REG - Victoria PLC - New Flooring Category Acquisition: Rugs

VictoriaAnnouncement

29/11/2021 07:00

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RNS Number : 8499T  Victoria PLC  29 November 2021

For Immediate Release
                                               29
November 2021

This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law
by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is
disclosed in accordance with the Company's obligations under Article 17 of
MAR.

 

Victoria PLC

('Victoria' or the 'Group')

·    Carve Out & Acquisition of the Rugs & UK Carpet Divisions of
Balta Group NV

         Expansion into a Major New & Growing Flooring Category:
Rugs

 

·    Koch Equity Development Further £150m Investment on Improved Terms

 

Victoria PLC, (LSE: VCP) the international designers, manufacturers and
distributors of innovative flooring, is delighted to announce it has agreed to
acquire the highly profitable and growing rugs division of Balta Group, the
Belgium-based flooring company, along with its profitable UK polypropylene
carpet and non-woven carpet businesses (collectively "the Divisions"),
together with the internationally-known brand, "Balta" (the "Acquisition").

 

The Acquisition can be funded entirely from the Company's existing financial
resources. However, the Board has taken the opportunity to conclude a firm
commitment for a further preferred equity investment with KED Victoria
Investments LLC ("KED"), an affiliate of Koch Equity Development LLC, on
improved terms, as outlined in this announcement, to support further growth in
due course.

 

Key terms of the Acquisition

 

·    For the 12 months ended March 2021, the Divisions generated unaudited
total revenues of €307.0 million (c. £260.2m(1)) (FY2020: €303.5m) and
normalised EBITDA of €35.5 million (c. £30.1m(1)) (FY2020: €29.9m).

 

·  Total consideration to be paid in cash on completion is approximately
€138 million (c. £117m(1)), depending on the working capital movements and
cash generation of the Divisions up to completion. In addition, the Divisions
have approximately €57 million (c. £48m(1)) of debt (excluding IFRS 16
leases), which is expected to remain in place following completion.

 

·   As at 31 December 2020, Balta Group's most recent year end, the
Divisions had net assets excluding the above debt of approximately €213
million (c. £180m(1)).

 

·   Completion of the Acquisition is subject to the conclusion of the
carve-out of the Divisions from the rest of the Balta Group and is expected in
April 2022.

 

·   The purchase price will be funded entirely from the Group's cash
balances along with additional preferred equity to be provided by KED, a
substantial shareholder in Victoria. Following recent negotiations, the
quantum of this follow-on preferred equity has been increased since the
original commitment in November 2020, and the pricing has been reduced
(further details below).

 

·   Victoria's leverage will remain in line with its stated financial
policy following completion, with a current ratio of net debt to pro-forma
EBITDA(2), considering the full effect of the Acquisition and the newly
committed KED funding, of c. 3.2x.

 

The Acquisition will be immediately earnings-accretive and is a continued step
in Victoria's strategy of growing its business with earnings-enhancing
acquisitions, and then using available synergies to drive further increases in
margin and revenue. The Board believes that the Acquisition presents an
excellent strategic fit with Victoria's existing business and will be additive
to the overall strong organic growth prospects of the Group.

 

Strategic rationale for the Acquisition

 

Established in 1964 in Belgium, Balta Group has several operating businesses
across different sectors of the commercial and residential flooring industry.
The Acquisition relates specifically to the operating businesses that will
provide the maximum synergistic opportunities with Victoria's existing
operations, at an attractive valuation.

 

The full integration of the Divisions with Victoria's existing manufacturing
and distribution operations are expected to drive very material cost
synergies, estimated by the Board to be more than €15 million over the next
2-3 years, which will create significant value for shareholders.

 

Balta have announced that they decided to sell the Divisions to Victoria to
refocus their activities on their commercial flooring business.

 

(A more detailed presentation is available on Victoria's website at
https://www.victoriaplc.com/reports/)

 

Rugs Division

The rugs division, which had revenues of €182.9 million (£155.0 million) in
2020, manufactures and distributes mechanically woven rugs, which are sold in
more than 100 countries across the world. It is the No.1 producer in Europe
and No.2 globally behind an Egypt-based rugs manufacturer.

 

·   Rugs are a growing flooring category - particularly in the US, where
the division has a strong market presence and generates more than 35% of its
revenues.

 

·   Demand is more fashion driven, with consumers replacing rugs much more
frequently than other types of flooring. Importantly, rugs are also resistant
to competition from products such as LVT, wood, and ceramic tiles as they are
often used to complement hard surface materials.

 

·   The rugs division's route to market is via major international
retailers and wholesalers, and the business has a blue chip, diversified
global customer base and long-standing customer relationships. (For example,
the business has been a supplier to each of its six largest customers for more
than 20 years).

 

·   Victoria has identified material value-creating commercial synergies
with its existing business. Very often, the first thing consumers do after
installing a hard floor (such as ceramic tiles or LVT sold by Victoria's
US-subsidiary, Cali) is buy a rug to put on top of it. Consequently,
Victoria's management plan for Cali's online business to offer its own
exclusively designed rug collection to drive complementary sales -
particularly outdoor rugs, which are a high-growth consumer trend. Balta Rugs
also has significant opportunity to expand its commercial activities with
home-focused ecommerce retailers in the US and Europe.

