel: 020 7280 5000

        

 





LETTER FROM THE CHAIRMAN OF HEYWOOD WILLIAMS GROUP PLC

 

 

HEYWOOD WILLIAMS GROUP PLC
(Incorporated under the Companies Act 1985 and registered in England and Wales No. 5954792)

 




Directors


Registered Office

Roger Boyes
Robert Barr
Mike Richards
William Schmuhl
Mark Wild
Graham Menzies
Stephen Rogers

(Non-Executive Chairman)
(Chief Executive)
(Finance Director)
(Chairman - US operations)
(Group Counsel and Company Secretary)
(Non-Executive Director)
(Non-Executive Director)

Brindley House
Premier Way
Lowfields Business Park
Elland
West Yorkshire
HX5 9HF





1 October 2009

To Shareholders and, for information only, to holders of options over Ordinary Shares under the Heywood Williams Share Schemes

 

Dear Shareholder

Proposed Restructuring, proposed cancellation of admission of Ordinary Shares to the Official List and to trading on the London Stock Exchange's market for listed securities, approval of Related Party Transaction, approval of waiver of Rule 9 of the Takeover Code and Notice of General Meeting

1.    Overview

Today, Heywood Williams announced that it had reached agreement with its UK Banking Syndicate on the terms of a proposed debt and share capital restructuring of Heywood Williams, including the proposed Cancellation of the admission of its Ordinary Shares to the Official List and to trading on the London Stock Exchange's market for listed securities.

The Restructuring is designed to put in place an appropriate long term capital structure to enable the Group to trade through the current adverse economic conditions and to have the capability to grow as its markets recover. The key terms of the Restructuring are:

    a debt for equity exchange of £21 million of existing bank debt resulting in the issue of 14,410,974 A Ordinary Shares to the UK Banking Syndicate;

    a grant of Warrants over 6,600,362 A Ordinary Shares to the UK Banking Syndicate;

    £6 million increase in the Group's committed facilities from the UK Banking Syndicate to £45 million following the Restructuring;

    agreement with the Pension Trustee to defer deficit repair contributions, on an affordability basis, until 2014;

    immediately following completion of the Restructuring the UK Banking Syndicate and Mike McTighe (who will be appointed to the Board by the UK Banking Syndicate), will together be interested in 80 per cent. of the Company's issued share capital on a fully diluted basis, with Existing Shareholders holding 10 per cent. and the executive members of the Board and certain other members of the senior management also being interested in 10 per cent.; and

    cancellation of admission of Ordinary Shares to the Official List and to trading on the London Stock Exchange's market for listed securities.

The Proposals are conditional upon, inter alia, Shareholders' approval being obtained at the General Meeting. Given that the Related Party Directors will be participating in the Proposals, the Restructuring requires approval as a related party transaction under the Listing Rules. In addition, the Listing Rules require that the Cancellation is subject to the prior approval of Shareholders. Further details of the Related Party Transaction and the Cancellation are set out in paragraphs 3.6 and 4 below.

The Restructuring and other Proposals are also conditional upon, inter alia, the approval by the Independent Shareholders at the General Meeting on a poll of (i) the Shared Ownership Plan and (ii) the waiver of Rule 9 of the Takeover Code granted by the Takeover Panel. Further details of the Shared Ownership Plan and the Rule 9 Waiver are set out in paragraphs 3.4 and 8 below.

Accordingly, the purpose of this document is to provide Shareholders with the background to and reasons for the Proposals, to explain why your Board considers the Proposals to be in the best interests of the Company and its Shareholders as a whole and to seek the requisite approval from Shareholders for the Proposals. Further details of the Restructuring and the Proposals are contained in Part III of this document.

At the end of this document you will find notice of a General Meeting which has been convened for 11.00 am on 20 October 2009 for the purpose of considering and, if thought fit, approving Resolutions to implement the Proposals.

The Proposals set out in this document are very important and require your close attention. Your Board is of the view that the Proposals present the best prospects for securing a significantly improved financial structure for the Group and the continuing support of its UK Banking Syndicate, upon which the Group is dependent for its ability to trade. Your attention is drawn to the recommendation of the Board set out in paragraph 19 below.

Shareholders should note that the Directors will not be able to proceed with the Restructuring and other Proposals unless and until all the proposed Resolutions are approved at the General Meeting. 

Furthermore, Shareholders should note that the Board believes that, without the Restructuring and other Proposals in place, it is highly likely that the Group would be unable to continue to operate within its existing banking facilities and would require significant immediate emergency funding. The Board is of the view that it is probable that appropriate emergency funding sources would not be available and, in this event, the Group would be unable to sustain its position as a going concern. Therefore, it is highly likely that failure to pass the Resolutions would lead the Group to enter into administration or some other form of insolvency procedure.

You are strongly urged to vote in favour of the Resolutions to be proposed at the General Meeting by completing the enclosed Form of Proxy and returning it to the address marked as soon as possible and, in any event, so as to be received by no later than 11.00 am on 18 October 2009.

You may, if you wish, register the appointment of a proxy or proxies, or voting instructions for the General Meeting electronically by logging on to www.sharevote.co.uk. You will need to use the series of numbers made up of your Voting ID, Task ID and Shareholder Reference Number printed on your Form of Proxy. Full details of the procedure are given on the website referred to above. The proxy appointment and/or voting instructions must be received by Equiniti at least 48 hours before the appointed time of the General Meeting, that is to say, no later than 11.00 am on 18 October 2009. Please note that any electronic communication sent to the Company or Equiniti that is found to contain a computer virus will not be accepted. The use of the internet service in connection with the General Meeting is governed by Equiniti's conditions of use set out on the website, www.sharevote.co.uk, and may be read by logging on to that site.

2.    Background to and reasons for the Restructuring and Cancellation

2.1    Background

Since the latter part of 2007 and during 2008, the Group has faced unprecedented downturns in the building products markets it serves due to the impact of the global credit crisis on consumer spending. Approximately 80 per cent. of the Group's sales are branded building products to customers in the home improvement and residential new build market segments across Europe and North America. All of the markets that the Group serves are suffering from one of the most severe downturns experienced in recent economic cycles. Consumer credit for housing related activities has reduced significantly whilst becoming more expensive. These very tough market conditions in the home improvement and residential new build markets deteriorated much further in the second half of 2008 and the first half of 2009. It is estimated that the global residential housing markets in which the Group operates have declined on average by 40 per cent. since the second half of 2007. These adverse market conditions are expected to continue for the remainder of 2009, and your Board does not anticipate any significant market recovery until well into 2010. Group sales in the first half of 2009 were down 24 per cent. compared to the same period in 2008.

The Group's specialist distribution businesses responded rapidly to the adverse market conditions by reducing costs significantly, defending margins, continuing to drive new product introductions and, most importantly in the Board's view, generating cash by reducing working capital. Since 31 December 2007, for example, the Group has reduced headcount by over 35 per cent. and a reduction of working capital generated a cash inflow of £5.0 million in 2008.

The significant downturn in the Group's markets has had a major impact on revenue, which reduced overall by 12.5 per cent. to £219.2 million in 2008 (£250.5 million in 2007). The reduction in total revenue of £31.3 million had a substantial impact on adjusted operating profit, which decreased to £2.5 million from £11.7 million in 2007. After finance costs and share of associate losses, the adjusted loss before taxation was £2.3m (2007: £9.1 million profit). After interest and tax, the adjusted loss for the year resulted in an adjusted diluted loss per share of 4.0 pence (2007: 7.7 pence earnings per share). The Group had net debt of £46.7 million at the end of 2008 (2007: £36.9 million), an increase of £9.8 million due primarily to payment of the deferred consideration of £8.0 million in respect of the Carlisle Brass acquisition.

