REG - Finsbury Food Group - Acquisition of the Fletchers Group <Origin Href="QuoteRef">FIF.L</Origin>

Finsbury FoodAnnouncement

29/10/2014 10:57

RNS Number : 9419T
Finsbury Food Group PLC
10 October 2014
Date:
10 October 2014
On behalf of:
Finsbury Food Group plc ('Finsbury Food', 'the Company' or 'the Group')

Finsbury Food Group plc
Acquisition of the Fletchers Group
Finsbury Food, (AIM: FIF) a leading manufacturer of cake and bread bakery goods, today announces that it has entered into an agreement to acquire the Fletchers Group ("Fletchers"), the group of bakeries that produces morning goods and specialist bread products for leading UK grocery retailers and foodservice customers. 
 The total consideration payable by the Company for Fletchers is approximately 56.0 million on a debt-free/cash-free basis. The consideration is to be funded through a significantly oversubscribed placing of new Ordinary Shares raising 35.0 million at 59p and new debt facilities. 
 The Directors expect the Acquisition to be earnings enhancing during its first full year of ownership and allows the Group to benefit from significant cash generation that will support a progressive dividend policy for the Enlarged Group going forward. 
 The Enlarged Group will be one of the largest speciality bakery groups in the UK, with sales approaching 300 million and a broad spread of customers across the food retail and foodservice channels. Strategic and financial benefits include:
- complementary product ranges and new food service channels;
- retail customer diversification;
- the benefits of significant capital investment within Fletchers manufacturing; and
- a multi-channel platform for further acquisitions in due course.
 The Acquisition will provide a platform for the Group to address the attractive UK foodservice bakery market, which is worth approximately 900 million per annum, 70 per cent. of which is morning goods. Both Finsbury Food and Fletchers supply products to the growing morning goods sector. 
 As part of a trading update accompanying the Transaction, Finsbury Food today confirms it has had a positive trading performance since its year end in June 2014, with sales 5 per cent. ahead of prior year through a combination of volume, mix and price. Since March 2014, Fletchers' financial year has been strong, with sales in line with management expectations. Fletchers is seeing the benefits of substantial capital expenditure in recent years and has secured a number of significant contracts since the 29 March 2014 financial year-end which will benefit sales in the second half.
 Due to the size of the Acquisition relative to the Company, it will be treated as a reverse takeover and, in order for it to proceed, will require shareholder approval and for the Enlarged Share Capital of the Company to be admitted to AIM. An Admission Document containing details of the Enlarged Group and containing a notice of General Meeting will be posted to Shareholders today and is available to view on the Company's website at www.finsburyfoods.co.uk.
John Duffy, Chief Executive of Finsbury Food, commented:
"The acquisition of Fletchers is a transformational development for the Group, and will add scale to the effect that we will be one of the largest speciality bakery groups in the UK.
"Fletchers is a highly complementary business, which broadens the Finsbury UK speciality bakery product, customer and channel growth potential and will provide a strong platform for the Group to address the Foodservice markets. We believe the Enlarged Group will be in a strong position for new licensing arrangements, joint ventures and stronger customer and brand relationships. 
"By servicing both the cake and bakery market, through both retail and foodservice, the Enlarged Group will have a diversified product and customer offering, and greater potential for driving growth for our shareholders. We look forward to welcoming the Fletchers team and customers into Finsbury Food and continuing to provide our newly broadened customer base with high quality products and service." 
Stephen Holding, Managing Director of Fletchers, said:
"Fletchers has undergone a significant transformation since it was acquired by Vision Capital in 2007, and I am very proud of the hard work and dedication of our colleagues which has made the company what it is today. This is an exciting next step for the company and I'm looking forward to the opportunities that being part of the enlarged Finsbury Foods will bring."
This summary should be read in conjunction with the full text of this announcement and the Admission Document, which is being posted to Shareholders today. Defined terms within this announcement have the same meanings as those within the Admission Document.
For further information:



Finsbury Food Group plc
www.finsburyfoods.co.uk
John Duffy (Chief Executive)
Tel: 029 20 357 500
Stephen Boyd (Finance Director)



