REG - Mothercare PLC - Equity issue and restructuring

MothercareAnnouncement

09/07/2018 07:05

RNS Number : 9761T
Mothercare PLC
09 July 2018
 


NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION (IN WHOLE OR IN PART) IN, INTO OR FROM THE UNITED STATES, AUSTRALIA, CANADA, JAPAN OR THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION
 
The information contained within this announcement is deemed by the Company to constitute inside information for the purposes of the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.
 
THIS ANNOUNCEMENT IS AN ADVERTISEMENT FOR THE PURPOSES OF THE UK PROSPECTUS RULES OF THE FINANCIAL CONDUCT AUTHORITY ("FCA") AND DOES NOT CONSTITUTE A PROSPECTUS OR A PROSPECTUS EQUIVALENT DOCUMENT. NEITHER THIS ANNOUNCEMENT NOR ANY PART OF IT SHOULD FORM THE BASIS OF OR BE RELIED ON IN CONNECTION WITH OR ACT AS AN INDUCEMENT TO ENTER INTO ANY CONTRACT OR COMMITMENT WHATSOEVER. INVESTORS SHOULD NOT SUBSCRIBE FOR OR PURCHASE ANY SHARES REFERRED TO IN THIS ANNOUNCEMENT EXCEPT ON THE BASIS OF INFORMATION CONTAINED IN THE PROSPECTUS TO BE PUBLISHED BY THE COMPANY IN DUE COURSE IN CONNECTION WITH THE PLACING AND OPEN OFFER. COPIES OF THE PROSPECTUS WILL, FOLLOWING PUBLICATION, BE AVAILABLE FROM THE COMPANY'S REGISTERED OFFICE AND ON ITS WEBSITE  WWW.MOTHERCAREPLC.COM
 
 
Mothercare plc
("Mothercare", the "Company" or the "Group")
Fully underwritten £32.5m equity issue and restructuring update
 
Mothercare today announces that it has made good progress with the refinancing and restructuring plans set out on 17 May 2018 and can now update on the final stages of this process, including:
 
Equity raise and refinancing
 
•            A fully underwritten equity issue to raise £32.5m from our existing shareholders (the "Capital Raising")
•            The Capital Raising will be effected by way of a 1 for 1 placing and open offer at 19 pence per New Ordinary Share which is expected to complete on 27 July 2018
•            The revised debt facilities of £67.5m (the "New Debt Facilities") provided by Mothercare plc's existing lenders remain conditional upon, amongst other things, the completion of the Capital Raising
•            Mothercare will shortly be publishing a Prospectus in connection with the Capital Raising and will convene a General Meeting to approve certain matters necessary to implement the proposed Capital Raising
 
CVA Proposals
 
•            The CVA challenge periods for both Mothercare UK Limited and ELC Limited completed last week and no challenges have been made or filed with the High Court.  Accordingly those CVAs are now effective
•            The CVA proposal in respect of Childrens World Limited ("CW") did not receive the required support from creditors, and as such, the CW directors have resolved to place CW into administration, which will result in the transfer of 13 of its 22 stores to other Mothercare group companies to continue trading
•            The completion of the Group's other CVA Proposals and the administration of CW are expected to result in the exit from 60 UK stores and a continuing UK store estate of 77 stores for Mothercare as a whole by June 2019, with 19 of those stores on reduced rent
 
Outlook
 
•            Current trading continues to follow the patterns seen in the second half of the last financial year, with challenging conditions in the UK and some stability visible in our International operations
•            The Group's efficiency and cost savings initiatives have now identified cost savings totalling £19m together with £10m cash realisation arising out of the processes outlined above and other programmes
 
Clive Whiley, Interim Executive Chairman, said:
 
"When I joined the business just three months ago, Mothercare faced a bleak future with growing and pressing financial stresses upon the business.  We have worked tirelessly as a team to get to where we are today and this fully underwritten equity issue marks the end of this initial phase, returning the Group to financial stability. This could not have happened without the support of all of our stakeholders for which we are very grateful.
 
"Alongside the fundraising, we have been very busy on numerous fronts to restructure the Group for future profitability. Whilst the lack of full approval for the Childrens World CVA was disappointing, we have now found a solution which allows us to go further and faster with the right-sizing of our store portfolio. We have also identified significant areas for further efficiencies and cost savings, which will underpin our return to a sustainable future.
 
"The last three months of hard work and progress have put in place the foundations to get Mothercare back to where it should be as a fit for purpose business with a stronger and more efficient structure both for our UK business and our International franchisees."
 
Mark Newton-Jones, Chief Executive Officer, said:
 
"After a very challenging period for our business, we have now finalised arrangements to restructure and refinance the Group, ensuring that the transformation of the Mothercare brand we started four years ago can now be completed. Mothercare is a great British brand with over 50 years of heritage and we now have the financing in place to take it forward for many more years to come.
 
"We have seen an unprecedented period for UK retail and we have not been alone in facing a number of strong headwinds. I'm pleased to say however, that we are now in a position to re-focus on our customers and improve the Mothercare brand both in the UK and across the globe. We have exciting plans ahead to revitalise the brand through enhancing our product ranges, improving our design and value, developing our digital and multi-channel proposition and investing in our people. Our goal remains clear, to be the leading global specialist for parents and young children."
 
 
Enquiries
 
Mothercare plc
Mark Newton-Jones / David Wood / Glyn Hughes    
01923 694935
 
MHP Communications
Tim Rowntree / Simon Hockridge
020 3128 8789 / 8778
 
Numis Securities Limited
Luke Bordewich / Oliver Cardigan / Oliver Cox   
0207 260 1000
 
Shore Capital
Dru Danford / Patrick Castle / Daniel Bush
0207 408 4090
 
 
Notes:
1.           This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014
2.           The person responsible for the release of this announcement is Glyn Hughes, CFO at Mothercare plc, Cherry Tree Road, Watford, Hertfordshire, WD24 6SH
3.           LEI number of Mothercare plc: 213800ZL6RPV9Z9GFO74.
 
 
1.    INTRODUCTION
 
On 17 May 2018, Mothercare announced a full refinancing of the Group and a restructuring of the Company's UK operations.
 
As part of the Capital Refinancing Plan, the Company announced a fully underwritten placing and open offer of New Ordinary Shares to raise approximately £28 million in gross proceeds. After discussions with certain of the Company's major shareholders and in order to supplement working capital requirements, the Company has elected to increase the size of the Placing and Open Offer of New Ordinary Shares and is now conducting a fully underwritten Placing and Open Offer at an Issue Price of 19 pence per New Ordinary Share to raise approximately £32.5 million in gross proceeds (the "Capital Raising"). Pursuant to the Capital Raising the Company is offering to its Qualifying Shareholders one New Ordinary Share at an Issue Price of 19 pence for every one Existing Ordinary Share.
 
The Capital Raising is part of the Company's wider capital refinancing plan providing funding of £117.5 million in aggregate to implement the acceleration of the Group's transformation plan. The capital refinancing plan comprises the following key elements (together, the "Capital Refinancing Plan"):
a)    the New Debt Facilities of £67.5 million with a final maturity extended to December 2020 and certain interim step downs to be provided by the Company's existing Senior Lenders (the "New Debt Facilities");
b)    the new £8 million shareholder loans from certain of the Company's largest shareholders (the "Shareholder Loans"), each of which is, subject to shareholder approval as a related party transaction (as defined in the Listing Rules) convertible into New Ordinary Shares at the lower of: (i) 19 pence per New Ordinary Share; and (ii) the most recent price at which any Shareholders have subscribed for newly issued equity in the Company since entry into the Shareholder Loans (the "Related Party Transactions");
c)    the £32.5 million Capital Raising;
d)    working capital initiatives releasing up to £10 million from the Company's existing trade debtor balances (the "Debtor Financing"); and
e)    the restructuring of the Group's UK store portfolio through company voluntary arrangements of the Company's subsidiaries, Mothercare UK Limited and Early Learning Centre Limited, and the entry into administration of Childrens World (the "UK Restructuring").
 
The CVA Proposals were approved by the unsecured creditors and shareholders of the CVA Companies at the relevant creditor CVA meetings on 1 June 2018 and took effect following expiry of the statutory period, during which a challenge could be made to the relevant courts under the relevant legislation (the "Challenge Period"). The Challenge Period expired on 5 July 2018 without any such challenge having been successfully made and it is therefore expected that the CVA Proposals will complete imminently. Full implementation of the Capital Refinancing Plan is now solely conditional upon completion of the Capital Raising set out in this announcement.
 