The downturn has continued into the first half of 2009 impacting the Group further, with revenue reduced overall by 23.9 per cent. to £88.5 million in the six months to June 2009 (£116.3 million in the six months to June 2008). The Group reported an operating loss before exceptionals of £5.2 million in the six months to 30 June 2009 (profit of £3.5 million in the six months to June 2008). For the six months to 30 June 2009, exceptional items of £1.9m million were incurred, primarily in respect of severance costs and advisory fees associated with bank facility negotiations. After interest, tax and before exceptionals, the loss for the six months to 30 June 2009 resulted in a diluted loss per share of 9.0 pence (six months to 30 June 2008: 1.0 pence earnings per share). As at 30 June 2009, the Group had net debt of £47.6 million compared to £46.7 million as at 31 December 2008.1

2.2    Reasons for the Restructuring

The combination of the economic downturn and the reduction in the availability of consumer credit have had a direct adverse impact on the Group's performance and led to a significant reduction in cash flows generated by the Group's businesses. As a result, the Group will not be able to generate sufficient cash flows to sustain interest and principal payments on its debt facilities based on its current capital structure and indebtedness. During the first half of 2008, your Board recognised that the deterioration in the Group's operating performance would affect its ability to meet its banking covenants during the second half of 2008, as well as its scheduled debt principal repayments due to the UK Banking Syndicate and its scheduled UK pension deficit repair contributions in 2009. The management therefore entered into early discussions with the UK Banking Syndicate and the Pension Trustee to agree a solution. The UK Banking Syndicate agreed to issue two covenant waiver letters in September and December 2008.

After an in-depth review of the Group's markets and its competitive positioning, your Board concluded that the depth and length of the current downturn would continue to affect the Group in 2009 and for the majority of 2010, and that a recovery to pre-downturn activity levels would take a number of years to achieve. As a result, during the first half of 2009, it was agreed with the UK Banking Syndicate to establish a medium term solution, in order to provide sufficient time to organise and implement a long term sustainable capital structure, and in order to avoid covenant breaches that could have had a negative impact on the Group's business relationships and activity.

 

As part of the medium term solution, in February 2009, the Pension Trustee agreed to defer £3.75 million of pension deficit repair contributions due from January 2009 to March 2010 until April 2010 onwards. Also in February 2009, the UK Banking Syndicate confirmed the availability of the existing £60.0 million committed facility and agreed new covenants through to June 2010. These covenants are based on maximum absolute variances against budget for EBITDA, operating cash flow and operating net assets of the UK, certain Irish and the Chinese companies within the Group and are measured on a quarterly basis. The UK Banking Syndicate also agreed to defer £6.7 million of repayments of the term loan due quarterly from September 2009 to June 2010. These deferred capital repayments are to be paid over the remaining repayment term of the loan from September 2010 to September 2011. This agreement was predicated on the Group implementing a long term sustainable capital structure solution by the end of November 2009 (the UK Banking Syndicate having approved an extension to this milestone from the original date of end of September 2009 until the end of November 2009), and contained different milestones generating additional payment obligations if missed. Your Board is pleased to confirm that all of these milestones have been achieved to date and that no such additional payment obligations have been incurred under the agreement. Failure to reach the final milestone of implementing a long term sustainable capital structure by the end of November 2009 would trigger a payment of £4.5 million to the UK Banking Syndicate, which would be payable in five equal quarterly instalments from the Group's quarter end date falling on or about 30 September 2010.


1    The financial information contained in this paragraph has been extracted without material adjustment from the Group's audited financial results for the years ended 31 December 2007 and 31 December 2008, and from the unaudited financial results for the six months ended 30 June 2009.

In addition, in January 2009, the Group was able to replace its expiring US facility with a new US$10.0 million (£6.2 million) revolving credit facility from Cole Taylor Bank, which expires in January 20122. The facility is subject to net worth and earnings covenants if utilisation of the facility exceeds US$7.0 million (£4.3 million) such that currently the limit on the facility is, in effect, US$7.0 million (£4.3 million). The facility is for utilisation within the US only.

During 2008, at the same time as the Group was initiating discussions with its UK Banking Syndicate, your Board considered and explored various options to try and generate sufficient cash in order to address the level of the Group's indebtedness and maximise value for Shareholders. However, in your Board's opinion no viable alternative solution was available. Consequently, your Board believes that the Restructuring and other Proposals represent the only available route to achieving a stronger balance sheet and providing a long term sustainable capital structure for the Group.

In reaching its conclusions that the Restructuring and the other Proposals represent the only available route to achieving a stronger balance sheet and providing a long term sustainable capital structure for the Group, your Board relied on its assessment of the Group's current indebtedness, the current depressed operating performance, the lack of any expected significant market recovery until well into 2010 and the lack of alternative corporate solutions. In addition, your Board does not believe that it would be possible, in the current market conditions, to raise sufficient new finance by way of an equity issue. In the absence of any new equity, the Board reached agreement with its UK Banking Syndicate and Pension Trustee to the proposed Restructuring and related Proposals.

3.    Outline of the Restructuring

3.1    Overview

As at 30 June 2009, the Group's unaudited net borrowings were £47.6 million3, including £51.0 million in respect of the UK Banking Syndicate's £60.0 million committed facility. In addition, the Group's UK Pension Scheme deficit was valued at £11.0 million on an IAS 19 basis at 30 June 2009 but has been valued by the actuary of the Pension Scheme at £43.5 million on an actuarial funding basis as at 31 December 2008.

Your Board has agreed with the Pension Trustee that, based on the current forecasts and subject to completion of the Proposals, no pension deficit repair contributions will be made until 2014 unless the business outperforms the current plan. From 2014, contributions are proposed to revert to the pre-Restructuring agreed level of £3.0 million per annum, gradually increasing to £5.0 million per annum from 2018. Your Board has also agreed with the Pension Trustee the assumptions relating to the 31 December 2008 triennial valuation of the Pension Scheme, resulting in a pension deficit of £43.5 million referred to above.

 

It is intended that the Restructuring will provide the Group with a long term sustainable capital structure. On completion of the Restructuring, the UK Banking Syndicate has agreed to convert £21.0 million of existing debt into equity and to provide £6.0 million of incremental committed working capital facilities to help the Group address its liquidity requirement in the short and medium term. The debt for equity conversion will result in a significant reduction in the Group's borrowings. Amended UK Banking Syndicate committed facilities available to the Group totalling £45.0 million will comprise a £30.0 million term loan, an £11.0 million revolving credit facility, a £1.5 million term loan and an interest roll up term loan of £2.5 million. An arrangement fee of £1.4 million will become payable on 30 September 2013 in connection with the amended committed facilities, if the Restructuring proceeds.

In exchange for the conversion of £21.0 million of existing debt into equity, the UK Banking Syndicate and Mike McTighe will, in aggregate, receive 80 per cent. of the equity, on a fully diluted basis, post Restructuring. In order to align the interests of the UK Banking Syndicate and the Management Team in the future of the Group, the UK Banking Syndicate requires that, as part of the Restructuring, an appropriate management incentive package is agreed, whereby the Management Team is interested in 10 per cent. of the equity immediately following the Restructuring. This will be effected by the Management Team, jointly with the EBT Trustee, subscribing to C Ordinary Shares as described in paragraph 3.4 below. The Proposals will result in Existing Shareholders holding 10 per cent. of the share capital post Restructuring on a fully diluted basis. Of the 80 per cent. stake that would otherwise be allocated to the UK Banking Syndicate, 2 per cent. will be held by Mike McTighe, who will be appointed to the Board by the UK Banking Syndicate. Mike McTighe will also hold these shares jointly with the EBT Trustee in a similar manner to the Management Team.