 

·  The rugs division has state-of-the-art manufacturing facilities in
Belgium (186,000 sqm) and Turkey (86,000 sqm), along with distribution
warehouses in Belgium and the United States (60,000 sqm). It is an optimal
production platform, with the more labour-intensive rugs produced in
lower-cost Turkey and the entirely machine-produced rugs manufactured in
Belgium. This unique structure, together with a skilled product design team,
maintains the business in a strong competitive position.

 

·    As normal with businesses acquired by Victoria, the rugs division
will continue to operate with a significant degree of autonomy. The rugs
division has high-quality management, led by Marc Dessein (who joined the
business in 1992 and was appointed managing director in 2006), and are well
known to Victoria's senior team.

 

UK Carpet Division

Victoria has been manufacturing carpet in the UK for more than 125 years and
holds a Royal Warrant from HM The Queen, having supplied the royal household
for many years. It has high-quality and well-invested manufacturing facilities
in Wales and Yorkshire, operated by an experienced and committed management
team, led by Jan Debrouwere. The acquisition of Balta's UK residential carpet
division, which had revenues of €103.3 million (£87.5 million) in 2020,
will capitalise on these and other strengths to create further value for
Victoria's shareholders:

 

·   The continental carpet business, (c.30% of the total division being
acquired) will be further optimised to contribute towards the expected
synergies.

 

·   The increased scale of the integrated business is expected to reduce
raw material costs and further improve productivity at the factories, with a
consequential improvement in operating margin.

 

·    The Balta brand will be carried forward with its unique selling
proposition. The Belgian plant will be added to the Victoria Group
manufacturing platform. The Acquisition will, consequently, enable Victoria to
access a broader range of manufacturing capacity and extend its sales network
into new territories.

 

·    Several members of Victoria's senior management know the division
exceptionally well, having successfully managed it previously. Their knowledge
and experience will be invaluable as the division is swiftly integrated into
the Group.

 

·   The UK flooring sector is characterised by strong competition from
larger global operations, significant imports, and customers focused on price.
The Acquisition will enable Victoria to improve efficiency and better serve
its customers. Post-completion, Victoria's Board expects to have a c.16%(3)
market share of the UK broadloom carpet market and a little under 5% of the UK
flooring market as a whole.

 

·   Consumer demand for carpet remains strong in the UK, where it is the
dominant category of flooring with a largely unchanged market share of
c.58%(3) for the last 15 years. Over the last 12 months, the demand for
flooring has primarily come from existing home owners redecorating. However,
the Board expects demand to continue next year and beyond, due to the record
level of housing transactions that has been experienced in the UK this year.
Housing sales are a good 12-18 month leading indicator of remodelling-led
demand for flooring, which is Victoria's core market for carpets and underlay.

 

Non-woven Division

The non-woven carpets business, which had 2020 revenues of €17.3 million
(£14.7 million), manufactures technical products for a wide variety of
applications, including automotive, insulation, and carpet backing. It will
continue to be managed by its managing director, Franky Viaene, and will be
integrated in one of the existing Divisions.

 

KED preferred equity investment - key terms

 

It is 12 months since shareholders approved a number of resolutions that
enabled KED, an affiliate of Koch Equity Development LLC and a subsidiary of
Koch Industries, Inc., to subscribe for convertible preferred shares, thereby
providing capital to accelerate Victoria's acquisition-led growth whilst
maintaining the Board's long-expressed leverage policy with a significantly
less dilutive effect on existing shareholders than ordinary equity issuance.
The Board believe that this partnership with KED has already been very
successful for both parties and contributed to the significant wealth creation
Victoria's shareholders have experienced.

 

The Acquisition can be funded entirely from the Company's existing financial
resources. However, the Board has today taken the opportunity to agree with
KED the terms of an improved preferred equity investment pursuant to a
commitment letter (the "Commitment Letter"), which would both increase the
amount of capital to be invested whilst materially lowering the cost to
Victoria. This additional capital will support the Group's continued growth.

 

Subject to the approval of shareholders and the satisfaction of other
customary conditions within the Commitment Letter, KED would invest an
additional £150 million (the "New Preferred Equity Investment"), bringing the
total preferred equity investment to £225 million, by way of convertible
preferred shares ("New Preferred Shares"). These New Preferred Shares, which
carry no voting rights, have similar features to the existing preferred shares
other than the following material differences:

 

a.   A reduction in the preferred dividend of 100bps (to 8.85% if paid in
kind or 8.35% if paid in cash), which will also apply to the existing £75
million of convertible preferred shares with effect from the date of issue of
the New Preferred Shares.

 

b.   No further issue of warrants with the New Preferred Shares (the
existing warrants from the original KED investment remain in place).