As announced by the Company on 4 June 2018, the company voluntary arrangement proposal in connection with the Company's subsidiary Childrens World was not approved by the necessary 75 per cent. majority of unsecured creditors by a very narrow margin at 73.3 per cent. Accordingly, the company voluntary arrangement proposal for Childrens World did not progress any further. After exploring all available options, the directors of Childrens World have decided to place Childrens World into administration. The directors of Childrens World have submitted a notice of intention to appoint administrators to the High Court and Childrens World is expected to enter formally into administration on 9 July 2018. Mothercare UK Limited has been assigned or assumed leases of 13 stores previously leased in the name of Childrens World and 9 stores previously leased in the name of Childrens World will be closed. Mothercare UK Limited will temporarily occupy (under a licence) the 9 stores due to be closed in order to ensure they are closed down in an orderly fashion.
 
The First Resolution to Fifth Resolution set out in the Notice of General Meeting at the end of the Prospectus (to be published in due course) must be passed in order for the Capital Raising to proceed. However, the Capital Raising is not conditional on the passing of the Sixth Resolution which pertains to the approval of the Related Party Transactions, or the Seventh to Tenth Resolution which constitute general authorities customarily tabled at the Company's annual general meeting. In the event that any of the First Resolution to Fifth Resolution are not passed and the Capital Raising does not proceed, and the Company is unable to avoid a breach of its financial covenants under its New Debt Facilities, the Company would likely have to enter into administration or receivership in early October 2018, at which point Shareholders would lose all or a significant part of the value of their investment in the Company.
 
The purpose of this letter is to set out the background to, and the reasons for, the Capital Raising and to recommend that you vote in favour of the Resolutions set out in the Notice of General Meeting at the end of the Prospectus (to be published in due course).
 
The Capital Raising has been fully underwritten by Numis and Shore Capital on, and subject to, the terms of the Placing Agreement. The principal terms of the Placing Agreement are summarised in paragraph 15.4 of Part X (Additional Information) of the Prospectus (to be published in due course).
 
2.    BACKGROUND TO AND REASONS FOR THE CAPITAL REFINANCING PLAN
               
Since my appointment as Interim Executive Chairman on the 19 April 2018, my priority has been to act as a catalyst to galvanise support from all of the Group's stakeholders and to provide a resolution to the acute short-term cash problems that were facing the Company. In that context, the comprehensive measures set out in the announcement made on 17 May 2018 presented demonstrable evidence of a sea change in the fortunes of Mothercare. Notwithstanding the unavoidable impact the measures will have upon some of the Group's employees, we have to act with urgency to mitigate the headwinds being experienced by the UK retail sector as a whole.
 
This deterioration in the Company's trading performance in the second half of FY 2017/18 was exacerbated by the necessity to run the business for cash in order to operate within the Group's then available financing facilities whilst simultaneously having to bear a mounting burden of professional costs that threatened to inundate the business. The Mothercare executive team successfully managed through this process, without undue pressure on the Group's valued suppliers and trading partners. The Capital Refinancing Plan is comprehensive, harnessing support from key stakeholders and, following completion of the CVA Proposals, the Capital Raising and UK Restructuring, will present a solution to both the operational and financial deficiencies apparent as at 24 March 2018.
 
We have therefore concluded that there is no viable or acceptable alternative to the Capital Refinancing Plan which is expected to enable the Company to refinance fully. With the support of its key stakeholders - employees, suppliers, trade partners, shareholders, lending banks, pension fund and landlords - following completion of the Capital Refinancing Plan, we believe the Company will be well placed to accelerate completion of the Group's transformation plan launched in 2014.
 
We are acutely aware of the impact of the UK Restructuring and of the Capital Refinancing Plan on certain stakeholders and we have taken the opportunity, where legally appropriate, to consult with:
·     the British Property Federation, as the trade body representing many of the Group's UK landlords as well as directly with individual landlords wherever possible;
·     the Pension Protection Fund ("PPF"), the Pensions Regulator and the Pension Trustees of the Company's defined benefit pension schemes (being (i) the Mothercare Executive Pension Scheme; and (ii) the Mothercare Staff Pension Scheme (the "DB Schemes")), as a result of which the PPF, where appropriate, voted in favour of the CVA Proposals at the CVA meetings on 1 June 2018; and
·     employees affected by the proposals.
 
The CVA Proposals triggered a PPF assessment period, during which the PPF assumes the rights of the Pension Trustees, including voting rights. The Company has entered into a deficit recovery contributions deed to ensure that pension scheme contributions are protected, further details of which are set out in paragraph 15.6 of Part X (Additional Information) of the Prospectus (to be published in due course).
 
We anticipate that the Capital Refinancing Plan, together with completion of the UK Restructuring, will allow the Company to accelerate its transformation plan by ultimately generating cost savings of £10 million per annum and in addition, we expect cash realisations of at least £10 million through store closures and other UK and International initiatives within 18 months of the date of this announcement. In parallel, as part of the accelerated transformation plan, we have launched a root and branch review of every facet of the Mothercare business, which is anticipated to yield a further £9 million of annualised cost savings globally.
 
3.    UK RESTRUCTURING
 
Notwithstanding the efforts of management and colleagues in the business and of the Franchise Partners, we have not moved far or fast enough to keep up with the rapidly changing dynamics and shopping patterns of customers. The continued decline of UK store footfall and the inflexible store cost base, alongside the ever growing importance of multichannel and purely e-commerce retailing has challenged the business. This is set against the context of a UK market environment of depressed consumer confidence, which has presented significant and worsening obstacles to the Group's business model burdened by the current number of stores in the UK.
 
Alongside Mothercare, a significant number of other store-centric UK retailers have faced unprecedented trading and profitability problems in the last year, including, to different degrees, ToysRUs / BabiesRUs, Maplin, Multiyork, Poundworld, New Look, Carpetright, House of Fraser, Debenhams, John Lewis Partnership, Marks & Spencer and Dixons Carphone. We believe that a significant proportion of the issues the Group has faced in the last year reflect broader market and consumer conditions that have impacted ourselves and many other UK retailers with legacy store estates.
 
The restructuring of our UK store portfolio is expected to result in a portfolio of 77 UK stores by June 2019 and 73 UK stores by the end of FY 2021/22. The restructuring of our UK store portfolio from 137 stores at the end of FY 2017/18, has been or will have been, following completion of the CVA Proposals and the entry into administration of Childrens World, implemented as follows:
·     60 stores have been or will be closed by June 2019 (instead of the 50 stores originally announced on 17 May 2018) (this comprises 58 stores closing pursuant to the CVA Proposals and the entry into administration of Childrens World together with another 2 stores closing as a result of expiring or terminated leases which have not been renewed);
·     19 stores will remain open and have had rent reductions; and
·     58 stores will remain open on substantially unchanged terms and/or rents.
 
In addition to the above, the CVA Proposals will also compromise certain intra-group balances owed by the companies undergoing the CVA Proposals in favour of certain entities in the Group. The CVA Proposals did not compromise claims of any creditors other than intra-group creditors and landlords. Accordingly, the claims of all suppliers, the entitlements of employees and recovery contributions to the Group's DB Schemes will continue to be paid in full.
 
 
The Capital Refinancing Plan, together with the completion of the UK Restructuring, will allow the Company to accelerate the transformation plan by:
·     ultimately generating cost savings of at least £19 million per annum, including from rent reductions and store costs and central overheads with £9 million of those cost savings targeted from rightsizing the business globally; and
·     cash realisations of at least £10 million through store closures and other UK and International initiatives within 18 months of the date of this announcement.
 
The completion of the CVA Proposals and the entry into administration of Childrens World are vital steps to return the Group's UK business towards financial sustainability and positive cash contribution. The Group will also improve its customer offer and product range, sharpen the in-store execution of the remaining estate and, alongside these changes, invest in its online proposition in order to support sustainable growth in the longer term. Our base plans conservatively assume a significant reduction in the sales volume from the stores that are closing notwithstanding that over recent years the growth in online sales has broadly matched the decline in store sales due to store closure. This prudent approach to our base plan creates a further opportunity. Our UK retail operations team will focus in particular on the Group's online offering in order to recapture a larger proportion of sales from these closures.
 
As the Group moves forward following the UK Restructuring, our long-term aim is to operate Mothercare with no term debt for the foreseeable future, utilising the Group's New Debt Facilities to finance its normal seasonal intra-year working capital cycle. We aim to achieve this by a disciplined approach to further cost cutting and working capital initiatives that are already in train, alongside definitive and challenging internal executive targets, hard-wired into the business and designed to truly transform the business. We believe nothing less is acceptable at this stage of Mothercare's development.
 