2    GBP-USD exchange rate of 1.62 as at 22 September 2009 used to convert USD facilities to GBP equivalents.

3    Extracted without material adjustment from the Group's unaudited financial results for the interim period ended 30 June 2009.


Details of the UK Banking Syndicate's proposed equity interests are described in Part III of this document. It will comprise a combination of A Ordinary Shares and Warrants. As at 1 October 2009, assuming that all the Warrants are exercised in full, the UK Banking Syndicate would hold shares representing, in aggregate, 78 per cent. of the Company's equity.

The UK Banking Syndicate has made it clear to your Board concerning the Restructuring that it is not in a position to improve the terms of the Restructuring beyond those set out in this document.

The Board believes that the implementation of the Proposals will create a stronger foundation for the Group's business going forward, from both a financial and trading perspective.

As part of the Proposals, the prior consent of the Majority Investors will be required in order for the Company or any Group Company to take certain actions. Shareholders should note that the actions which require the Majority Investors' prior consent are extensive in nature and that the Board will be unable to agree any material transactions without the Majority Investors' prior consent. Details of the actions which will require such consent are set out in paragraph 2.7(f) of Part III of this document.

From a financial perspective, both the new debt service payment schedule and the new amortisation schedule should reduce the pressure on operating cash flow and enable the Group to address its obligations. The Proposals are intended to provide additional headroom at peak drawings and, as such, sufficient working capital should be available to meet the increased demand as the Group's markets recover.

In addition, the Proposals are expected to improve the credit rating of the Group and provide additional stability to the relationships of the Group with its customers, suppliers, employees and other stakeholders.

3.2    Share sub-division and partial share reclassification

To facilitate the Restructuring, the Company will undertake a share sub-division and partial share reclassification. Under the share sub-division, each existing Ordinary Share of 20 pence will be sub-divided into 20 new D Ordinary Shares, each having a nominal value of one penny. Therefore, the Company's existing 84,853,519 issued Ordinary Shares of 20 pence nominal value will initially be split into 1,697,070,380 D Ordinary Shares in the Company each having a nominal value of one penny.

Under the terms of the partial share reclassification, of the 1,697,070,380 D Ordinary Shares arising as a result of the share sub-division, 629 out of every 630 D Ordinary Shares will be converted into Deferred Shares. One share out of the 630 shares will remain as a D Ordinary Share with a nominal value of one penny each. Where an individual holding of D Ordinary Shares is not wholly divisible by 630, the 629 or fewer D Ordinary Shares that are in excess of the whole multiple of 630 will be converted into Deferred Shares. After the proposed share sub-division and partial reclassification, Existing Shareholders will therefore hold, in aggregate, 2,693,761 D Ordinary Shares and 1,694,376,619 Deferred Shares (subject to adjustment for fractional entitlements as described above).

 

The Deferred Shares are being issued for technical reasons and, once issued, will confer no voting or economic rights upon Shareholders. No share certificates will be issued in respect of the Deferred Shares. Shortly after the completion of the Restructuring, it is anticipated that the Company will exercise its right under the new Articles to procure that all of the Deferred Shares are transferred to the Company for an aggregate price of one penny and cancelled. Shareholders will not receive any payment as a result of this transfer to the Company of their Deferred Shares, but nor will the transfer cause Shareholders to forego any valuable economic or voting rights. Further details in relation to the Company's right to effect this transfer are set out in paragraph 2.9(e)(iv) of Part III of this document.

Pending receipt of a share certificate in respect of the D Ordinary Shares, Shareholders wishing to transfer their D Ordinary Shares will be required to produce their existing Heywood Williams share certificates to the Registrars. With effect from the date of the completion of the Restructuring, share certificate(s) for existing Ordinary Shares will cease to be valid. On receipt of a share certificate in respect of his D Ordinary Shares, a Shareholder should destroy his share certificates in respect of existing Ordinary Shares.

3.3    Debt for equity exchange

As part of the Restructuring, the UK Banking Syndicate has agreed to convert £21 million owed to them under the Facilities Agreement into A Ordinary Shares representing 70.86 per cent. of the enlarged ordinary share capital of the Company immediately following the issue of those A Ordinary Shares, the B Ordinary Shares and the C Ordinary Shares (as referred to below) and the share sub-division and reclassification in respect of D Ordinary Shares referred to above (but excluding for this purpose, all A Ordinary Shares arising from the exercise of the Warrants).

The UK Banking Syndicate will be granted Warrants over 6,600,362 A Ordinary Shares. Separately, the Warrants will only become exercisable by the UK Banking Syndicate either (i) immediately before a successful application for admission of all or any class of share capital of the Company on the Official List, the London Stock Exchange's AIM market or any other recognised investment exchange; or (ii) immediately before the sale of 51 per cent. or more of the share capital of the Company.

Mike McTighe and the EBT Trustee will jointly subscribe for B Ordinary Shares representing 2.0 per cent. of the enlarged fully diluted ordinary share capital of the Company following the issue of those B Ordinary Shares, the A Ordinary Shares (including A Ordinary Shares to be issued following the exercise of the Warrants), the C Ordinary Shares (as referred to below) and the share sub-division and reclassification in respect of D Ordinary Shares referred to above.

Based on the assumptions set out below, the following table provides summary details of the UK Banking Syndicate's and Mike McTighe's expected respective interests in Heywood Williams' issued share capital on completion of the Restructuring:

 




Name of Shareholders

Percentage of issued ordinary share capital immediately following completion of
the Restructuring

Percentage of issued ordinary Share capital immediately following exercise of Warrants

Lloyds Banking Group (shares being allotted to
Bank of Scotland plc and Lloyds TSB Bank plc
or as they direct)

47.68

52.00

National Australia Bank Limited

23.18

26.00

Mike McTighe / EBT Trustee1

2.65

2.00







Total

73.51

80.00








 

 

1    These percentages include, in respect of Mike McTighe, shares which will be owned jointly with the EBT Trustee as described in paragraph 3.5 of this Part I

 

Assumptions:

(i)    That there are 84,853,519 Ordinary Shares in issue immediately prior to completion of the Restructuring and options over 4,627,725 Ordinary Shares (which would have to be satisfied out of the issue of new Ordinary Shares) in existence immediately prior to completion of the Restructuring and that none of these options are exercised prior to the exercise of the Warrants.

(ii)    That no Bank disposes or acquires any A Ordinary Shares allotted to it pursuant to the Restructuring prior to the exercise of the Warrants.

(iii)    That references to percentages of issued ordinary share capital are references to the percentage of income or capital distribution made by the Company which the relevant Shareholder(s) are entitled to receive.

(iv)    That no other Shares are issued by Heywood Williams prior to the exercise by the Banks of the Warrants.

3.4    The Shared Ownership Plan

Following the Cancellation becoming effective, a Shared Ownership Plan will be adopted by the Company as part of the Restructuring. Under the Shared Ownership Plan, each member of the Management Team (other than Richard Karcher) will subscribe, jointly with the EBT Trustee, for C Ordinary Shares upon and subject to the terms of a Joint Ownership Agreement. Under the terms of the Joint Ownership Agreement, the relevant Management Team member will benefit from the growth in value of his jointly owned C Ordinary Shares less an amount of interest calculated at a rate fixed when the C Ordinary Shares are subscribed (on a simple interest basis). The principal terms of the Shared Ownership Plan and the Joint Ownership Agreement are set out in paragraph 2.13 of Part III of this document.

For US tax reasons, Richard Karcher will participate in a share option in respect of C Ordinary Shares. This will be established as part of the Shared Ownership Plan and will have comparable commercial terms to the Shared Ownership Plan regarding the cessation of employment and when value may be realised from the arrangements.