Cenkos Securities plc

Bobbie Hilliam / Harry Pardoe (Corporate Finance)
Tel: 020 7397 8900
Alex Aylen (Sales)



Redleaf Polhill
finsbury@redleafpr.com
Rebecca Sanders-Hewett 
Tel: 020 7382 4730
Jenny Bahr



Acquisition of Fennel Acquisition Limited
Placing of 59,322,034 Placing Shares at 59p per Ordinary Share
Admission of the Enlarged Share Capital to trading on AIM
and
Notice of General Meeting
Introduction
Your Board announced today that the Company has conditionally agreed, subject, inter alia, to Shareholder approval at a General Meeting, to acquire Fletchers by way of an acquisition of the entire issued share capital of Fennel Acquisition Limited. The total consideration payable by the Company in respect of the Acquisition (including amounts payable in respect of repayment of outstanding shareholder and bank debt) is 56.0 million payable in cash at Completion. In order to fund the consideration the Company has also today announced it is raising 35.0 million (before expenses) by way of the Placing of 59,322,034 Placing Shares at 59 pence per Ordinary Share in order to finance part of the consideration due under the Acquisition Agreement. In addition, the Company has also entered into an agreement in respect of the New Debt Facilities to finance the remainder of the consideration due under the Acquisition Agreement. The New Debt Facilities will also be used to fund the ongoing working capital requirements of the Enlarged Group.
In view of the size of the Acquisition relative to the Company, the Acquisition is classified as a reverse takeover under the AIM Rules and is therefore conditional, inter alia, on Shareholders passing the Resolutions at the General Meeting, all of which must be passed in order for the Transaction to be implemented. An Admission Document containing a Notice of General Meeting has been sent to Shareholders today. 
Background to and reasons for the Acquisition
On 27 February 2013, the Company sold its Free From business (consisting of Livwell Bakery and United Central Bakeries) for a total value of approximately 21.0 million to focus on its core cake and bread businesses. The sale of Free From represented a shift in the Company's strategy from a transitionary period focused on debt reduction to a new period of financial stability and the pursuit of growth. Since the disposal, the Company has reported strong financial results, as most recently evidenced by the audited results for the twelve months ended 28 June 2014, and has generated cash to pay down debt and resume the payment of dividends. The Company has also embarked on significant investment to achieve organic growth. 
The Directors have believed since the sale of Free From that it is appropriate for the Company to pursue focussed, complementary, bolt on acquisitions to increase the Group's scale in the UK bakery market.
The Fletchers group of bakeries produces and supplies a wide range of fresh and frozen bakery products, with a primary focus on morning goods and bread. Fletchers' products are distributed to leading UK grocery retailers and foodservice customers. The Directors believe the Acquisition is in line with the acquisition strategy of the Company and allows the Company to increase its scale as well as providing the following strategic and financial benefits:
 complementary product ranges, bringing together Finsbury Foods' cake business, the Fletchers and Finsbury Food bread businesses and Fletchers' morning goods product range;
 new distribution capability, with the introduction of foodservice distribution channels;
 retail customer diversification across all the key UK supermarkets, as well as a wide range of foodservice customers covering restaurants, coffee shops, bars and fast food outlets;
 operational synergy opportunities between group companies and new customers and channels;
 financial cost synergies in direct and indirect areas due to increased scale;
 the benefits of significant capital investment within Fletchers manufacturing operations and historical tax losses;
 the collective talent of the respective management teams who will seek to ensure the successful integration and growth of the two businesses; and
 a multi-channel platform for further acquisitions in due course.
The Enlarged Group will be one of the largest speciality bakery groups in the UK with expected annual sales approaching 300 million, strong cash-flow resilience and dividend capability.
The Enlarged Group Structure
The Enlarged Group will comprise UK Bakery and Overseas. UK Bakery will comprise both the existing UK sector businesses at Memory Lane in Cardiff, Lightbody near Glasgow and N&H at Salisbury as well as the new businesses, Fletchers Group Bakery in Sheffield, Grain D'Or in London and Kara in Manchester. The Overseas business will remain unchanged.
Strategy of the Enlarged Group
