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Fulcrum Utility Services - Response to Tender Offer

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FULCRUM UTILITY SERVICES LIMITED

("Fulcrum", the "Company" or the "Group")

Further Re. Unsolicited Proposed Tender Offer by Harwood Capital LLP

Following its announcement on 9 April 2020, the board of directors of Fulcrum (the "Board") has now consulted with its advisers and major independent shareholders and provides the following further response to the unsolicited announcement by Harwood Capital LLP ("Harwood") of its intention to make a tender offer (the "Tender Offer") for up to 53,500,000 of the Company's ordinary shares at a price of 26.25 pence per share ("Tender Price").

  • The Board continues to regard Harwood's announcement as an opportunistic manoeuvre against the backdrop of stock market uncertainty and share price volatility resulting from the ongoing COVID-19 pandemic. 
  • The Board believes that the Tender Price significantly undervalues the Company and its prospects and does not reflect a fair value for independent shareholders.
  • The Board reiterates its recommendation that shareholders should take no action and neither accept the Tender Offer, when made, nor sell any shares to Harwood at or below the Tender Price.  
  • It is not a term of the proposed Tender Offer that the Company will be delisted and shareholders who are concerned about this possibility are strongly urged not to tender their shares and instead to support the Board, senior management and those independent shareholders who have so indicated in letters of intent (who together are interested in shares representing in aggregate approximately 39.87 per cent. of the Company's issued shares) in rejecting the proposed Tender Offer and opposing any subsequent attempt to delist the Company from AIM.  Under the AIM Rules, any delisting requires a majority of 75 per cent. of votes cast at a shareholder meeting.

The Board notes Harwood's stated intention, should the Tender Offer complete, to seek Board representation for itself and Bayford Group and to use this as a platform to propose a resolution to delist the Company from AIM. The Board considers that this would manifestly not be in the best interests of independent shareholders given the loss of liquidity currently provided as a company admitted to trading on AIM. Accordingly, the Directors and senior management, who are interested in shares representing in aggregate approximately 3.83 per cent. of the issued shares in the Company, will not tender any shares to Harwood and will oppose any resolution to cancel the admission of the Company's shares to trading on AIM if subsequently proposed by Harwood and/or Bayford Group.

Discussions with independent shareholders since Harwood's unsolicited proposal was announced have also demonstrated significant support for the Board's position. Independent shareholders have provided letters of intent confirming that they intend (or, where applicable, will advise their underlying clients) not to tender any shares to Harwood and to oppose any resolution to cancel the admission of the Company's shares to trading on AIM if subsequently proposed by Harwood and/or Bayford Group.  These shareholders (or, where applicable, their underlying clients) are interested in shares representing in aggregate approximately 36.04 per cent. of the issued shares in the Company and, when aggregated with the shares held by the Directors and senior management (referred to above) these shares represent in aggregate approximately 39.87 per cent. of the issued shares in the Company. Under the AIM Rules, any delisting requires a majority of 75 per cent. of votes cast at a shareholder meeting.

Further to the Company's announcement on 1 April 2020 and in light of uncertainties as a result of COVID-19, the Board reiterates the strong financial profile of Fulcrum and its confidence in the Company's post-COVID-19 trading prospects, particularly following the disposal of its domestic customer gas connection assets and order book and associated meters to E.S. Pipelines Limited ("ESP") which has enabled the Group to repay all bank debt and leave the Group with net cash of £5.6 million as at 31 March 2020. As announced on 23 December 2019, the total estimated net consideration, inclusive of the £16.8m received on 31 March 2020, is expected to be £33 million with the balance to be received in future tranches.  In addition to the domestic gas assets being sold, the Company continues to own and operate I&C (Industrial and Commercial) gas assets and electricity assets.

The Board rejects in the strongest terms Harwood's unsubstantiated assertion that the ESP disposal "may well have been at an undervalue".  The Board considers the implementation of the ESP disposal, which did not require shareholder approval under the AIM rules, and the on-going future relationship with ESP to be in the best interests of all shareholders, in contrast to Harwood's opportunistic Tender Offer.  The agreement reached with ESP in December provides for the two companies to work together to identify and win new opportunities, with the Group undertaking the connections work and ESP paying to adopt the relevant infrastructure assets, when built.  The Board has been very encouraged by the quality of engagement with ESP to-date and believes the arrangement will add significant value.