The C Ordinary Shares which will be issued jointly to the relevant Management Team member (other than Richard Karcher) and the EBT Trustee for the purposes of the Shared Ownership Plan and the C Ordinary Shares which will be issued to the EBT Trustee over which Richard Karcher will be granted a nil-cost option will, immediately following the Restructuring, represent 10 per cent. of the issued share capital of the Company on a fully diluted basis. Rothschild, as Heywood Williams' financial adviser, considers the proposed terms of the Shared Ownership Plan to be fair and reasonable as far as the Independent Shareholders are concerned.

3.5    Mike McTighe

As referred to in paragraph 3.1 of this Part I, Mike McTighe will also subscribe jointly with the EBT Trustee for B Ordinary Shares. The jointly owned B Ordinary Shares to be subscribed by Mike McTighe and the EBT Trustee will amount to 2 per cent. of the Company's issued share capital on a fully diluted basis immediately following completion of the Restructuring. Mike McTighe and the EBT Trustee's subscription for the jointly owned shares will be pursuant to a joint ownership agreement, the terms and effect of which will be the same as the Joint Ownership Agreements to be entered into by each member of the Management Team (other than Richard Karcher) and the EBT Trustee. As Mike McTighe will become a non-executive director and not an employee of the Company, his joint ownership agreement will be outside of the Shared Ownership Plan.

The aggregate number of shares to be issued as a result of the Restructuring to Mike McTighe and the UK Banking Syndicate on a fully diluted basis will not exceed 80 per cent. of the issued share capital in the Company.

As the UK Banking Syndicate's appointee to the Board, Mike McTighe's prior consent will be required for the Company or any other Group Company to take certain actions. Shareholders should note that the actions which require Mike McTighe's prior consent are extensive in nature and that the Board will be unable to agree any material transactions without Mike McTighe's prior consent. Details of the actions which will require such consent are set out in paragraph 2.7(e) of Part III of this document.

3.6    Related Party Transaction

As described above and in Part III of this document, the Management Team (other than Richard Karcher), will participate in the Restructuring by subscribing, jointly with the EBT Trustee for C Ordinary Shares and Richard Karcher will receive a nil-cost option to acquire C Ordinary Shares. The C Ordinary Shares and the C Ordinary Shares subject of the nil-cost option will represent, in aggregate, 10 per cent. of the issued share capital of the Company on a fully diluted basis, immediately following completion of the Restructuring.

Each member of the Management Team is either a Director or a director of a subsidiary of the Company and is therefore classified by the Listing Rules as a 'related party'. Consequently, the Management Team's participation in the Restructuring is a related party transaction under the Listing Rules and will require Shareholders' approval at the General Meeting. Members of the Management Team, and their associates will be prohibited from voting in relation to the Resolutions.

The Related Party Directors have not taken part in the Board's consideration of the Proposals.

 

  

The beneficial and non-beneficial interests of the Management Team, and of those non-executive Directors who will remain with the Company after completion of the Restructuring, but excluding unexercised options (other than, in the case of Richard Karcher, the nil-cost option referred to in paragraph 3.4 of this Part I and Part III of this document) or awards over the Ordinary Shares, as at the date of this document and immediately following completion of the Restructuring are set out below:

 






Name

Number of existing Ordinary Shares

Percentage of existing Ordinary Shares

Number of Ordinary Shares immediately following completion
of the Restructuring
1,2

Percentage of Ordinary Shares immediately following completion
of the Restructuring
2,3

Robert Barr

20,000

0.024

770,280

2.859

Mike Richards

-

-

384,823

1.429

Mark Wild

125,000

0.147

388,791

1.443

Jason Anderson

-

-

384,823

1.429

Martin Wardhaugh

-

-

384,823

1.429

Richard Karcher

-

-

384,823

1.429

Roger Boyes

6,292

0.007

199

0.001

Graham Menzies

6,350

0.007

201

0.001

Stephen Rogers

-

-

-

-











Total

157,642

0.186

2,698,763

10.019

















 

 

1    These numbers include, in respect of Robert Barr, Mike Richards, Mark Wild, Jason Anderson and Martin Wardhaugh, C Ordinary Shares which will be owned jointly with the EBT Trustee pursuant to the Shared Ownership Plan 

2    These numbers assume, in respect of Richard Karcher, his nil-cost options over 384,823 C Ordinary Shares held by the EBT Trustee have been exercised in full

3    Percentages have been calculated on the assumption that the Warrants have been exercised in full by the Banks

The Management Team will abstain from voting on the Resolutions at the General Meeting and will take all reasonable steps to ensure that their associates also abstain from voting on the Resolutions at the General Meeting.

3.7    Summary and Conclusion

The proposed new capital structure immediately following the Restructuring, described in more detail in Part III of this document, represents the final outcome of the Board's negotiations with the UK Banking Syndicate. The Restructuring seeks to address the adverse impact of Heywood Williams' indebtedness and associated interest cost on its business, whilst retaining the possibility of delivering value to Shareholders in the future. It will also remove any capital repayments until 2013 and any UK pension deficit repair contributions until 2014 which is expected to enhance further cash flow generation. Furthermore, it will provide appropriate headroom at peak drawings and, as such, sufficient working capital should be available to meet the increased demand as the Group's market recovers. As a result of all these actions, the credit profile of the Group is expected to be enhanced with regard to suppliers and customers alike. This solution has been negotiated with a view to providing the Group with a sustainable long term capital structure. This proposed structure is considered to be key in aiming to ensure that the Group can address its financial obligations going forward.

It is important to note that, as explained below in the working capital section (in paragraph 6.2 of this Part I), your Board believes that failure to approve the Resolutions at the General Meeting, would have material and very detrimental consequences for the Group. In such circumstances, the Board believes that it is highly likely that the Group would be unable to continue to operate within its existing banking facilities and would require significant immediate emergency funding. The Board is of the view that it is probable that appropriate emergency funding sources would not be available and, in this event, the Group would be unable to sustain its position as a going concern. Therefore, it is highly likely that failure to pass the Resolutions would lead the Group to enter into administration or some other form of insolvency procedure.

 

4.    Cancellation

The Listing Rules require a listed company to maintain a sufficient number of shares in 'public hands' at all times. Following the completion of the Restructuring the Company will not meet this requirement. Your Board is therefore seeking your approval for the Cancellation. Following the Cancellation the Company will not be required to comply with (or incur costs associated with complying with) the requirements of, amongst other things, the Listing Rules. The Cancellation is expected to take effect at 8.00 am on 23 November 2009.

5.    Current trading and outlook for the Group

For the period ending 30 June 2009, the Group released the following statement:

'Heywood Williams continues to face very difficult market conditions due to major declines in residential housing markets worldwide. Sales in the first half of 2009 were down 24% compared to the same period in 2008. It is estimated that the residential housing markets that the Group operates in have declined, on average, by 40% since the second half of 2007. The Group has reduced headcount by over 35% in the same period. Net debt at the end of June 2009 was £47.6 million, which was better than expectations and £2.2 million less than June 2008, reflecting the Group's success at reducing working capital.

The key financial results for the first half of 2009 were:

    Sales decreased by 24% to £88.5 million (2008: £116.3 million)

    Operating loss (before amortisation and exceptional items) of £4.6 million (2008: profit of £4.1 million)

    Adjusted loss before tax, notional interest, amortisation and exceptional items was £6.5 million (2008: profit of £1.9 million)

    Exceptional items of £1.9 million were incurred, primarily in respect of severance and advisory fees associated with bank facility negotiations (2008: nil)

    Reported loss after tax of £9.5 million (2008: profit of £0.9 million)

    Working capital reduction of £6.3 million (2008: increase of £4.0 million)

    Cash outflow of £0.9 million (2008: outflow of £4.6 million before acquisitions)

    Closing net debt of £47.6 million (2008: £49.8 million)

The Group's key markets are currently exhibiting signs of fragile stability, but at levels 30% to 60% below those experienced in late 2007. Our management teams continue to work hard to outperform their markets. Market share gains have been achieved and significant cost reductions continue to be implemented to align the cost base with the tougher market conditions we are now facing. Headcount across the Group has been reduced by a further 14% since the end of 2008, which is in addition to the 24% reduction made during 2008.