4.    OUR STRATEGY
 
The Group's vision is to be the leading global specialist for parents and young children. The Group has made material progress towards becoming a digitally-led business supported by a modern store estate with appropriate IT systems and an efficient operational infrastructure. Following the implementation of the Capital Refinancing Plan, we will accelerate the transformation plan of Mothercare.
 
We believe that in the last few years our strategy has been broadly correct - defining the Group's vision to be the leading global specialist for parents and young children, and in the UK transitioning from a large portfolio of legacy high-street stores to a smaller portfolio of modern refurbished stores primarily situated on retail parks. These stores offer a broad mix of mother and baby products, related services and community hub activities supported by a significant and growing e-commerce business. The repositioning of our store estate will now be accelerated by the UK restructuring as we seek to invest in improving efficiency, our specialist credentials and the overall customer experience. Additionally, we will maintain a strong focus on cash generation and returns from our store estate.
 
There are six key elements which underpin the Group's accelerated transformation plan:
·     become a digitally-led business,
·     supported by a modern retail estate,
·     offering style, quality and innovation in product,
·     stabilise and recapture gross margin,
·     running a lean organisation whilst investing for the future, and
·     expanding further internationally.
 
Become a digitally-led business
The Group has made significant progress with its strategy to become digitally-led with enhanced multi-channel retailing through development of an improved online offering and tablet enabled in-store ordering facilities. We believe there is further scope to continue to improve the online performance, both in the UK and internationally.
 
There is a general market trend of customers towards researching and purchasing products online and in particular using their mobile phones. Research shows that the Group's customers are amongst the fastest adopters of mobile phones for online browsing of those customers surveyed. Approximately 75 per cent. of the total Mothercare and ELC website visits (combined) were made on mobile phones. We believe that in the UK today the vast majority of customers have a digital touchpoint with Mothercare through either its online website and app or social media channels and many choose to interact entirely online without visiting a physical store. We expect that over the medium term the vast majority of the Group's global customers will engage at some point through digital means, even if they ultimately transact through one of the stores.
 
Mothercare intends to make further investment in its digital offering, improving the customer's experience on the website, integrating more effectively the digital and in-store customer experience through tablet devices in stores and building on the strong customer database for personalised marketing.
 
The UK business has built an extensive database of nearly 2.7 million customers (being active in the last 12 months), intends to extract greater value from its customer database through personalised marketing, including developing the MyMothercare membership customers (representing nearly 750,000 within that database) where we have both due date and birth date, allowing further engagement, improved personalisation and spend.
 
In FY17/18, approximately 43 per cent. of all the UK sales were transacted digitally, including both pure e-commerce sales and also digital orders made on tablet devices in store. The digital penetration of the UK sales increased to 49 per cent. in the fourth quarter of FY17/18. The Directors believe this sales mix can grow to more than 50 per cent. of UK turnover over the medium term, but to do so the Group will need to continue to invest in its digital offering, infrastructure and IT systems. We are seeing the same consumer trends towards online sales internationally albeit the UK is the most advanced market for Mothercare in terms of both digital engagement and purchasing behaviour.
 
The relative profitability of Mothercare online sales is higher than those of Mothercare store-based sales. This is unusual in UK retail and reflects a relatively low store sales density compared with many retailers, which means that store occupancy costs to sales and store payroll to sales make selling through stores relatively inefficient. The Group's returns rate for online sales is far lower than experienced by many online fashion retailers who are negatively impacted by the trend to order several sizes to try on at home. As a leader in the mother and baby market, the Group receives 52 per cent. of its traffic organically (unpaid) and, its paid traffic has an average cost per click at 20 pence. By comparison top-ranking electronics or mobile phone paid traffic typically has a cost of 100 pence per click.
 
We have reviewed our digital proposition and will, in particular, improve the customer experience from checkout to product delivery which is a known pain point for customers. We will upgrade the look and feel of the website and optimise the accessibility of the advisory and product content, including improving site speed. Social and content are key to the digital growth agenda and we will continue to invest in building our community engagement and influencer strategy. We have already launched a new and improved digital booking platform for in-store events and specialist services this year. With all our digital innovation and optimisation, we will continue to work with our major partners to share learnings and best practice as they accelerate their digital sales growth.
 
Internationally, the multi-channel offerings of Franchise Partners have increased substantially in the last four years so that the Group now operates online channels in 23 countries. We aim to continue to develop the know-how of the Franchise Partners using the experience from the UK and by increasing the content and database support to develop the international online proposition further beyond just transactional sites. We will work with our Franchise Partners to improve their insight around local digital customer behaviour, launch new websites, build extended online ranges, develop their online marketing and social media capability, develop customer databases capturing lifestage data, build customer relationship management programmes, develop in-store digital ordering capability on tablet devices and develop the capability of colleagues to grow incremental sales by leveraging tablet-based digital ordering.
 
Supported by a modern retail estate
The Group, with advice from KPMG LLP, the Group's financial adviser on the CVA Proposals, carried out a comprehensive review of the Group's property portfolio and has identified 71 sites that were underperforming and/or on unfavourable lease terms or, in certain cases, not expected to have significant strategic value going forward. The Group's property leases were categorised into four categories, and the CVA Proposals and entry into administration of Childrens World have been structured to effect an acceleration of the transformation plan.
 
To date some 90 per cent. of the investment over the last four years in refurbishing the UK store portfolio has been concentrated upon the Group's continuing store portfolio in the UK.
 
We believe our targeted store portfolio with fewer stores and reduced rent and cost base, but in select locations will position us in our vision to be the leading specialist for parents and young children. Through our stores we will seek to bring to life our specialist proposition, in particular through offering improved training enhancing colleague knowledge in our specialism of mother and baby, additionally, we will incentivise our staff as they become more highly trained and better skilled at selling. Our position as a specialist will be enhanced through our offering of high value specialist services, for example ultrasound scanning and antenatal services. We will also seek to establish our stores as community hubs through organising events and promotional activities for expectant parents and also new parents.
 
The Group has enhanced the customer experience in-store through its newly refurbished stores with improved presentation and visual merchandising standards, and online by way of improved photo and video presentation and improved delivery services enabling customers to receive products at their convenience at home, at work or in store. Recent customer research highlights that customers are less price sensitive for a retailer that excels as a specialist (for example Lush, Body Shop, Waterstone's). We know that long-term sustainability of our brand comes through our vision to be the leading global specialist for parents and young children and whilst our specialist capabilities have improved, we believe we can build on this further.
 
The Group has increased its spend per head on store colleague training and created specialist learning and development roles to create and deliver training, as well as leveraging training from third-party product suppliers. The Group runs regular nationwide specialist expectant parent events in its stores where approximately 90,000 customers from the Group's database of nearly 2.7 million customers (being active in the last 12 months) have attended events to learn about and purchase products. These are supported by ancillary services providers such as first aid trainers, local midwives, baby massage and the National Childbirth Trust all of which provide education and knowledge to expectant parents. All the Group's stores offer maternity bra fitting, and most of the Group's stores offer car seat fitting as well as personal shops, and the Group's larger stores offer a wider range of specialist services such as ultrasound scanning of which over 30,000 scans were completed last year in mothercare stores, Memory Makers (creating keepsakes) and Clarks infant and children's shoe shops. We are planning to continue to grow the Group's high-value specialist services which results in significant increased footfall within the stores business. We are also planning to restructure the Group's store teams to create a defined specialist career path with training, certification and enhanced rates of pay.
 
Using the Group's UK database of nearly 2.7 million customers (being active in the last 12 months), of whom nearly 750,000 are in the MyMothercare database (being active in the last 12 months), the Group sends out emails with product recommendations and advisory content, personalised to the customer's life stage (week of pregnancy). The Group offers specialist service through live chat, information and advisory content, the mothercare blog, the mothercare Youtube channel and content through social media including Facebook (385,000 followers), Twitter (90,000 followers) and Instagram (145,000 followers). In the Middle East the Group's social following is even more advanced with over 900,000 followers. Mothercare's '2am Club' social media concept, originally created for lonely parents up in the middle of the night feeding, now has a Facebook community of 5,000 followers engaging with each other 24/7 for support and advice on all topics of pregnancy and early parenthood. The Group runs a weekly Facebook Live chat with a qualified midwife where the '2am Club' community can check in and ask questions. The Group is continually building its library of content, developing specialist partnerships and creating innovative ways to connect with the mothercare community, building enduring relationships with its customers that over time should reflect back to brand strength and commercial performance improvements.
 
Offering style, quality and innovation in product
The Group aims to improve the quality and newness of the product range both in-store and online and present it more effectively to its customers. The Group has restructured its ranges into a 'Good, Better, Best' product architecture, demonstrating good value products across all price points and supplementing these with exclusive third-party products and new brands. Exclusive products have been introduced across the branded Home & Travel ranges. This has increased from approximately 5 per cent. in FY 2013/14 to approximately 40 per cent. today.
 