The Board also rejects Harwood's assertion that the clawback provisions relating to a change of control of the Company that were agreed with ESP are materially detrimental to shareholders.  These provisions were the subject of arm's length negotiations resulting in a transaction which benefits all shareholders in the manner described above and in the Board's announcement of 23 December 2019.  Again, the Board considers this to be in contrast to Harwood's proposal to acquire a sizeable interest in the Company's shares, to seek to appoint directors to the board in conjunction with Bayford Group, and to use this as a platform to propose a resolution to delist the Company from AIM to the detriment of independent shareholders. 

The Group is prioritising maintaining the strength of its balance sheet and its cash reserves and, as stated previously, has no intention to declare a dividend for FY2020.  Subject to any material unforeseen impacts on the Group's trading and financial position arising from the COVID-19 pandemic, the Board intends to return the cash surplus (of up to £20 million) expected to be generated by the ESP disposal by way of special dividends over the next three to four years and to reinstate regular dividend payments in line with its previous policy of distributing half of available annual profits when it judges that it is prudent and appropriate to do so.  This dividend policy reflects the cash generative nature of the Group's infrastructure construction businesses and the expectation that there will be limited recurring capital expenditure commitments going forward. 

As detailed above, the disposal of domestic customer gas connection assets to ESP has transformed Fulcrum's financial position, and enables it to focus on a revised growth strategy under the stewardship of an enhanced executive team, led by Daren Harris. The Board continually evaluates corporate governance and, in particular, the balance of skills, leadership and independence. The Company has recently announced the appointment of Jennifer Babington as a new independent non-executive director (effective 1 May 2020) and Ian Pattison as Interim Chief Financial Officer (CFO) whilst the search for a permanent CFO is ongoing.

Sales orders in the third quarter to December 2019 were the highest ever achieved by the Group at £17.4m and, until the impact of COVID-19 in March delayed the signing of two large contracts, the Board had expected the final quarter of the 19/20 financial year to be even stronger. It is expected that the sales orders that did not complete in March will do so in due course.  Not including these deferrals, the Board expects the Group order book at 31 March 2020 to be approximately £71 million, up 17% year-on-year (31 March 2019: £60.5m; 30 September 2019: £62.6m (+13 %)). Looking further ahead, Fulcrum is a fundamentally robust business which gives the Board confidence that the Group is well positioned to prosper in the long term.

For completeness, the Board notes that its Chairman, Philip Holder, held a previous role as Independent Chairman of Forefront Group Limited, a company in which funds advised by Harwood held a majority interest.  Mr Holder stepped down from this role in 2014 when the business was sold. Mr. Holder is aware that he is listed on Harwood's website as a consultant to Harwood and has declared this role (as an operational adviser) in Fulcrum's Annual Reports. Mr Holder has not received any form of remuneration from Harwood or any other entity associated by Harwood in respect of this role and has confirmed to the directors that he plays no role in Harwood's investment decisions and had no prior knowledge of Harwood's intention to announce its Tender Offer. The remaining directors of Fulcrum are therefore satisfied that Mr. Holder does not have any conflict of interest in relation to Harwood's proposals.

The Board reiterates its recommendation that shareholders should take no action and neither accept the Tender Offer, when made, nor sell any shares to Harwood at or below the Tender Price.   It is not a term of the proposed Tender Offer that the Company will be delisted and shareholders who are concerned about this possibility are strongly urged not to tender their shares and instead to support the Board, senior management and those independent shareholders who have so indicated in letters of intent (who together are interested in shares representing in aggregate approximately 39.87 per cent. of the Company's issued shares) in rejecting the proposed Tender Offer and opposing any subsequent attempt to delist the Company from AIM.  Under the AIM Rules, any delisting requires a majority of 75 per cent. of votes cast at a shareholder meeting.