Group overview

Heywood Williams is a solutions provider/specialist distributor of branded building products with a strong portfolio of its own brands.

The Group comprises of two Divisions, namely the Hardware Division which designs, sources and distributes architectural hardware to the UK and selective European markets and the North American Specialist Distribution Division which markets and distributes branded building products primarily to the manufactured housing and recreational vehicle markets. Approximately 80% of the Group's sales of branded building products are to customers in the residential new build and home improvement market segments across North America and Europe. The remainder of the Group's sales are split between door and window hardware for the UK commercial property market and branded building products for the recreational vehicle market in North America.

The Group's priority over the short and medium term is to manage its balance sheet and maximise cash generation in order to weather the current very difficult market conditions and be well positioned for the subsequent market upturn. The two key objectives for 2009 are:

    To ensure that the Group continues to operate within its banking covenants and facilities, and

    To implement a more appropriate long term capital structure for the Group.

 

Hardware division: UK / Europe

The Hardware Division offers a broad range of hardware design and product solutions for housing developers, architectural ironmongers and window/conservatory fabricators. The Hardware Division has strong market leading positions in the UKIreland, Scandinavia and the Baltic States. The Division has some of the strongest brands in its respective markets, including Mila, Carlisle Brass and Eurospec.

Sales in the first half of 2009 were £51.0 million (2008: £63.5 million) and the operating profit before amortisation and exceptional items was £0.2 million (2008: £4.7 million). Cash generation has been strong in the first half helped by a working capital reduction of £3.1 million.

Across our European markets, new build and home improvement activities were considerably reduced compared to the first half of 2008, due to the continuing combined effects of consumers being more cautious, coupled with a considerable reduction in the availability of finance. The first quarter of 2009 was particularly difficult. In the UK it is estimated that the overall hardware market fell 25% in the first quarter of 2009 compared to 2008, which in turn was down over 15% compared to 2007. The Irish building products market contracted by over 40% and the market in Scandinavia and the Baltics fell over 50% in the first quarter of 2009 compared to 2008. Fragile stability was the main feature of the markets we serve during the second quarter of 2009, albeit at levels significantly below the corresponding period in 2008.

Against this unprecedented market deterioration, our management teams across the UK and European businesses have worked hard to outperform the market and minimise the impact of the downturn. Market shares have increased, including winning new business with a number of major accounts and significant cost reductions have been implemented to align the cost base with the tougher market conditions we are now facing. Headcount has been reduced by a further 17% since the end of 2008, which is in addition to the 23% reduction made during 2008.

North American specialist distribution divison: LaSalle Bristol

In North America, LaSalle Bristol is a leading specialist distributor of branded building products, with a particular focus on supplying floor coverings, plumbing products, lighting and air flow systems predominantly to the manufactured housing and recreational vehicle markets. LaSalle Bristol is the North American market leader in most of the product ranges it supplies.

The manufactured housing and recreational vehicle markets in North America essentially collapsed in the fourth quarter of 2008 and very low levels of market activity were experienced in the first quarter of 2009. In the first half of 2009 wholesale shipments of recreational vehicles declined 55% and manufactured housing production fell by 45% compared to the same period in 2008. The output of both industries hit unprecedented lows in the first quarter. The second quarter of 2009 has shown some modest seasonal improvement in both markets from the extremely low first quarter levels. Currently, the relevant trade associations anticipate that annual shipments in 2009 of both recreational vehicles and manufactured homes will be circa 50% down compared to two years ago.

LaSalle Bristol continues to outperform its competitors in an extremely difficult market. The LaSalle Bristol management team responded swiftly to the further downturn in the market by reducing costs early in the year, including a further headcount reduction of 9% since the end of 2008, which is in addition to the 28% reduction made during 2008. The team has been highly effective in generating cash by reducing stock levels quickly in response to reduced market demand while continuing to provide best in market customer service.

Sales were down 47% to $55.6 million (2008: $104.6 million). In sterling, revenue was down 29% to £37.5 million (2008: £52.8 million). LaSalle Bristol had an operating loss of £4.8 million after the allocation of Group costs compared to a loss of £0.6 million in the same period in 2008.

In January 2009, LaSalle Bristol successfully replaced a one year committed $6 million credit facility with a new three year asset based $10 million facility. This facility is exclusively for the use of LaSalle Bristol and hence the company has ring fenced financing for the next 3 years. The cash management actions taken by the team at LaSalle Bristol have resulted in the company being cash generative in the period despite the earnings loss. LaSalle Bristol was cash positive at the half year and has not yet utilised its new dedicated line of credit.

 

Group Funding

The Group's priority over the short and medium term is to manage its balance sheet and maximise cash generation in order to weather the current very difficult market conditions and be well positioned for the subsequent market upturn.

The Group was pleased to announce in February 2009 that it had agreed new medium term funding arrangements for the period to June 2010 with the UK Banking Syndicate, involving a covenant package more suited to current market conditions. The arrangements with the UK Banking Syndicate include a requirement to work with the UK Banking Syndicate to establish a more appropriate long term capital structure for the Group. Under the agreement, a £4.5 million liability is triggered if a satisfactory structure is not implemented by 30 September 2009.

Work in establishing an appropriate long term capital structure for the Group, which could result in a material dilution for existing holders of equity, is at an advanced stage. Following agreement with the UK Banking Syndicate, the timing for implementation of a satisfactory structure has been extended to 30 November 2009 to allow for regulatory steps to be completed. In the meantime, both Divisions are operating within the revised covenants and have sufficient facility headroom.

The Group's UK pension scheme deficit is valued at £11.0 million on an IAS 19 accounting basis at 30 June 2009. However, the triennial actuarial valuation, which has been brought forward in parallel with the work on the long term capital structure, has resulted in a deficit of £43.5 million on an actuarial funding basis as at 31 December 2008.

Implementation of the revised capital structure is conditional upon final agreement with the UK Banking Syndicate, followed by shareholder approval being obtained at a general meeting. Consequently, given that the above conditions currently prevail, this gives rise to uncertainty as to whether the proposed financial restructuring will be satisfactorily completed. However, on the basis that the proposed financial restructuring is satisfactorily completed, which is the Directors' expectation, the Directors are of the opinion that the going concern basis of accounting remains appropriate in preparing the Half Yearly Report.

Outlook

The Board believes that the Group will continue to face very difficult market conditions, at least for the remainder of 2009. The priorities for the Group remain to manage its balance sheet, maximise cash generation and implement a more appropriate long term capital structure.'

At the time of the interim results, finalising the details of the Proposals with the UK Banking Syndicate and obtaining the necessary Shareholder approval were key conditions to the implementation of the revised capital structure. This gave rise to uncertainty as to the appropriateness of the going concern basis for preparing the Group's interim financial statements given that, in the absence of the Restructuring or appropriate alternative funding sources, the Group would not have sufficient working capital for its present requirements. As announced today, an agreement has been reached with the UK Banking Syndicate, however the Proposals remain subject to Shareholder approval. Since the interim statement was issued on 27 August 2009, market conditions have remained challenging. The Board believes that the Proposals are key to the Group achieving its objectives for 2009 and beyond and, having explored the options, represent the only available route to achieving a stronger balance sheet and providing a long term sustainable capital structure for the Group, for the benefit of all stakeholders.