We continue to work with suppliers to introduce new brands and exclusive ranges, while adapting to the more difficult trading conditions experienced in the UK during FY 2018/19. The Group is sharpening its focus on its core markets of maternity, newborn, baby and toddler up to preschool and rationalising its ranges for older children. In Home & Travel we remain market leaders in travel and nursery furniture with a 44 per cent. share in pushchairs (FY 2016/17: 43 per cent.); 30 per cent. in car seats (FY 2016/17: 30 per cent.); 30 per cent. in bedding (FY 2016/17: 29 per cent.), and 32 per cent. in nursery furniture (FY 2016/17: 31 per cent.). The Group launched 345 new exclusive to Mothercare products in the year (FY 2016/17: 265), introducing new brands including Nuk, Safety First and Diono. In Clothing & Footwear, ranges such as My K by Myleene Klass, Little Bird by Jools Oliver, and Peter Rabbit, continued to resonate well with customers. Little Bird reached the age of five during the course of FY 2017/18 and is ranked as one of the Group's favourite brands since its launch, as voted by consumers. In Toys, the focus continued on running established brands such as Happyland and Blossom Farm, whilst growing ranges in areas of opportunity such as sports and outdoor. We plan to introduce more capsule ranges and adopt more brands exclusive to Mothercare.
 
Stabilise and recapture gross margin
In FY 2017/18, the Group's gross margin in the UK decreased as a result of a heavy reliance on promotional activity to drive sales and generate cash, triggered in part by the softened UK consumer environment. Gross margins grew by 34 basis points in the first half of FY 2017/18, but then went into decline in the second half of FY 2017/18 as the business saw sales of full price products fall as a result of the deteriorating consumer environment. Promotional activity was necessary to stimulate demand and in turn customers bought more heavily into the discounted items, particularly over the peak trading period.
 
The increase in cost of goods from the devaluation of sterling against the US dollar was partly negotiated away, but resulted in price increases for customers of 3 to 5 per cent. in FY 2017/18. These increases began to have an impact towards the end of the first half of FY 2017/18.
 
We finished FY 2017/18 with a margin reduction of 216 basis points and the percentage of full price product sales was 58 per cent. (FY 2016/17: 60 per cent.).
 
The Group intends to stabilise its gross margins and return to margin growth by:
·     improved buying negotiation through better product sourcing;
·     pricing for value with quality;
·     repositioning of the brand back to full price, leveraging specialism; and
·     marketing of quality, style and design and good value for money under the banner of "Lovingly Made, Perfectly Priced".
 
We believe that the Group's strong market position in the UK and the scale of its business internationally should enable it to work in partnership with suppliers to deliver on this strategy. As a result, we believe that some of the UK gross margin rate lost in FY 2017/18 can be recaptured over the medium term.
 
Running a lean organisation whilst investing for the future
The Group has pursued a strategy over the last three financial years to reduce its non-store operating costs and has made progress towards achieving this target, primarily through restructuring and Group reorganisation efforts intended to enforce tight management of central costs at the Group's head office and overseas sourcing offices, including a reduction in staff and improved sourcing efficiencies.
 
In FY 2017/18, the Group took decisive action to reduce the central cost base to become a leaner business. There remains a tight control over costs and further cost reduction initiatives have been identified in order to accelerate business simplification and to drive further central overhead savings and efficiencies. We also continued to invest in key areas such as warehousing, where the consolidation is now complete, and we can now fulfil products for both stores and online from one single site. This has led to a reduction in transportation costs. We also upgraded planning and merchandising systems to enable better management of stock and markdown, which in turn will reduce the working capital requirements of the Group.
 
We recognise that maintaining a lean cost organisation is an essential part of delivering the accelerated transformation plan. In maintaining a lean organisation we will focus on:
·     restructure the UK to create a relationship that mirrors the international franchisor/franchisee operating model;
·     review our product sourcing capabilities whilst sharpening the focus on product design;
·     reducing central headcount and cost; and
·     continued rationalisation of non-people costs.
 
Expanding further internationally
The Group expects to continue to grow its successful International business in partnership with its Franchise Partners. The Group currently has 33 Franchise Partners and operates in 50 countries and has a significant presence in the Middle East and many of the key emerging markets globally, including China, India, Indonesia and Russia. Over 80 per cent. of the international revenue is generated from these key markets. During the course of FY 2017/18, 122 stores were opened and 141 closed as part of the Group's rationalisation plan in certain territories. The 33 Franchise Partners now operate 1,139 stores in 50 countries, across 2.9 million sq. ft. of retail space. Recently Mothercare has transitioned from a joint venture in China to a franchise operation in order to maximise retailing opportunities in that particular market. The Group also entered the Vietnamese market through a franchised store and a further two stores are in development. Furthermore, the Group aims to consolidate its position in those markets where it sees significant growth opportunities whilst closing out Franchises in underperforming jurisdictions.
 
The Group's franchise agreement in India, a significant and growing market, is now under the ownership of the Reliance Group, one of India's largest companies and a significant retailer of local and international brands. The Mothercare brand positioning, and specialist knowledge, combined with the Reliance Group's stores and digital knowledge, is expected to enable Mothercare to enter a new phase of growth and realise the full potential of the mothercare brand in India.
 
Over the past few years the Group has been working together with its longstanding Franchise Partners to restructure, regularise and formalise its arrangements and contracts. We have entered into new contracts with a number of the key Franchise Partners, and will seek to repeat this across our International network. This will enable the Group over time to right size and strengthen its International business with terms of trade that incentivise the Franchise Partners to support sustainable growth and brand strength, improve direct and online operations in their markets and internationally, and enhance the cash generation and profitability of Mothercare's international territories.
 
In line with its intention to become a digitally-led business with a modern store estate, the Group aims to facilitate the extension of online sales with a key focus on its major markets. In both China and Russia our online business is in excess of 10 per cent. of sales, but the remaining markets, whilst having grown from 1.6 per cent. in FY 2014/15 to 3.3 per cent. in FY 2017/18, have significant room for growth.
 
5.    MANAGEMENT AND BOARD CHANGES
 
I would like to thank Alan Parker, who stepped down in April 2018 after six years as Chairman, for his service to the Company. In addition, as announced on 14 June 2018, Richard Rivers and Lee Ginsberg will step down with effect from the conclusion of the Company's next annual general meeting on 19 July 2018 and I would also like to thank them for their service over the past decade. We will commence the process of searching for a Senior Independent Non-executive Director to replace Richard Rivers following the Capital Raising. On 17 May 2018, Mark Newton-Jones agreed to return as Chief Executive Officer to complete the transformation plan he started and to work in tandem with David Wood as Group Managing Director. We recognise the need for strength and depth in both retailing and change management skills, extra retail resource and an appropriate blend of skills at senior level to deliver the challenging turnaround and UK Restructuring. These changes will reinforce the Board as it addresses the significant operational execution, cash and cost management exercise which lies ahead, alongside the change to a more "customer first" culture. We now have a first-class executive team - including Glyn Hughes as Chief Financial Officer - to ensure implementation of the transformational tasks ahead of us.
 
We are also taking measures to ensure that our board composition is appropriate from a governance perspective for a company of this size and nature. In addition, we believe that our current Board is cohesive and wholly engaged at an Operating Board level and has the advantage of access to Non-executive Directors with deeply embedded and relevant skills in retail and business change.
 
6.    INTER-CONDITIONALITY OF THE CAPITAL REFINANCING PLAN   
 
The Capital Raising, the conversion of the Shareholder Loans into equity and the continued availability of the New Debt Facilities and of the Debtor Financing were all conditional (amongst other things) on the end of the Challenge Period, which has now expired. However, the continued availability of the New Debt Facilities and the Debtor Financing remains conditional on the Capital Raising taking place. Due to the inter-conditionality of the respective elements of the Capital Refinancing Plan described above, if the First Resolution to Fifth Resolution are not passed or Numis exercises its right to terminate the Placing Agreement, and the Capital Raising does not proceed the New Debt Facilities, the Shareholder Loans and the Debtor Financing will become immediately re-payable on 30 September 2018 meaning that Mothercare will experience an immediate liquidity shortfall of up to £79.8 million in September 2018. The Capital Raising is not conditional on the passing of the Sixth Resolution which pertains to the approval of the Related Party Transactions, or the Seventh to Tenth Resolution which constitute general authorities customarily tabled at the Company's annual general meeting. If the Related Party Transactions are not approved by the Shareholders at the General Meeting, the Capital Raising and Capital Refinancing Plan will still be able to proceed, the Shareholder Loans will not convert to equity but the Company will not need to repay the Shareholder Loans until their maturity on 30 June 2021. As a result, if the First Resolution to Fifth Resolution are not passed and the Capital Raising and the Capital Refinancing Plan are not successfully completed and the Group is unable to avoid a prepayment event under the New Debt Facilities and the resulting liquidity shortfall, or is unable to secure alternative long-term financing, or cut costs and capital investment throughout the Group, or dispose of certain of the Group's assets before a liquidity shortfall or a default occurs, the Company would be likely to enter into administration or receivership in early October 2018, at which point Shareholders would lose all or a significant part of the value of their investment in the Company.
 