The Enlarged Group will be one of the largest speciality bakery groups in the UK, with sales approaching 300 million and a broad spread of customers across the food retail and foodservice channels. The Enlarged Group will have the capability and expertise to produce a wide range of speciality bakery products and will focus on the quality end of this product spectrum.
The Enlarged Group's strategy will focus on creating value by driving revenue and operational efficiency. The Enlarged Group will seek to:
 deliver organic growth via the enhanced product range, innovation and broader customer and channel relationships;
 improve operational efficiencies via supply chain optimisation and capital investment; and
 energise and enable its people in a performance driven culture.
The Directors have identified immediate business priorities, which provide a focus on integration, delivery of synergies and business optimisation whilst also growing underlying business performance. With a stronger balance sheet, the Directors expect the Enlarged Group to be better positioned to pursue new licencing arrangements, joint ventures and stronger customer and brand relationships.
The Directors' medium term strategy is to develop the Enlarged Group into a UK bakery leadership position targeting sales growth via organic growth and further acquisitions.
Enlarged Group Customers
The Enlarged Group supplies all of the key UK supermarkets. The foodservice customers of the Enlarged Group include Brakes and 3663 and a wide range of restaurants, coffee shops, bars and fast food outlets as end customers.
Current Trading and Prospects
Finsbury Food
As set out in the results of the Company for the year ended 28 June 2014, the Company achieved an increase in adjusted continuing profit before tax of 18 per cent. to 6.5 million (2013: 5.5 million) on broadly flat revenue of 175.7 million (2013: 176.6 million). The Company increased capital investment spend by 48 per cent. to 6.2 million while total net debt increased marginally, including deferred consideration payable, to 8.8 million (2013: 7.4 million). The Directors increased the proposed final dividend to 0.75 pence per Ordinary Share, taking the total dividend for the financial year to 1 pence per Ordinary Share (2013: 0.75 pence per Ordinary Share) a 33 per cent. increase year on year. 
Trading within Finsbury Food post year end has remained positive and the Group remains focused on driving sales growth via additional promotional and innovation investment. Both the capital investment and overhead reduction programmes completed in the previous financial year have complemented lagging input inflation recovery which has now been completed. Group sales are circa 5 per cent. ahead of prior year through a combination of volume, mix and price with some production benefits from the increased volumes and little discernible change in inventories.
Fletchers Group
Fletchers reported revenue of 95.0 million (2013: 99.1 million) for the year ended 29 March 2014, with total profit before interest, tax, depreciation and exceptional items of 6.0 million (2013: 6.2m). Earnings growth in the first six months of the Fletchers Group current financial year has been strong. The Fletchers Group is seeing the benefits of substantial capital expenditure in recent years and has secured a number of significant contracts since the 29 March 2014 financial year-end which will benefit sales in the second half. Production is benefiting from the new capital equipment with selling prices and inventories remaining in line with prior year.
Financial Reporting Timetable
The Enlarged Group will have a financial year-end of 30 June.
The Enlarged Group expects to publish unaudited financials for the six months to 31 December 2014 in March 2015. Further, the Enlarged Group expects to publish audited financials for the twelve months to 30 June 2015, in line with AIM Rule 19, no later than six months after the end of the financial year.
The Company has included audited financials for the twelve months to 29 March 2014 on Fennel in its Admission Document sent to Shareholders today. In accordance with AIM Rule 18, the Directors are required to release unaudited financial information relating to the Fletchers Group for the six months to 30 September 2014 no later than three months after the end of this period. Following the publication of these unaudited financials on Fletchers, the Enlarged Group will report every six months on a consolidated basis only, in line with the Company's reporting timetable set out above.
Dividend Timetable
On 22 September 2014, the Directors proposed a final dividend of 0.75 pence per Ordinary Share to Shareholders of Finsbury Food on the register on 14 November 2014. Due to the Transaction, the Directors have brought forward the record date from 14 November 2014 to 24 October 2014. The payment date will remain unchanged, being 10 December 2014. Placees will not be eligible for the final dividend.