6.    Working capital

6.1    With the Restructuring

Your Board is of the opinion that, following completion of the Restructuring, the Group has sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this document.

6.2    Without the Restructuring

Without the Restructuring and other Proposals in place, your Board is of the opinion that, the Group does not have sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this document.

The Board believes that, if Shareholders reject the Restructuring and other Proposals, the Group is highly likely to suffer material adverse consequences including, but not limited to:

    significant reduction of creditor and stakeholder support;

 

    substantial deterioration in relationships with customers, suppliers, employees and other stakeholders; and

    reduction in the support and obligations of the Group's lenders, including the Group's ability to comply with the terms and conditions of the existing facilities.

Whilst the Board recognises that it is difficult to predict the severity of these adverse consequences and the speed at which they would occur, the Board believes that it is highly likely that the Group would be unable to continue to operate within its existing banking facilities and would require significant immediate emergency funding. 

Your Board is of the view that it is probable that appropriate emergency funding sources would not be available. In this event, the Group would be unable to sustain its position as a going concern and could be forced to enter into administration or some other form of insolvency procedure.

The Board believes that, in an administration or other insolvency process, it is highly unlikely that the Ordinary Shares would retain any value. The Board is of the opinion that the Restructuring and other Proposals represent the only available route to achieving a long term sustainable capital structure for the benefit of all stakeholders in the current market conditions.

7.    The Restructuring and Cancellation - matters to be taken into consideration

Conditional upon the Resolutions being approved at the General Meeting, the Company will apply for the Cancellation and it is expected that cancellation of admission of the Ordinary Shares to the Official List will take effect from 8.00 am on 23 November 2009 with trading in the Ordinary Shares on the London Stock Exchange's market for listed securities ceasing at the close of business on 20 November 2009. In deciding whether or not to vote in favour of the Resolutions relating to the Restructuring and the Cancellation, Shareholders should take into consideration, inter alia, the following:

    it is a condition of the Restructuring that each of the Resolutions (including the Resolution approving the Cancellation) are approved, and if they are not approved, the Restructuring Agreements will lapse and the Restructuring and other Proposals will not proceed. In such circumstances, the Board believes that it is highly likely that the Group would be unable to continue to operate within its existing banking facilities and would require significant immediate emergency funding. The Board is of the view that it is probable that appropriate emergency funding sources would not be available and, in this event, the Group would be unable to sustain its position as a going concern. Therefore, it is highly likely that failure to pass the Resolutions would lead the Group to enter into administration or some other form of insolvency procedure;

    immediately following completion of the Restructuring, the UK Banking Syndicate and Mike McTighe (who will be appointed to the Board by the UK Banking Syndicate), will, in aggregate hold 80 per cent. of the Company's enlarged issued ordinary share capital on a fully diluted basis and the UK Banking Syndicate will be contractually entitled to appoint and remove one non-executive director (and two observers) to and from the Board. All other directors will be capable of being appointed and removed by Shareholders in general meeting. Accordingly, the members of the UK Banking Syndicate holding more than 50 per cent. of the Ordinary Shares will, together, be able to control such appointments and removals. In addition, the UK Banking Syndicate's prior consent will be required in respect of any material decisions which the Board may seek to take, details of these consent rights being set out in the description of the Restructuring Agreements in Part III of this document;

    if the Cancellation occurs, it is likely that, thereafter, there will be no public market in the Ordinary Shares and the opportunity for Shareholders to realise their investment in the Company will be more limited;

    following the Cancellation, the regulatory regime which applies solely to companies whose shares are admitted to the Official List and to trading on the London Stock Exchange's market for listed securities, comprised within the Listing Rules, will no longer apply. The Listing Rules require, inter alia, that a company which is subject to them seek the approval of its shareholders for various transactions including acquisitions or disposals above a particular magnitude and transactions between a company and related parties. Accordingly, it is possible that following the Cancellation a sale of all or part of the Company's business could be completed without Shareholders being entitled to vote on any such sale; and

 

    following the Cancellation, the Company will remain subject to the provisions of the Takeover Code for a period of time.

8.    Dispensation from Rule 9 of the Takeover Code

Following the Restructuring and the exercise of the Warrants, Lloyds Banking Group will be interested in 14,007,558 A Ordinary Shares representing 52 per cent. of the issued ordinary share capital (calculated on the basis of the same assumptions as those on which the table in paragraph 3.3 on page 10 has been based). Under Rule 9 of the Takeover Code, where any person acquires, whether by a single transaction or series of transactions over a period of time, interests in securities in which he or persons acting in concert with him carry 30 per cent. or more of the voting rights of a company which is subject to the Takeover Code, that person is normally required by the Takeover Panel to make a general offer to the shareholders of that company to acquire their shares.

Rule 9 of the Takeover Code also provides, inter alia, that where any person who, together with persons acting in concert with him, is interested in shares which in aggregate carry not less than 30 per cent. of the voting rights of such a company but is not interested in shares carrying more than 50 per cent. of such voting rights of the company, a general offer will normally be required if any further interests in shares are acquired by any such person which increases the percentage of shares carrying voting rights in which he is interested.

An offer under Rule 9 of the Takeover Code must be made in cash and at the highest price paid per share by the person required to make the offer, or any person acting in concert with him, for any interest in shares of the company acquired during the 12 months prior to the announcement of the offer.

Under the Takeover Code, a concert party arises where persons acting together pursuant to an agreement or understanding (whether formal or informal) co-operate, to obtain or consolidate control of that company. A person has control of a company if he is interested in shares carrying 30 per cent. or more of the company.

The Takeover Panel has agreed, subject to the approval of Independent Shareholders on a poll at the General Meeting, to waive the obligation for any members of Lloyds Banking Group to make a general offer that would otherwise arise as a result of the Restructuring and subsequent exercise of Warrants. Accordingly, Resolution 6 is being proposed at the General Meeting and will be taken on a poll.

Immediately following the Restructuring, Lloyds Banking Group will hold 47.68 per cent. of the Ordinary Shares. Immediately following the exercise of the Warrants, Lloyds Banking Group will hold 52.00 per cent. of the Ordinary Shares. If the relevant Resolutions are passed and the Restructuring takes effect, then Lloyds Banking Group would hold 9,696,800 A Ordinary Shares and Warrants over 4,310,758 A Ordinary Shares, which will, when exercised and assuming that no other shares are issued before such time, represent an interest in excess of 50 per cent. of the voting rights of Heywood Williams, and will be able to increase its aggregate interest in Heywood Williams without incurring any obligation to make a general offer to all shareholders to acquire their shares in Heywood Williams.

Lloyds has indicated that, with the exception of William Schmuhl who has agreed to resign from the Board on completion of the Restructuring and the appointment of Jason Anderson, Richard Karcher, Martin Wardhaugh and Mike McTighe to the Board on completion, it is not presently proposing any changes to the Board following completion of the Restructuring. Lloyds does not have any specific intentions regarding the future business of, or strategic plans for, Heywood Williams, the locations of Heywood Williams' places of business, the redeployment of its fixed assets or the continued employment of the Heywood Williams Group's employees and, other than in relation to the changes to the Board as set out above, the management of Heywood Williams following completion of the Restructuring.

In any event, the UK Banking Syndicate has agreed with Heywood Williams under the Investment Agreement (a summary of which is set out in paragraph 2.7 of Part III of the Circular) that the various corporate governance rights which they are to be granted, including in respect of the appointment of directors and veto rights over significant matters, should be exercised by the Majority Investors. Lloyds Banking Group will not, on its own, constitute the Majority Investors and therefore, on completion of the Restructuring, Lloyds Banking Group would not be in a position on its own to implement any plans regarding the Heywood Williams Group.