7.    USE OF PROCEEDS
               
The Capital Raising is expected to raise approximately £32.5 million in total gross proceeds. The conversion of the Shareholder Loans, if approved by Shareholders at the General Meeting, would release a further £8 million from debt. Following deduction of total transaction costs in respect of the Capital Refinancing Plan of £8.5 million, this will result in approximately £32.0 million of net proceeds, which the Directors intend to use to pay down the Company's existing indebtedness under the New Debt Facilities. As noted above, we intend to operate Mothercare with no term debt for the foreseeable future, utilising the Group's New Debt Facilities to finance its normal seasonal intra-year working capital cycle.
 
8.    CURRENT TRADING AND PROSPECTS
 
The performance of the Group since the start of FY 2018/19 has broadly followed a similar pattern to that seen in the second half of FY 2017/18. Conditions in the UK have remained challenging, with consumer confidence and store footfall remaining under pressure as also set out in paragraph 3 of this Part I (Letter from the Interim Executive Chairman of Mothercare plc). Against a backdrop of increased promotional activity, Mothercare has delivered a UK performance in the first 14 weeks of FY 2018/19 to date with total sales down 7.0 per cent. compared with the 14 week period in FY 2017/18 and like for like sales down 4.6 per cent. over the same period. Our International business has continued to stabilise with total sales down 1.2 per cent. in the first 14 weeks of FY 2018/19 compared with total sales over the same period in FY 2017/18. We expect these conditions in both the UK and our international markets to continue for the foreseeable future.
 
We currently expect our performance in FY 2018/19 to be volatile and variable from month to month taking into account current conditions and uncertainties in the UK economy, annualisation of last financial year's sales patterns and the shorter term impacts of the operational changes and restructuring. Whilst we are confident the changes we are executing will deliver the planned benefits in the medium term, it is likely that there may be short term impacts on our business operations during FY 2018/19 as we effect these changes.
 
9.    OVERSEAS SHAREHOLDERS
 
The attention of Overseas Shareholders who have registered addresses outside the United Kingdom, or who are citizens or residents of, or are located in, countries other than the United Kingdom, is drawn to the information in Part IV (Terms and Conditions of the Capital Raising) of the Prospectus, which is to be published in due course.
 
9.1 United States
The New Ordinary Shares have not been, and will not be, registered under the US Securities Act or under the securities laws of any state, district or other jurisdiction of the United States. Accordingly, the New Ordinary Shares may not be offered, sold, resold, delivered, distributed or otherwise transferred, directly or indirectly, within the United States unless such offer and sale is made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act. The New Ordinary Shares are being offered or sold outside the United States, in reliance on Regulation S.
 
None of the securities referred to in this announcement have been approved or disapproved by the SEC, any state securities commission in the United States or any other US regulatory authority, nor have such authorities passed upon or determined the adequacy or accuracy of this announcement. Any representation to the contrary is a criminal offence in the United States.
 
9.2 Other jurisdictions
This announcement and any accompanying documents are not being made available to Overseas Shareholders with registered addresses in any Excluded Territory and may not be treated as an invitation to subscribe for any New Ordinary Shares by any person resident or located in such jurisdictions or any other Excluded Territory.
 
The New Ordinary Shares have not been, and will not be, registered under the applicable securities laws of any Excluded Territory. Accordingly, the New Ordinary Shares may not be offered, sold, delivered or transferred, directly or indirectly, in or into any Excluded Territory to or for the account or benefit of any national, resident or citizen of any Excluded Territory.
 
This announcement has been prepared to comply with English law, the Prospectus Rules and the Listing Rules, and the information disclosed may not be the same as that which could have been disclosed if this announcement had been prepared in accordance with the laws of jurisdictions outside the United Kingdom.
 
NONE OF THE SECURITIES REFERRED TO IN THIS ANNOUNCEMENT SHALL BE SOLD, ISSUED OR TRANSFERRED IN ANY JURISDICTION IN CONTRAVENTION OF APPLICABLE LAW.
 
10.  PRINCIPAL TERMS OF THE CAPITAL RAISING       
 
The Company is proposing to raise approximately £32 million (before estimated expenses of approximately £2.2 million) by way of Placing and Open Offer of up to 170,871,885 New Ordinary Shares, representing, in aggregate, 42.3 per cent. of the Enlarged Share Capital, at an issue price of 19 pence per New Ordinary Share.
 
Separate to the Placing and Open Offer, the Company has entered into the Shareholder Loan Agreements (as more fully described in paragraph 15.5 of Part X (Additional Information) of the Prospectus (to be published in due course)), pursuant to which £8 million was provided to the Company for use towards general corporate and working capital purposes of the Group. The Shareholder Loans are fully drawn down and are convertible into New Ordinary Shares, subject to, among other things, approval of the Related Party Transactions.
 
Both the conversion of the Shareholder Loans and the Issue Price for the Placing and Open Offer will be priced at 19 pence per New Ordinary Share. The Issue Price of 19 pence per New Ordinary Share represents an approximately 33.6 per cent. discount to the Closing Price of 28.6 pence per Ordinary Share on the Reference Date and an 11 per cent. discount to the Closing Price of 21.3 pence per Ordinary Share on 16 May 2018, being the business day prior to the announcement of the Capital Refinancing Plan. This was set as the Issue Price as a result of our assessment of market conditions and following discussions with a number of institutional investors. We are in agreement that the level of discount and method of issue are appropriate to secure the investment necessary. The Issue Price of 19 pence per New Ordinary Share is the highest price at which the Shareholder Loans would convert into New Ordinary Shares resulting in 62,684,400 New Ordinary Shares in aggregate being issued to these Shareholders in full discharge of all loan and interest sums due at the time of conversion, if the Related Party Transactions are approved by Shareholders at the General Meeting.
 
The Capital Raising has been fully underwritten by Numis and Shore Capital on, and subject to, the terms of the Placing Agreement. The principal terms of the Placing Agreement are summarised in paragraph 15.4 of Part X (Additional Information) of the Prospectus (to be published in due course).
 
The Capital Raising is conditional upon the following:
·     the First Resolution to Fifth Resolution being passed by Shareholders at the General Meeting (without material amendment);
·     the Placing Agreement becoming or being declared unconditional in all respects (save in respect of Admission) and not having been terminated in accordance with its terms prior to Admission; and
·     Admission becoming effective by not later than 8.00 a.m. on 27 July 2018 (or such later time and/or date as the parties to the Placing Agreement may agree, being not later than 8.00 a.m. on 30 September 2018).
 
Accordingly, if any of such conditions are not satisfied, or, if applicable, waived, the Capital Raising will not proceed and any Open Offer Entitlements and Excess Open Offer Entitlements admitted to CREST will thereafter be disabled and application monies will be returned to applications (at the applicant's risk) without interest as soon as possible.
 
Application will be made for the New Ordinary Shares to be admitted to listing on the premium listing segment of the Official List and to trading on the London Stock Exchange's main market for listed securities. It is expected that Admission of the New Ordinary Shares will become effective and dealings in the New Ordinary Shares will commence by 8.00 a.m. on 27 July 2018 (whereupon an announcement will be made by the Company to a Regulatory Information Service).
 
The New Ordinary Shares following completion of the Capital Raising will, in aggregate, represent approximately 50 per cent. of the Company's issued Ordinary Shares following Admission. The New Ordinary Shares issued through the Capital Raising and assuming conversion of the Shareholder Loans in full on their maturity date of 30 June 2021 will represent approximately 57.7 per cent. of the Company's issued ordinary shares, on the assumption that no further Ordinary Shares are issued as the result of the exercise of any options or awards under the Share Schemes between the Reference Date and Admission. The maximum number of New Ordinary Shares which would be issued in respect of a full conversion of all Shareholder Loans would be 62,684,400, representing 15.5 per cent. of the fully Enlarged Share Capital. The above calculations assume that no Ordinary Shares are issued as a result of the exercise of any options or awards under the Share Schemes between the Reference Date and the Record Date.
 
