Carpetright Plc - Refinancing, possible offer and trading update
("Carpetright" or the "Company")
Refinancing update, possible offer for the Company and trading update
The Company announces an update in respect of its long-term financing arrangements.
As previously disclosed, the Company's revolving credit facility (the "RCF"), purchased by Meditor European Master Fund Limited ("Meditor") on 3 September 2019, is due to expire on 31 December 2019. The Company's overdraft facilities (the "Overdrafts"), provided by NatWest and Ulster Bank but funded by Meditor, are also due to expire on 31 December 2019. The unsecured loan provided to the Company by Meditor on 11 May 2018 is due for repayment on 31 July 2020 at a value of £25.7 million (together with the RCF and the Overdrafts referred to in this announcement as the "Debt Facilities"). The Company's statutory net debt as at 26 October 2019 was approximately £27 million, comprising gross debt of £56 million, offset by cash and cash equivalents of £29 million (of which approximately £20 million was restricted cash and monies due from merchant and finance providers). In addition, accrued interest amounted to £6.2 million. In line with normal seasonal trends, statutory net debt is expected to increase to between approximately £40 million to £50 million in December 2019, and gross debt is expected to rise commensurately.
Refinancing and possible offer for the Company
The Board believes that approximately £80 million is needed for the Company to (i) repay the Debt Facilities; (ii) meet the Company's ongoing working capital requirements; and (iii) provide the Company with the necessary growth capital to execute its strategy as set out below.
The Company has been actively exploring various long-term financing solutions including standard "high street" refinancing, asset-backed lending, strategic asset sales and equity financing.
Having now explored the viability of all of these possible options, the Board announces that it is in discussions with Meditor in relation to a possible offer by Meditor (or a company incorporated for this purpose by Meditor) to acquire all of the issued and to be issued shares of the Company, expected to be by way of a Scheme of Arrangement (the "Possible Offer"). Meditor has indicated that the Possible Offer would be at 5p per Share, paid in cash. If the Possible Offer is made, then on the Scheme of Arrangement becoming effective, it is expected Meditor will convert the majority of the outstanding debt under the Debt Facilities into equity and provide the Company with additional capital, thereby providing the Company with a stronger balance sheet to enable it to pursue the strategic and growth initiatives set out below.
The Company has received irrevocable undertakings to vote in favour of the Possible Offer in respect of the following ordinary shares in the capital of the Company ("Shares"):
Aberforth Partners LLP - 38,410,929 Shares, representing in aggregate 12.6% of the Company's issued share capital.
In addition, the Company has received letters of intent to vote in favour of the Possible Offer from the following:
Majedie Asset Management - 20,020,440 Shares representing in aggregate 6.6 % of the Company's issued share capital;
Countywide Developments Limited - 6,534,159 Shares representing in aggregate 2.2% of the Company's issued share capital; and
Soros Fund Management LLC - 7,985,666 Shares representing in aggregate 2.6% of the Company's issued share capital.
In aggregate, therefore, irrevocable undertakings and letters of intent have been received in respect of an aggregate of 72,951,154 Shares representing 24.0% of the issued share capital of the Company (and 34.3% of the share capital not currently held by Meditor). See Schedule 1 for further detail.
There can be no certainty that the Possible Offer will be made, nor as to its terms. A further statement will be made as appropriate.
In accordance with Rule 2.6(a) of the Code, by not later than 5.00 pm on 28 November 2019, Meditor must either announce a firm intention to make an offer for Carpetright in accordance with Rule 2.7 of the Code or announce that it does not intend to make an offer for Carpetright, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. This deadline will only be extended with the consent of the Takeover Panel in accordance with Rule 2.6(c) of the Code.
This announcement has been made with Meditor's agreement.
Strategy and growth initiatives
In line with UK retail generally, the current flooring market remains challenging, reflecting the wider economic and geopolitical backdrop. Carpetright's position as market leader nevertheless remains strong, with recent surveys showing high levels of brand awareness (88% prompted, 64% unprompted) and an engaged and dedicated workforce. The Company further believes that the fundamentals of the floorcovering market are good, with the UK flooring market expected to grow at a CAGR of 1.9% from £1.97 billion in 2019 to £2.12 billion in 2023.
The Company's strategy is focused on several key areas including: implementing IT infrastructure upgrades across the UK business to drive efficiencies and further online opportunities; entering into new partnerships, such as with Furniture Village, to deliver increased customer reach with minimal capital commitments; a continued drive to optimise the UK store estate through selective closures and relocations to further reduce costs; and investing in and delivering improved returns from the Company's operations in the Netherlands and Belgium, together with a turnaround of its currently loss making business in the Republic of Ireland.
Growth initiatives following a refinanced balance sheet
As a result of the Company's current balance sheet constraints, its capital expenditure in recent periods has been limited. With a strengthened balance sheet and an injection of growth capital, following the refinancing the Company expects to invest further in the following areas: the store refurbishment programme; staff training; the development of its digital platform; marketing; and its operations in Continental Europe. The total cost of these initiatives over the medium term is expected to be £20 to £25 million, to be funded as result of the proposed refinancing.
The Company will also use the new funds to mitigate the impact of competition in the sector. In the longer term, the Company will explore opportunities to improve its sourcing arrangements, further develop its distribution model and evaluate potential acquisitions.
The Board believes that Carpetright is performing well despite the challenging economic backdrop and intense sector competition. Group profitability is improving as the Company drives store efficiency and reduces the central cost base.
The Company continues to display strong range management across categories, with a key focus on expanding in hard flooring and digital, in line with its strategic growth objectives. Whilst management of supplier terms has been challenging, the Company continues to work well with partners in its supply chain and expects this to yield an improved position moving forward.
The Company's average sales per store ratios have improved in recent periods and the prolonged sales decline appears to be bottoming out; however, in the present UK economic climate, the Board remains cautious. In H1 FY20, LFL sales growth has been achieved in all territories, however the ongoing impact of negative consumer confidence and Brexit on the current retail environment could present a challenge in the balance of the financial year.
The European business, driven by performance in the Netherlands and Belgium, continues to trade well and the Company believes that it is in a good position to improve profitability.
Bob Ivell, Chairman of Carpetright, said:
"Shareholders will be aware that we have been engaged in comprehensive refinancing discussions to replace existing facilities which expire at the end of this calendar year. The Possible Offer being announced today would put in place a new financing structure for Carpetright which would enable us to continue our recovery and make necessary investments in improving our business."