 

9.    Information on Lloyds Banking Group

Lloyds was incorporated on 21 October 1985 (registration number 95000). Lloyds' registered office is at Henry Duncan House, 120 George StreetEdinburgh EH2 4LH. The Lloyds Banking Group is a leading UK based financial services group, whose businesses provide a wide range of banking and financial services in the UK and at a limited number of locations overseas. Its main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment provision.

Further information on the Lloyds Banking Group is set out in Parts V and VI of this document.

10.    Shareholder approval

Implementation of the Proposals requires the passing of all of the Resolutions. The Resolutions are conditional upon each other and it will only be possible to implement the Proposals if all of the Resolutions are passed at the General Meeting. Shareholders should note that the Directors will not be able to proceed with the Restructuring and other Proposals unless and until all the proposed Resolutions are approved at the General Meeting.

Set out below is a summary of the Resolutions to be proposed at the General Meeting:

Resolution 1 - Sub-division and partial reclassification of Ordinary Shares, authority to allot, disapplication of pre-emption rights and adoption of new Articles

Resolution 1 seeks Shareholders' (excluding the Management Team) approval to:

(a)    the sub-division and partial reclassification of the existing issued Ordinary Shares of 20 pence each into D Ordinary Shares of one penny each and Deferred Shares of one penny each. The sub-division and partial conversion will result in the 84,853,519 existing Ordinary Shares converting into a maximum of 2,693,761 D Ordinary Shares with the remainder of the existing Ordinary Shares being converted into Deferred Shares of one penny each;

(b)    give the Directors authority to allot 14,410,974 A Ordinary Shares, Warrants in respect of 6,600,362 A Ordinary Shares, 538,752 B Ordinary Shares2,693,761 C Ordinary Shares and 50,193 D Ordinary Shares. Further details regarding the effect of this authority to allot are included in paragraph 1 of Part III of this document;

(c)    disapply Shareholders' statutory pre-emption rights in relation to the issue of Ordinary Shares and Warrants pursuant to the Proposals. Further details regarding the effect of this power to issue ordinary shares are included in paragraph 1 of Part III of this document;

(d)    amend the Articles so as to delete all provisions of the Articles, which have been incorporated into the Articles from the memorandum of association of the Company (with effect from 1 October 2009), as a result of the operation of section 28 of the Companies Act 2006; and

(e)    the adoption of new Articles. The new Articles will differ materially from the Company's existing Articles to reflect inter alia, the fact that as a result of the implementation of the Proposals (i) the Company's Share capital will be comprised of five classes of shares; (ii) the Ordinary Shares will no longer be admitted to the Official List and to trading on the London Stock Exchange's market for listed securities; and (iii) the UK Banking Syndicate will own 78 per cent. of the issued share capital (on a fully diluted basis). A summary of some of the key provisions of the new Articles are set out in paragraph 2.9 of Part III of this document.

Resolution 2 - approval of Cancellation

Under the Listing Rules, the Cancellation can only be effected by the Company after the passing of a special resolution by Shareholders (excluding the Management Team) in general meeting, and the expiration of a period of not less than 20 business days from the date of the Shareholder approval. Resolution 2 therefore seeks approval of the Cancellation.

Resolution 3 - approval of Related Party Transaction

Resolution 3 seeks Shareholders' (excluding the Management Team) approval of the Proposals, which will constitute a Related Party Transaction.

Resolution 4 - approval of Shared Ownership Plan for the purposes of the Listing Rules

Resolution 4 seeks Shareholders' (excluding the Management Team) approval of the proposed Shared Ownership Plan and the proposed arrangements to be established for Mike McTighe based on the Shared Ownership Plan as described in paragraphs 2.13 and 2.14 of Part III of this document.

 

Resolution 5 - approval of Shared Ownership Plan for the purposes of the Code

Resolution 5 seeks Independent Shareholders' approval (for the purposes of the Code) of the Shared Ownership Plan, as described in paragraph 2.13 of Part III of this document. The Code requires that the vote on the Shared Ownership Plan be conducted by way of a poll and that only Independent Shareholders should vote on such a resolution.

Resolution 6 - approval of Rule 9 Waiver granted by the Takeover Panel

Resolution 6 seeks Independent Shareholders' approval, as explained in paragraph 8 above, of a waiver of the obligation that could arise for any member of the Lloyds Banking Group to make a general offer for the entire issued share capital of the Company as a result of completion of the Restructuring and exercise of the Warrants. This Resolution will need to be approved by way of a poll of Independent Shareholders.

Prohibition on voting by the Management Team

The Management Team will be participating in the Proposals. Each member of the Management Team is therefore deemed to be a 'related party' of the Company for the purposes of the Listing Rules. Accordingly, the participation of the Management Team in the Proposals is classified by the Listing Rules as a 'related party transaction' and, as such, requires the approval of Shareholders (excluding the Management Team) by way of a simple majority in general meeting. The Management Team (and their associates) will not be entitled to vote at the General Meeting on the Resolutions. Each member of the Management Team has undertaken that he will not, and will take all reasonable steps to ensure that his associates (as defined in the Listing Rules) will not, vote on the Resolutions at the General Meeting.

Irrevocables

The Company and the UK Banking Syndicate have received irrevocable undertakings from the Independent Directors to vote in favour of each of the Resolutions in respect of all of the 80,142 Ordinary Shares beneficially held by them, representing, in aggregate, 0.094 per cent. of the votes capable of being cast at the General Meeting.

Further details of these irrevocable undertakings are set out in paragraph 4 of Part VI of this document.

11.    Effect of Restructuring on awards granted under the Heywood Williams Share Schemes

Awards under the Heywood Williams Performance Share Scheme Plan 2006 will not vest as a result of the Proposals. Awards made in October 2006 and which will mature in October 2009 will lapse as the performance targets for these awards will not be satisfied. The holders of awards granted in March 2007 and March 2008 (being Robert Barr, Mike Richards and Mark Wild) have agreed to surrender these awards conditional upon completion of the Restructuring.

Due to the low value of the awards, the Remuneration Committee has exercised its discretion to determine that awards under the Heywood Williams Group Retention Shares Plan will be treated as vesting on completion of the Restructuring and participants will be offered a payment of cash based on the market value of the Ordinary Shares to which the awards relate. The cash cost should not exceed £40,000 in aggregate.

Under the Heywood Williams Group PLC 2001 Savings Related Share Option Scheme options over only 70,727 Ordinary Shares are outstanding. Robert Barr and Mark Wild have agreed to surrender the 47,777 options, they hold in aggregate, conditional upon completion of the Restructuring leaving a total of 22,950 options outstanding. Any options that are not surrendered will continue to subsist (albeit in respect of D Ordinary Shares) after the completion of the Restructuring and will, if necessary, be adjusted in line with the dilution of all Existing Shareholders.

12.    Director and Board Changes

The UK Banking Syndicate intends to appoint Mike McTighe as their appointee to the Board on completion of the Proposals. Details of the terms of his appointment to the Board, his participation in the Proposals and his joint ownership of B Ordinary Shares with the EBT Trustee are also set out in Paragraphs 2.11, 2.12 and 2.14 of Part III of this document.

With the exception of William Schmuhl, the Directors (including myself and the other non-executive Directors), will remain on the Board following completion of the Proposals and each will remain in their current roles. Proposed changes to the directors' service contracts or letters of appointment to be made as part of the Proposals are set out in paragraph 2.9 of Part III of this document. William Schmuhl will step down from the Board with effect from the completion of the Proposals.

In addition, the Related Party Managers will be appointed to the Board with effect from the completion of the Proposals. Details of the proposed changes to their service contracts are set out in paragraph 2.10 of Part III of this document.