Qualifying Shareholders who do not take up any of their Open Offer Entitlements will suffer a dilution of:
·     approximately 57.7 per cent. to their interests in the Company pursuant to the conversion of the Shareholder Loans (subject to approval of the Related Party Transactions) and the Capital Raising; or
·     approximately 50.0 per cent. to their interests in the Company pursuant to the Capital Raising if the Shareholder Loans are not converted.
 
For these purposes, any dilution which may result from the vesting or exercise of any awards under the Share Schemes between the Reference Date and the Record Date has been disregarded.
 
10.1 The Placing and Open Offer
Numis, as agent of the Company, has also made arrangements to conditionally place the Placing Shares with institutional investors at the Issue Price. The Placing Shares will be subject to clawback to satisfy valid applications by Qualifying Shareholders under the Open Offer. Subject to the waiver or satisfaction of the conditions and the Placing Agreement not being terminated in accordance with its terms, any Open Offer Shares not subscribed for under the Open Offer will be issued to Placees and/or the subscribers procured by Numis, with the net proceeds of the Placing being retained by Mothercare.
 
Open Offer Entitlements
Qualifying Shareholders have the opportunity under the Open Offer to subscribe for New Ordinary Shares at the Issue Price, payable in full on application and free of expenses, pro rata to their existing shareholdings, on the basis of
 
one New Ordinary Share for every one Existing Ordinary Share
held by them and registered in their names at the Record Date. Fractions of Ordinary Shares will not be allotted and each Qualifying Shareholder's entitlement under the Open Offer will be rounded down to the nearest whole number.
 
Qualifying Shareholders are also being offered the opportunity to subscribe for Excess Shares in excess of their Open Offer Entitlements pursuant to the Excess Application Facility as described below.
 
Fractional entitlements to New Ordinary Shares will be aggregated and offered with the Excess Shares pursuant to the Excess Application Facility, and will ultimately be sold as part of the Excess Application Facility or the Placing, in each case for the benefit of the Company.
 
Excess Application Facility
Qualifying Shareholders may apply to subscribe for Excess Shares using the Excess Application Facility, should they wish. Qualifying Non-CREST Shareholders wishing to apply to subscribe for Excess Shares may do so by completing the relevant sections on the Application Form. Qualifying CREST Shareholders who wish to apply to subscribe for more than their Open Offer Entitlements will have Excess Open Offer Entitlements credited to their stock account in CREST and should refer to paragraph 4.3 of Part IV (Terms and Conditions of the Capital Raising) of the Prospectus (to be published in due course) for information on how to apply for Excess Shares pursuant to the Excess Application Facility.
 
The Excess Application Facility will comprise Open Offer Shares that are not taken up by Qualifying Shareholders under the Open Offer pursuant to their Open Offer Entitlements, which have been clawed back from Placees and the aggregated fractional entitlements. Qualifying Shareholders' applications for Excess Shares will, therefore, be satisfied only to the extent that any fractional entitlements are aggregated and to the extent that applications by other Qualifying Shareholders are made for less than their pro rata Open Offer Entitlements. If there is an over-subscription resulting from excess applications, allocations in respect of such excess applications will be scaled down at the our absolute discretion in consultation with Numis.
 
Further information on the Open Offer and the terms and conditions on which it is made, including the procedure for application and payment, are set out in Part IV (Terms and Conditions of the Capital Raising) of the Prospectus (to be published in due course) and, where relevant, in the Application Form.
 
Shareholders should be aware that the Open Offer is not a rights issue. As such, Qualifying Non-CREST Shareholders should note that their Application Forms are not negotiable documents and cannot be traded. Qualifying CREST Shareholders should note that, although the Open Offer Entitlements and Excess Open Offer Entitlements will be admitted to CREST, and be enabled for settlement, the Open Offer Entitlements and Excess Open Offer Entitlements will not be tradeable or listed and applications in respect of the Open Offer may only be made by the Qualifying Shareholder originally entitled or by a person entitled by virtue of a bona fide market claim. New Ordinary Shares for which application has not been made under the Open Offer will not be sold in the market for the benefit of those who do not apply under the Open Offer and Qualifying Shareholders who do not apply to take up their entitlements will have no rights nor receive any benefit under the Open Offer. Any New Ordinary Shares which are not applied for under the Open Offer entitlements and Excess Open Offer Entitlements will be allocated to Placees and/or other subscribers procured by Numis or, failing which, to Numis subject to the terms and conditions of the Placing Agreement, further details of which are set out in paragraph 15.2 of Part X (Additional Information) of the Prospectus (to be published in due course).
 
The Placing and Open Offer will raise gross proceeds of approximately £32.5 million.
 
11.  RELATED PARTY TRANSACTIONS
 
The Shareholder Loans consist of separate agreements with Blake Holdings in the amount of £5 million, DC Thomson in the amount of £2 million and Lombard Odier (or affiliates thereof) in the amount of £1 million, amounting to an aggregate sum of £8 million. They comprise an unsecured three year loan carrying a compound coupon of 0.83333 per cent. per month which capitalises into the principal on a monthly basis. The Shareholder Loans include provisions that the principal amount of the loan, together with any accrued, non-capitalised interest and a redemption premium of 10 per cent., may be converted into New Ordinary Shares at the lower of: (i) 19 pence per New Ordinary Share; and (ii) the most recent price at which any Shareholders have subscribed for newly issued equity in the Company since entry into the Shareholder Loans on 17 May 2018.
 
Blake Holdings, DC Thomson and Lombard Odier are regarded as related parties under Chapter 11 of the Listing Rules by virtue of their (or their affiliates') shareholdings in Mothercare. Therefore, the conversions of the Shareholder Loans into New Ordinary Shares are classified as related party transactions (for the purposes of the Listing Rules).
 
Blake Holdings, DC Thomson and Lombard Odier (acting on behalf of its affiliates) will not vote on the Sixth Resolution in accordance with the Listing Rules and all of them have undertaken to take all reasonable steps to procure that their associates (as defined in the Listing Rules) will also not vote on such resolution.
 
M&G Investment Management which holds 21,652,186 Existing Ordinary Shares (approximately 12.7 per cent. of the Company's issued ordinary share capital), has agreed to subscribe up to 34,174,377  New Ordinary Shares (resulting in M&G Investment Management being interested in not more than 16.3 per cent. of the Enlarged Share Capital, assuming no clawback.
 
As a consequence of the current interest of M&G Investment Management in the Company, their proposed participation (as outlined above) in the Capital Raising constitutes a related party transactions for the purposes of Chapter 11 of the Listing Rules and hence the transaction is disclosed in accordance with Listing Rule 11.1.10R and the Company has received written confirmation from Numis that the terms of the transaction are fair and reasonable as far as the Company's Shareholders are concerned.
 
12.  LISTING, DEALINGS AND SETTLEMENT
 
Application will be made to the UK Listing Authority for the New Ordinary Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on the London Stock Exchange's main market for listed securities. It is expected that Admission will become effective and that dealings in the New Ordinary Shares on the London Stock Exchange will commence at or shortly after 8.00 a.m. on 27 July 2018.
 
Details of further terms and conditions of the Capital Raising, including the procedure for acceptance and payment are set out in Part IV (Terms and Conditions of the Capital Raising) of the Prospectus (to be published in due course) and, where relevant, will also be set out in the Application Form.
 
13.  GENERAL MEETING
 
The General Meeting will be held at 10.00 a.m. on 26 July 2018 at the offices of DLA Piper UK LLP, 3 Noble Street, London EC2V 7EE. The General Meeting is being held for the purpose of considering and, if thought fit, passing the Resolutions. Full details of the notice of meeting and the resolutions will be contained in the Prospectus which will published shortly, posted to shareholders and available on the Company's website.
 
First Resolution - Sub-division of Ordinary Shares          
Second Resolution - Amendment to the Articles of Association
Third Resolution - Authority to allot (Capital Raising)
Fourth Resolution - Disapplication of pre-emption rights (Capital Raising)         
Fifth Resolution - Approval of Issue Price
Sixth Resolution - Related Party Transactions
Seventh Resolution - Authority to allot (general authority)
Eighth Resolution - Disapplication of pre-emption rights (general authority)
Ninth Resolution - Disapplication of pre-emption rights (general authority)
Tenth Resolution - Purchase of own shares
 
14.  IMPORTANCE OF VOTE
 
Your attention is again drawn to the fact that the Capital Raising is conditional and dependent upon, amongst other things, the First Resolution to Fifth Resolution being passed at the General Meeting.
 
Shareholders are asked to vote in favour of the First Resolution to Fifth Resolution at the General Meeting in order for the Capital Raising to proceed. We believe that the successful completion of the Capital Raising will significantly strengthen the Group's balance sheet and this will enable the Group to deliver the accelerated transformation plan which will be important to the future success of the Group.
 