Following Completion, it is expected that the Enlarged Group will adopt a progressive dividend policy with an initial dividend cover ratio of approximately 3.5 times calculated on an earnings per share basis. The Board will decide the absolute level of interim and final dividends to be paid at the relevant time in light of the performance and cash flow of the Enlarged Group.
The Enlarged Group will operate with a June financial year-end; it is therefore expected that interim dividends for the period to December will be declared in March and paid in April and final dividends for the period to June will be declared in September and paid in December. Assuming that the Acquisition will be completed in October 2014, the first interim dividend to be paid by the Enlarged Group will (subject to the usual considerations), therefore, be declared in March 2015.
The Transaction
The Acquisition 
On 9 October 2014, the Company entered into the Acquisition Agreement under which it has conditionally agreed to acquire the entire issued share capital of Fennel. The Company has agreed to pay a total consideration of approximately 56.0 million in cash at Completion in respect of the Acquisition, which includes an amount required in order to repay, at Completion, all of the outstanding shareholder and bank debt owed by the Fletchers Group. The net proceeds of the Placing will be used to part-fund the amount payable by the Company and the Directors expect to utilise up to 33.8 million from the New Debt Facilities to fund the remainder.
The Acquisition Agreement is conditional upon Shareholders approving the Resolutions that will be proposed at a General Meeting, and each of the Placing Agreement and the New Debt Facilities becoming unconditional.
The New Debt Facilities
On 9 October 2014, the Company entered into New Debt Facilities with HSBC Bank Plc and Lloyds Bank Plc. The New Debt Facilities total up to 52.0 million. The New Debt Facilities will be used by the Company to part fund the Acquisition, pay certain costs associated with the Acquisition, refinance certain existing indebtedness and for general working capital. 
The Placing
Details of the Placing
On Admission the Company will have 126,226,318 Ordinary Shares in issue and an expected market capitalisation of approximately 74.5 million. The Placing comprises the issue of 59,322,034 new Ordinary Shares by the Company to raise 35.0 million (before expenses). The placing price of 59p represents a discount of [4.1] per cent. to the closing share price on 9 October 2014.
Cenkos has agreed, pursuant to the Placing Agreement and conditional, inter alia, on Admission, to use its reasonable endeavours to place the Placing Shares, with institutional and other investors. The Placing, which is not being underwritten, is conditional, inter alia, upon:
 the Placing Agreement becoming unconditional and not having been terminated in accordance with its terms prior to Admission; and
 Admission becoming effective not later than 30 October 2014, or such later date as Cenkos and the Company may agree, being not later than 31 October 2014.
The Placing Shares will rank pari passu in all respects with the Existing Ordinary Shares including the right to receive all dividends and other distributions declared, paid or made after Admission, save that they will not rank for the final dividend of the Company that will be paid on 10 December 2014. None of the Placing Shares have been marketed to or will be made available in whole or in part to the public in conjunction with the application for Admission.
Related Party subscription as part of the Placing and voting undertaken
Ruffer LLP and London Finance and Investment Group P.L.C. have agreed to subscribe for 9,712,200 Placing Shares and 1,000,000 Placing Shares respectively pursuant to the Placing.
Following Admission, Ruffer LLP will have a beneficial interest in 20,938,389 Ordinary Shares, representing 16.6 per cent. of the Enlarged Share Capital and London Finance and Investment Group P.L.C. will have a beneficial interest in 10,000,000 Ordinary Shares, representing 7.9 per cent. of the Enlarged Share Capital. Ruffer LLP and London Finance and Investment Group P.L.C. are each a ''related party'' (as defined by the AIM Rules) of the Company by virtue of being existing substantial shareholders in the Company. The Directors having consulted with Cenkos, the Company's Nominated Adviser for the purposes of the AIM Rules, believe the terms of the related party subscriptions are fair and reasonable insofar as the Shareholders of the Company are concerned.
Placing and Transaction Considerations
As set out in the Recommendation section below, the Directors believe the Transaction to be in the best interests of the Company and its Shareholders as a whole. In making this statement the Directors have spent time, and have taken appropriate advice from Cenkos, in considering the Transaction and the method by which the cash consideration payable under the Acquisition Agreement should be raised. The Directors concluded that a Placing was the most appropriate structure to raise equity funding, alongside funds raised from the New Debt Facilities, for the following reasons:
 a non-pre-emptive offer enabled the Company to demonstrate funding certainty to the vendors of Fennel and their advisors ahead of entering into the Acquisition Agreement. The Directors do not believe Finsbury Food would have secured exclusivity on the Acquisition nor have been able to execute the Acquisition Agreement, within the proposed timetable, without the certainty of funds provided via a placing;
 the Directors believe it is important, based on investor feedback, to maintain a net debt to EBITDA leverage ratio of less than approximately 2.5 times in order to maintain financial flexibility and stability going forward as a publicly listed company. In adopting this leverage ratio the required amount of money to be raised via a new equity issue to fund the consideration for the Acquisition, was significant relative to the size and market capitalisation of the Company. The Directors do not believe the necessary equity funds could have been raised from existing Shareholders alone and, based on advice, the Placing represented the most attractive structure for new incoming investors;
 the Placing Price represents a discount to the closing mid-market price of [4.1] per cent. per Ordinary Share as at 9 October 2014 (being the latest practicable date prior to the date of this announcement). The Directors believe the minimal pricing discount of the Placing Shares makes the Placing an attractive source of finance for the Company whilst minimising dilution for Shareholders. Shareholders will also benefit from the expected operational and financial performance of the Enlarged Group going forward;
 the Placing enables the Company to attract a number of new institutional shareholders to its shareholder register, which the Directors expect will improve liquidity going forward; and
 the time and costs associated with a pre-emptive offer would have been significant, especially the requirement to produce a prospectus for a rights issue or open offer, and offered no certainty of a meaningful funding.
Admission 
Application will be made by the Company for the Existing Ordinary Shares and the Placing Shares to be admitted or re-admitted, as the case may be, to trading on AIM. Subject to the passing of the Resolutions, Admission is expected to occur and dealings to commence on 30 October 2014.
If the Transaction is not completed, the Existing Ordinary Shares will continue to be traded on AIM, the Acquisition and the Placing will not take place and the Placing Shares will not be admitted to AIM. Application has been made for the Placing Shares to be eligible for admission to CREST with effect from Admission.
Voting Undertakings
The Company has received undertakings from certain Shareholders to vote in favour of each of the Resolutions. These persons, which include the Directors, together have an aggregate beneficial holding of 13,968,036 Ordinary Shares, amounting to 20.9 per cent. of the Existing Ordinary Shares.
General Meeting
An Admission Document containing a notice convening the General Meeting of the Company, to be held at the offices of CMS Cameron McKenna LLP at Mitre House, 160 Aldersgate Street, London EC1A 4DD at 10.00 a.m. on 29 October 2014, has today been sent to Shareholders.
Recommendation
The Directors consider the Transaction to be in the best interests of the Company and the Shareholders as a whole and accordingly unanimously recommend that Shareholders vote in favour of the Resolutions to be proposed at the General Meeting as they intend to do in respect of their own beneficial holdings amounting, in aggregate, to 2,741,847 Ordinary Shares, representing approximately 4.1 per cent. of the Existing Ordinary Shares.
Admission Statistics
Number of Existing Ordinary Shares
66,904,284
Placing Price
59 pence
Number of Placing Shares being issued pursuant to the Placing
59,322,034
Gross Proceeds of the Placing
35.0 million
Number of Ordinary Shares in issue on Admission
126,226,318
Percentage of the current issued Ordinary Share capital being placed pursuant to the Placing
88.7 per cent.
Market capitalisation on Admission (approximately)
74.5 million
AIM 'ticker'
FIF.L
SEDOL
0918642
ISIN number
GB0009186429
Expected Timetable of Principal Events
Publication of the Admission Document
10 October 2014
Latest date and time for receipt of completed Forms of Proxy
10.00 a.m. on 27 October 2014
General Meeting
10.00 a.m. on 29 October 2014
Completion of the Acquisition
30 October 2014
Admission and dealings in the Enlarged Share Capital commence on AIM
30 October 2014
CREST accounts credited for Placing Shares in uncertificated form
30 October 2014
Despatch of definitive share certificates, where applicable
by 13 November 2014
 

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The company news service from the London Stock Exchange
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