13.    Risk factors

For a review of certain risk factors which should be taken into account when considering whether to vote in favour of the Resolutions, please refer to Part II of this document.

14.    General Meeting

A notice of a General Meeting of Heywood Williams to be held at the offices of Pinsent Masons LLP at 3 Hardman StreetManchesterM3 3AU at 11.00 am on 20 October 2009 is set out at the end of this document.

The purpose of the General Meeting is for Shareholders to consider and, if thought fit, approve the Resolutions.

Completion of the Proposals, which is expected to occur on or around 24 November 2009, will be conditional, inter alia, upon the following (subject to any waiver of such conditions made in accordance with the terms of the Restructuring Agreements):

    the passing of each of the Resolutions;

    either (a) the issue by the Irish Competition Authority of a determination under section 21 of the Irish Competition Act 2002 in terms acceptable to the UK Banking Syndicate authorising the Proposals; or (b) the period specified in section 21(2) of the Irish Competition Act 2002 having elapsed without the Irish Competition Authority having informed the UK Banking Syndicate of its determination (if any) under section 21 of the Irish Competition Act 2002 in relation to the Proposals; and prior to completion of the Proposals no application in the Irish High Court having been made by any person seeking judicial review of the determination referred to in (a) above or the failure to make a determination as referred to in (b) above (as the case may be);

    the Office of Fair Trading not having referred the Proposals to the Competition Commission under section 33 of the Enterprise Act 2002 or, if the Proposals are referred to the Competition Commission before they are completed, the Competition Commission making a Positive Decision;

    the Office of Fair Trading not having invited one or more of the parties to the Investment Agreement to an issues meeting (within the meaning of the Office of Fair Trading's jurisdictional and procedural guidance for mergers (OFT527)) in respect of the Proposals, or, if the Office of Fair Trading has invited one or more of the parties to the Investment Agreement to such an issues meeting, it subsequently confirming in terms reasonably satisfactory to the UK Banking Syndicate that it is not its intention to refer the Proposals to the Competition Commission or, if the Proposals are subsequently referred to the Competition Commission, the Competition Commission making a Positive Decision; and

    the Restructuring Agreements not having been terminated prior to completion of the Restructuring and the conditions precedent to certain of the Restructuring Agreements having been satisfied. A description of the Restructuring Agreements is set out in Part III of this document.

15.    Settlement of D Ordinary Shares

Following the effective date for the Restructuring, expected to be 24 November 2009, any CREST holders who held Ordinary Shares as at the record date and are entitled to new D Ordinary Shares, are expected to have their CREST Accounts credited with the D Ordinary Shares on or around 24 November 2009. Any certificated holders on the register as at the record date for the Restructuring (5.00 pm on 20 November 2009) and entitled to D Ordinary Shares are expected to have share certificates despatched by 30 November 2009.

16.    Action to be taken

You will find enclosed with this document a Form of Proxy for use at the General Meeting.

 

Whether or not you intend to be present at the General Meeting, you are requested to complete the Form of Proxy in accordance with the instructions printed on it and to return it to the Company's Registrars, Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6ZL as soon as possible and, in any event, so as to arrive not later than 11.00 am on 18 October 2009.

You may, if you wish, register the appointment of a proxy or proxies, or voting instructions for the General Meeting electronically by logging on to www.sharevote.co.uk. You will need to use the series of numbers made up of your Voting ID, Task ID and Shareholder Reference Number printed on your Forms of Proxy. Full details of the procedure are given on the website referred to above. The proxy appointment and/or voting instructions must be received by Equiniti at least 48 hours before the appointed time of the General Meeting, that is to say, no later than 11.00 am on 18 October 2009. Please note that any electronic communication sent to the Company or Equiniti that is found to contain a computer virus will not be accepted. The use of the internet service in connection with the General Meeting is governed by Equiniti's conditions of use set out on the website, www.sharevote.co.uk, and may be read by logging on to that website.

If you hold your Ordinary Shares in uncertificated form (i.e. in CREST) you may vote using the CREST proxy voting service in accordance with the procedures set out in the CREST Manual (please also refer to the accompanying notes to the Notice of General Meeting set out at the end of this document). Proxies submitted via CREST (under CREST participant ID RA19) must be received by Equiniti not later than 11.00 am on 18 October 2009.

The completion and return of a Form of Proxy will not preclude you from attending the General Meeting and voting in person if you wish to do so.

If you have any questions relating to this document or the General Meeting, please call the Shareholder Helpline operated by Salisbury Associates on freephone 0800 012 6252 between 9.00 am and 5.00 pm Monday to Friday (excluding bank or public holidays). Please note that the Shareholder Helpline cannot provide advice on the merits of the matters to be considered at the General Meeting nor can it give any financial, legal or taxation advice or accept proxy voting instructions.

Should you have any questions relating to the completion and return of your Form of Proxy or CREST proxy voting, please call the Shareholder Helpline operated by the Company's Registrars, Equiniti, on 0871 384 2856 (or, from outside the United Kingdom, +44 121 415 026) between 9.00 am and 5.00 pm Monday to Friday (excluding bank or public holidays). Calls to 0871 384 2856 cost 8 pence per minute (including VAT) plus your service provider's network extras. Calls to the helpline from outside the United Kingdom will be charged at applicable international rates. Different charges may apply to calls from mobile telephones. Please note that calls to these numbers may be monitored for security and training purposes. The helpline cannot provide advice on the merits of the matters to be considered at the General Meeting nor can it give any financial, legal or taxation advice or accept proxy voting instructions.

17.    Further information

Your attention is drawn to the further information in relation to the Proposals, the Company and the Lloyds Banking Group set out in Parts III to VI of this document.

You are advised to read the whole of this document and not merely rely on the summarised information in this letter.

18.    Importance of the vote

Given the Group's current financial position and the uncertain nature of the Group's home improvement and residential building markets generally, your Board believes that proceeding with the Proposals is the only available means by which the Group can address its financial position. If the Proposals do not proceed for any reason, the Board believes that it is highly likely that the Group would be unable to continue to operate within its existing banking facilities and would require significant immediate emergency funding. The Board is of the view that it is probable that appropriate emergency funding sources would not be available and, in this event, the Group would be unable to sustain its position as a going concern. Therefore, it is highly likely that failure to pass the Resolutions would lead the Group to enter into administration or some other form of insolvency procedure. Whilst the Board recognises that it is difficult to predict the exact timing at which these developments would occur, the Board believes that such administration or other insolvency proceedings could commence as early as December 2009.

The Board believes that it is unlikely that the Ordinary Shares would retain any value in an administration process or other insolvency, and that the Restructuring and other Proposals represent the only available route to achieving a stronger balance sheet and providing a long term sustainable capital structure for the Group.

19.    Recommendation

The Board considers the Proposals to be in the best interests of the Company and of Shareholders as a whole. Accordingly, the Board recommends that Shareholders vote in favour of the Resolutions to be proposed at the General Meeting as the Independent Directors intend to do in respect of the Ordinary Shares in which they are beneficially interested (representing, in aggregate, 0.094 per cent. of the issued voting share capital of the Company).

The Board, which has been so advised by Rothschild, considers that the Proposals are fair and reasonable and in the best interests of Independent Shareholders and the Company as a whole. In providing such advice, Rothschild has taken into account the commercial assessment of the Board.

The Related Party Directors have taken no part in the Board's consideration of the Proposals. Each of the Related Party Directors and Related Party Managers have undertaken not to vote on the Resolutions and have undertaken to take all reasonable steps to ensure their respective associates do not vote on the Resolutions at the General Meeting.


Yours faithfully,

R.F. Boyes

Chairman

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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