If the First Resolution to Fifth Resolution are not passed or Numis exercises its right to terminate the Placing Agreement and the Capital Raising therefore does not proceed the New Debt Facilities, the Shareholder Loans and the Debtor Financing will become immediately re-payable on 30 September 2018 meaning that Mothercare will experience an immediate liquidity shortfall of up to £79.8 million in September 2018. The Capital Raising is not conditional on the passing of the Sixth Resolution which pertains to the approval of the Related Party Transactions, or the Seventh to Tenth Resolution which constitute general authorities customarily tabled at the Company's annual general meeting. If the Related Party Transactions are not approved by the Shareholders at the General Meeting, the Capital Raising and Capital Refinancing Plan will still be able to proceed, but the Shareholder Loans will not convert to equity. However, the Company will not need to repay the Shareholder Loans until their maturity on 30 June 2021. As a result, if the First Resolution to Fifth Resolution are not passed and the Capital Raising and therefore the rest of the Capital Refinancing Plan are not successfully completed and the Group is unable to implement any of the alternative financing arrangements or other actions set out below, the Company would be likely to enter into administration or receivership in early October 2018, at which point Shareholders would lose all or a significant part of the value of their investment in the Company.
 
If the Capital Raising does not proceed, the Group would put in place an action plan to avoid the initial liquidity shortfall, covenant default and ongoing liquidity shortfall, which would first involve attempting to renegotiate the terms of the New Debt Facilities to secure further amendments of the financial covenants and increases to the amounts available under the New Debt Facilities. In order to be successful, the amendments to the New Debt Facilities would need to be in place for several months beyond the initial liquidity shortfall period to enable the Group to secure alternative funding arrangements. We believe that such amendments would only be agreed by the Senior Lenders, if at all, at a significant cost to the Group in the form of additional fees payable to the Senior Lenders, increased coupon payments and/or additional restrictions on, or commitments to engage in, corporate actions (e.g. disposals), each of which would adversely affect or delay implementation of the Group's strategy. Given the conditionality required by the Senior Lenders in respect of the New Debt Facilities we do not believe that negotiating the required amendments to the New Debt Facilities has a high chance of success. Any such increase in financing costs will result in matching payments becoming due to the DB Schemes as set out in Part X (Additional Information) of the Prospectus (to be published in due course).
 
If the Senior Lenders were not to waive any prepayment due under the New Debt Facilities and were not to agree to commercially acceptable amendments of the Group's financial covenants and increases to the amounts available under the New Debt Facilities, the Group would then seek alternative long-term committed financing arrangements to replace or refinance the amounts outstanding under those arrangements, which, if available at all, would be likely to be significantly more expensive and onerous than those which apply under the New Debt Facilities.
 
The Company could also seek other forms of funding, although our experience of seeking such funds in the recent financing review suggests that the terms of such other forms of funding will result in significant value transfer from Shareholders and/or creditors. We believe that seeking alternative funds is likely to be successful, however, it may not be available at commercially acceptable terms and we would need to balance the receipt of funds with the additional cost of debt. Any such alternative financing arrangement may result in matching payments becoming due to the DB Schemes as set out in Part X (Additional Information) of the Prospectus (to be published in due course).
 
In addition to initiatives to provide additional cash headroom, the Group may take action to effect a sale of the business as whole or the disposals of assets, such as the disposal of one or more of the Group's businesses to facilitate a reduction of the Group's outstanding indebtedness. We believe they may be able to secure a transaction on such a basis in an acceptable timeframe, however, there can be no guarantee that we would be able to secure a transaction at a price which they believe is reflective of the full value of the assets being disposed and the New Debt Facilities (and possibly any new financing arrangements) restrict the Group's ability to make disposals without the consent of the Senior Lenders, which could be withheld. Such a transaction would restrict the Group's future growth opportunities and would likely impact the Group's ability to maintain or improve its competitive positioning.
 
As a result, if the Capital Raising does not proceed to completion and the Group is unable to implement any of the alternative financing arrangements or other actions set out above, the Company would be likely to enter into administration or receivership in early October 2018, at which point Shareholders would lose all or significant part of the value of their investment in the Company.
 
Accordingly, we believe that the Capital Raising is in the Shareholders' best interests, and it is very important that Shareholders vote in favour of the Resolutions so that it can proceed.
 
 
IMPORTANT NOTICE
 
The information contained in this announcement is for background purposes only and does not purport to be full or complete. No reliance may be placed for any purpose on the information contained in this announcement or its accuracy or completeness. The information in this announcement is subject to change. Nothing in this announcement should be interpreted as a term or condition of the Capital Raising.
This announcement contains "forward‐looking statements" with respect to the financial condition, results of operations and business of Mothercare and to certain of Mothercare's plans and objectives with respect to these items.
Forward‐looking statements are sometimes but not always identified by the use of a date in the future or such words as 'anticipates', 'aims', 'due', 'could', 'may', 'should', 'expects', 'believes', 'intends', 'plans', 'targets', 'goal', or 'estimates'. By their very nature forward‐looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that may or will occur in the future.
There are various factors that could cause actual results and developments to differ materially from those expressed or implied by these forward‐looking statements. These factors include, but are not limited to, changes in the economies, political situations and markets in which Mothercare operates; changes in the regulatory or competition frameworks in which Mothercare operates; the impact of legal or other proceedings against or which affect Mothercare; changes in inflation or exchange rates.
All written or verbal forward‐looking statements, made in this announcement or made subsequently, which are attributable to Mothercare or persons acting on their behalf, are expressly qualified in their entirety by the factors referred to above.
Neither Mothercare nor any other person (including Numis and Shore Capital) intends to update these forward‐looking statements.
Numis, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for Mothercare and for no one else in connection with the matters described in this announcement and will not be responsible to anyone other than Mothercare for providing the protections afforded to clients of Numis (as the case may be) nor for providing advice in relation to the matters referred to in this announcement or any other transaction, arrangement or matter referred to in this announcement.
Shore Capital, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for Mothercare and no one else in connection with the matters described in this announcement will not be responsible to anyone other than Mothercare for providing the protections afforded to clients of Shore Capital (as the case may be) nor for providing advice in relation to the matters referred to in this announcement or any other transaction, arrangement or matter referred to in this announcement.
This announcement has been issued by Mothercare and is the sole responsibility of Mothercare. No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by Numis or Shore Capital, or by any of their affiliates or agents as to, or in relation to, the accuracy or completeness of this announcement or any other written or oral information made available to or publicly available to any interested party or their advisers, and any liability therefore is expressly disclaimed.
This announcement and the information contained herein do not constitute an offer of securities in the United States. The securities referred to in this announcement have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold in the United States absent registration under the Securities Act or pursuant to an exemption from, or a transaction not subject to, such registration requirements.
Mothercare has not registered and does not intend to register the offering of any securities in the United States or to conduct a public offering of any securities in the United States.
The information in this announcement may not be forwarded or distributed to any other person and may not be reproduced in any manner whatsoever. Any forwarding, distribution, reproduction, or disclosure of this information in whole or in part is unauthorised. Failure to comply with this directive may result in a violation of the Securities Act or the applicable laws of other jurisdictions.
 
INFORMATION TO DISTRIBUTORS
 
Solely for the purposes of the product governance requirements contained within: (a) EU Directive 2014/65/EU on markets in financial instruments, as amended ("MiFID II"); (b) Articles 9 and 10 of Commission Delegated Directive (EU) 2017/593 supplementing MiFID II; and (c) local implementing measures (together, the "MiFID II Product Governance Requirements"), and disclaiming all and any liability, whether arising in tort, contract or otherwise, which any "manufacturer" (for the purposes of the MiFID II Product Governance Requirements) may otherwise have with respect thereto, the New Ordinary Shares to be issued in the Capital Raising have been subject to a product approval process, which has determined that the Shares are: (i) compatible with an end target market of retail investors and investors who meet the criteria of professional clients and eligible counterparties, each as defined in MiFID II; and (ii) eligible for distribution through all distribution channels as are permitted by MiFID II (the "Target Market Assessment"). Notwithstanding the Target Market Assessment, distributors should note that: the price of the Ordinary Shares may decline and investors could lose all or part of their investment; the New Ordinary Shares to be issued in the Capital Raising offer no guaranteed income and no capital protection; and an investment in the New Ordinary Shares to be issued in the Capital Raising is compatible only with investors who do not need a guaranteed income or capital protection, who (either alone or in conjunction with an appropriate financial or other adviser) are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear any losses that may result therefrom. The Target Market Assessment is without prejudice to the requirements of any contractual, legal or regulatory selling restrictions in relation to the Capital Raising. Furthermore, it is noted that, notwithstanding the Target Market Assessment, Numis will only procure investors who meet the criteria of professional clients and eligible counterparties.
 