 

Related Party Transaction

Shareholders are reminded that an affiliate of KED holds 10.7% of the issued
share capital of the Company following KED's on-market purchase last year of
12.5 million ordinary shares, which aligns its interests with those of the
ordinary shareholders. It is also a substantial shareholder as defined by the
AIM Rules. KED's participation in the New Preferred Equity Investment, and in
the Commitment Letter, constitutes a related party transaction under Rule 13
of the AIM Rules. The independent directors (being those directors other than
Blake Ressel), having consulted with the Company's Nominated Adviser, Singer
Capital Markets, consider that the terms of the related party transaction are
fair and reasonable insofar as shareholders of the Company are concerned.

 

The New Preferred Equity Investment is expected to complete in January 2022
subject to shareholder approval at a general meeting, finalisation of the
necessary definitive documents and other customary conditions. A shareholder
circular with further details will be issued in due course.

 

Philippe Hamers, Group Chief Executive, Victoria PLC, commented:

"This selective acquisition of two highly complementary businesses will be
significantly value creating for Victoria's shareholders. The rugs division
has been hugely successful over many years and there are very material
operating synergies between the carpet division and Victoria's existing
business. These are both businesses that Victoria already knows extremely
well."

 

Cyrille Ragoucy, Chief Executive Officer, Balta Group NV, commented:

"I am pleased that we have reached this mutually beneficial agreement with
Victoria plc. Our Rugs, Residential PP and Non-Woven businesses have found a
new owner with a great operational fit. This transaction allows us to focus on
our Commercial businesses in Europe and the United States and on our European
Residential PA business by investing in sustainability and growth."

 

Geoff Wilding, Executive Chairman, Victoria PLC, said:

"Victoria has spent time building a high-quality operational management team
with depth and commitment. They have been successful at increasing the
operating margin of the Group's UK carpet division from 5% to 18% through
steady productivity gains and improved customer service. Consequently,
Victoria's management team are now laser-focussed on execution of our detailed
plans for each of the recently announced acquisitions, and I am certain they
will achieve similar gains as the businesses are integrated.

 

Victoria is a highly disciplined buyer and, upon completion of this
acquisition will, this financial year, have invested approximately £370
million to add c. £65 million of EBITDA to the Group."

 

(1) Applying a GBP:EUR exchange rate of 1.18

(2) Leverage ratios calculated in-line with the Group's debt facilities

(3) Source: Freedonia Global Flooring Report 2021

 

 The person responsible for arranging the release of this announcement on
 behalf of the Company is Michael Scott, Group Finance Director.

 For more information contact:

Victoria PLC                                                   +44 (0) 1562 749 610

 Geoff Wilding, Executive Chairman

 Philippe Hamers, Group Chief Executive

 Michael Scott, Group Finance Director

 Singer Capital Markets (Nominated Adviser and Joint Broker)    +44 (0) 207 496 3095

 Rick Thompson, Phil Davies, Alex Bond

 Berenberg (Joint Broker)                                       +44 (0) 203 207 7800

 Ben Wright, Mark Whitmore

                                                                +44 (0) 207 418 8900

 Peel Hunt (Joint Broker)

 Adrian Trimmings, Andrew Clark                                 +44 (0) 20 7466 5000

 Buchanan Communications (Financial PR)

 Charles Ryland, Chris Lane, Vicky Hayns, Tilly Abraham

 

About Victoria

 Established in 1895 and listed since 1963 and on AIM since 2013 (VCP.L),
 Victoria PLC, is an international manufacturer and distributor of innovative
 flooring products. The Group, which is headquartered in Kidderminster, UK,
 designs, manufactures and distributes a range of carpet, flooring underlay,
 ceramic tiles, LVT (luxury vinyl tile), artificial grass and flooring
 accessories.

 Victoria has operations in the UK, Spain, Italy, Belgium, the Netherlands, the
 United States and Australia and employs approximately 4,000 people across more
 than 26 sites. Victoria is the UK's largest carpet manufacturer and the second
 largest in Australia, as well as the largest manufacturer of underlay in both
 regions.

 The Group's strategy is designed to create value for its shareholders and is
 focused on consistently increasing earnings and cash flow per share via
 acquisitions and sustainable organic growth. (Further information about
 Victoria can be found on its website, www.victoriaplc.com.)

 

 

 About Victoria

 Established in 1895 and listed since 1963 and on AIM since 2013 (VCP.L),
 Victoria PLC, is an international manufacturer and distributor of innovative
 flooring products. The Group, which is headquartered in Kidderminster, UK,
 designs, manufactures and distributes a range of carpet, flooring underlay,
 ceramic tiles, LVT (luxury vinyl tile), artificial grass and flooring
 accessories.

 Victoria has operations in the UK, Spain, Italy, Belgium, the Netherlands, the
 United States and Australia and employs approximately 4,000 people across more
 than 26 sites. Victoria is the UK's largest carpet manufacturer and the second
 largest in Australia, as well as the largest manufacturer of underlay in both
 regions.

 The Group's strategy is designed to create value for its shareholders and is
 focused on consistently increasing earnings and cash flow per share via
 acquisitions and sustainable organic growth. (Further information about
 Victoria can be found on its website, www.victoriaplc.com.)

 

 

 

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