For the avoidance of doubt, the Target Market Assessment does not constitute: (a) an assessment of suitability or appropriateness for the purposes of MiFID II; or (b) a recommendation to any investor or group of investors to invest in, or purchase, or take any other action whatsoever with respect to the Ordinary Shares.
 
Each distributor is responsible for undertaking its own Target Market Assessment in respect of the Ordinary Shares and determining appropriate distribution channels.
 
Defined terms
 




Term


Definition




Admission


admission of the New Ordinary Shares to the premium listing segment of the Official List and to trading on the main market for listed securities of the London Stock Exchange




Application Form


the personalised application form on which Qualifying Non-CREST Shareholders may apply for New Ordinary Shares under the Open Offer




Articles of Association


the articles of association of the Company, as amended from time to
time




Capital Raising


Placing and Open Offer to raise approximately £32 million in gross proceeds




Capital Refinancing Plan


the Company's wider capital refinancing plan providing funding of £117.5 million in aggregate to implement the acceleration of the Group's transformation plan




Challenge Period


the statutory period following the CVA vote, during which a challenge could be made to the relevant courts under the relevant legislation




Closing Price


the closing, middle market quotation in pounds sterling of an Existing Ordinary Share, as published in the Daily Official List




CVA Companies


Mothercare UK Limited and Early Learning Centre




CVA Proposals


company voluntary arrangements under Part 1 of the Insolvency Act 1986 in respect of the CVA Companies




CW


Childrens World Limited




Daily Official List


the daily official list of the London Stock Exchange




DB Schemes


the Company's defined benefit pension schemes being (i) the Mothercare Executive Pension Scheme; and (ii) the Mothercare Staff Pension Scheme




Debtor Financing


a debtor backed facility of up to £10,000,000




Eighth Resolution


the resolution relating to the disapplication of pre-emption rights in respect of an allotment of Ordinary Shares to be proposed at the General Meeting




Enlarged Share Capital


the expected issued ordinary share capital of the Company immediately following the issue of the New Ordinary Shares pursuant to the Capital Raising




Executive Directors


Clive Whiley, Mark Newton-Jones, David Wood and Glyn Hughes




Excess Application Facility


the facility for Qualifying Shareholders to apply for Excess Shares in excess of their Open Offer Entitlements




Excess Open Offer Entitlements


in respect of each Qualifying CREST Shareholder who has taken up his Open Offer Entitlement in full, the entitlement (in addition to the Open Offer Entitlement) to apply for Excess Shares, up to the number of Open Offer Shares, credited to his stock account in CREST pursuant to the Excess Application Facility, which may be subject to scaling down at the absolute discretion of the Board in consultation with Numis




Excess Shares


Open Offer Shares which may be applied for in addition to Open Offer Entitlements




Excluded Territory


the United States, Australia, Canada, Japan, South Africa, New Zealand and any other jurisdiction where the extension or availability of the Placing and Open Offer (and any other transaction contemplated thereby) would breach any applicable law (and "Excluded Territory" means any one of them)




Existing Ordinary Shares


the ordinary shares of 50 pence each in the capital of the Company
at the Record Date




Fifth Resolution


the resolution to approve the Issue Price of 19 pence per New Ordinary Share




First Resolution


the resolution relating to the sub-division of each Ordinary Share of 50 pence into one Ordinary Share of one penny and one deferred share of 49 pence to be proposed at the General Meeting




Fourth Resolution


the resolution relating to the disapplication of pre-emption rights in respect of the allotment of the New Ordinary Shares to be proposed at the General Meeting




Franchise Partners


the third parties with whom the Group has entered into franchise arrangements to sell its products in territories other than the UK (including, for the avoidance of doubt, the Group's joint venture in the Ukraine);




General Meeting or GM


the general meeting of the Company to be convened pursuant to the notice set out in this announcement (including any adjournment thereof)




Issue Price


the price at which the New Ordinary Shares are issued




Listing Rules


the listing rules made under Part VI of FSMA (as set out in the FCA Handbook), as amended from time to time




New Debt Facilities


the Facilities as amended and restated by the amendment and restatement agreement entered into between the Company and HSBC Bank plc and dated 17 May 2018, concerning the revised committed debt facilities of £67,500,000 with a final maturity extended to December 2020 and certain interim step downs to be provided by the Company's existing Senior Lenders




New Ordinary Shares


the Placing Shares, the Open Offer Shares and the Conversion Shares




Ninth Resolution


the resolution relating to the disapplication of pre-emption rights in respect of an allotment of Ordinary Shares to be proposed at the General Meeting




Non-executive Directors


Lee Ginsberg, Richard Rivers, Nick Wharton and Gillian Kent




Open Offer


the conditional invitation to Qualifying Shareholders to subscribe for the Open Offer Shares at the Issue Price on the terms and subject to the conditions set out in this announcement and in the case of Qualifying Non-CREST Shareholders only, the Application Form




Open Offer Entitlements


entitlements to subscribe for the Open Offer Shares, allocated to a Qualifying Shareholder pursuant to the Open Offer




Open Offer Shares


the 170,871,885 New Ordinary Shares for which Qualifying Shareholders are being invited to apply to be issued pursuant to the terms of the Open Offer




Operating Board


collectively, the Executive Directors and the Non-executive Directors




Overseas Shareholders


shareholders with registered addresses outside the United Kingdom or who are incorporated in, registered in or otherwise resident or located in, countries outside the United Kingdom




Pension Protection Fund or
PPF


the Board of the Pension Protection Fund as set up by section 107 of the Pensions Act 2004




Pension Trustees


each of the trustees of the DB Schemes




Placees


any person who has conditionally agreed to subscribe for the Placing Shares;




Placing


the conditional placing, by Numis, as agent of and on behalf of the Company, of the Placing Shares subject to clawback pursuant to the Open Offer, on the terms and subject to the conditions contained in the Placing Agreement




Placing Agreement


the sponsor and placing agreement dated 9 July 2018 between the
Company, Numis and Shore Capital




Placing Shares


the New Ordinary Shares proposed to be issued by the Company
pursuant to the Placing




Prospectus Rules


the prospectus rules made under Part VI of FSMA (as set out in the FCA Handbook), as amended




Qualifying CREST Shareholder


Qualifying Shareholders holding Ordinary Shares in uncertificated form




Qualifying Non-CREST Shareholders


Qualifying Shareholders holding Ordinary Shares in certificated form




Qualifying Shareholders


holders of Existing Ordinary Shares on the register of members of
the Company on the Record Date




Record Date


the close of business in London on 5 July 2018




Reference Date


6 July 2018, the last practicable date prior to publication of this announcement




Related Party Transactions


the proposed conversion of the Shareholder Loans into New Ordinary Shares at the lower of: (i) 19 pence per New Ordinary Share; and (ii) the most recent price at which any Shareholders have subscribed for newly issued equity in the Company since entry into the Shareholder Loans




Resolutions


the First Resolution, Second Resolution, Third Resolution, Fourth Resolution, Fifth Resolution, Sixth Resolution, Seventh Resolution, Eighth Resolution, Ninth Resolution and Tenth Resolution to be proposed at the General Meeting




Second Resolution


the resolution relating to the amendment of Company's Articles of Association to be proposed at the General Meeting




Senior Lenders


those lenders as described in paragraph 15.1 of Part X (Additional Information) of the Prospectus (to be published in due course)




Seventh Resolution


the resolution granting the Directors general authority to allot Ordinary Shares to be proposed at the General Meeting




Shareholder Loans


shareholder loans from DC Thomson, Lombard Odier (acting for LMAP Epsilon and 1798 Volantis) and Blake Holdings, each of which being convertible into New Ordinary Shares at the option of such shareholder, conditional upon, among other things, the approval of the Company's shareholders of the conversion of the relevant shareholder loan as a Related Party Transaction




Shareholder(s)


holder(s) of Ordinary Shares




Sixth Shareholders


the resolution approving to approve the conversion by Blake Holdings, DC Thomson and Lombard Odier of the Shareholder Loans into New Ordinary Shares under the Shareholder Loan Agreements as related party transactions to be proposed at the General Meeting




Tenth Resolution


the resolution granting the Company the authority to purchase up to 10 per cent. of its issued Ordinary Shares to be proposed at the General Meeting




UK Restructuring


the restructuring of the Group's UK store portfolio through the CVA
Proposals




Underwriters


Numis and Shore Capital




 




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