TIDMTAN
RNS Number : 3232B
Tanfield Group PLC
20 September 2018
Tanfield Group Plc
("Tanfield" or the "Company")
Snorkel Investment Update
The Board of Tanfield (the "Board") provides the following
update to the market relating to its investment in Snorkel
International Holdings LLC ("Snorkel"), the aerial work platform
business.
Background
-- Tanfield is a 49% shareholder in the equity of Snorkel
following the joint venture between Tanfield Group Plc and Xtreme
Manufacturing LLC ("Xtreme"), a Company owned by Don Ahern of Ahern
Rentals Inc ("Ahern"), relating to Snorkel, in October 2013.
-- As reported in the Corporate Update on 13 July 2018 and in
the Snorkel investment update on 9 September 2018, it is the
Board's intention to impair the Snorkel investment value from
GBP36.3m to GBP19.1m ($25.3m) in its forthcoming interim
statements, which represents approximately 12p per share.
-- In June 2018, Snorkel indicated to the Board that it expects
Xtreme will cause SKL Holdings to exercise its call option at the
earliest opportunity, in October 2018.
-- The Board reported in the 2017 Annual Report that entering
into the next phase would bring with it a level of uncertainty. In
the event that the call option is exercised in October 2018, the
Board anticipates that there will most likely be a period of
negotiation - potentially protracted - prior to any financial
realisation and the Board will need to assess the Company's
position and, if necessary, take appropriate advice and initiate an
audit at or prior to that time.
-- Based on the information currently available to the Board, it
is likely that the trailing 12 month EBITDA at October 2018 will
result in the price of the call option being at best a modest
amount, possibly nil, but this will need to be validated at the
time and consequently the Board has restricted its current
valuation of the Company's interest in Snorkel to the priority
amount and preferred return values only.
-- The Q2 results show a material restatement of the Snorkel
balance sheet and a significant increase in the value of
non-current liabilities from $27m at 31 March 2018 to $79m at 30
June 2018 and the Board has requested information on these
changes.
-- Charles Brooks, the former Chief Financial Officer of
Tanfield Group Plc who had significant input in to the key
documents pertaining to the joint venture between Tanfield and
Xtreme and whose employment transferred following the joint venture
and who is now the Chief Financial Officer at both Snorkel and
Xtreme, has made assertions that directly contradict the Board's
understanding and belief as to the intent and meaning of the
agreements that were entered in to.
Investment Update
The assertions made by Mr Brooks, is that the preferred interest
position, described in the excerpt from the circular below as being
"$50,000,000 (which may be subject to adjustment)" is only
applicable until 30 September 2018, after which date the value will
be nil. The Board do not agree with the assertions made by Mr
Brooks and are of the belief that the intent of the agreement
requires the payment of the preferred interest position prior to or
in conjunction with Xtreme seeking to exercise the call option to
acquire Tanfield's equity in Snorkel. A summary of the transaction,
as provided in the circular, summarised the transaction as
follows:
Quote
Xtreme, by way of its holding in SKL Holdings, proposes a staged
acquisition of the Snorkel Division, via the creation of Snorkel
International Holdings, in which Tanfield will retain a holding
until the consideration terms are fully met. Xtreme has committed
to making significant working capital facilities available to
Snorkel International Holdings to deliver its growth forecast (such
growth forecast is estimated by Xtreme to require between US
$35,000,000 and US $50,000,000 of working capital) and to deliver
certain other strategic benefits and synergies to Snorkel
International Holdings. Tanfield will retain an initial interest in
49% of Snorkel International Holdings and a preferred interest
position of US $50,000,000 (which may be subject to adjustment, as
described in section 3.1 of this Document), in exchange for
Xtreme's controlling interest in Snorkel International Holdings.
Subject to the Snorkel Division reaching an EBITDA of at least US
$25,000,000 for any prior 12 month period within 5 years of
Closing, Tanfield can demand payment of this preferred interest
which would be paid when Snorkel International Holdings is able to
fund such payment and its net debt/EBITDA ratio is less than 2,
ultimately reducing Tanfield's interest to 30% and Xtreme will hold
70% of Snorkel International Holdings.
Subject to the payment of the preferred interest, and within 5
years of Closing, Tanfield has a "put" option on this remaining
holding, whereby SKL Holdings will be obliged to purchase the
remaining interest held by Tanfield at an agreed multiple of 5.5
times EBITDA earnings, as at the date of the put, again subject to
Snorkel International Holdings being able to fund. SKL Holdings has
a call option on the same commercial terms.
Unquote
It should be noted that, whilst the preferred interest position
is described in the circular above as being "$50,000,000 (which may
be subject to adjustment)", the actual value of the preferred
interest position, after adjustment, was materially reduced to only
$22.5m which, in addition to a preferred return (2.5% annual
interest) of $2.8m, totals $25.3m and underpins the planned
impairment of the investment value to GBP19.1m ($25.3m). The Board
acknowledge that as the final value of the preferred interest
position was to be based on specific assets and liabilities
calculated on the day of closing, it would have been impossible to
accurately forecast a specific value, hence being subject to
adjustment. However, in February 2014, when the remaining Board
members, whose employment did not transfer to Snorkel in October
2013 (comprising of three non-executive Directors) (the "Remaining
Board Members"), became aware of the level of adjustment that was
to be made to the $50m preferred interest position, they were
highly critical that a more accurate estimate of the likely value,
or a range of likely values, was not provided in the circular and
felt that this may have resulted in a level of ambiguity in the
value of the proposed transaction.
The Board are firm in their belief that the intent of both the
Remaining Board Members at the time of proposing the transaction
and that of the shareholders who authorised the Company to enter
into the agreements at a General Meeting, was not that the
preferred interest position was only valid until 30 September 2018,
and after which, a call option could be exercised without payment
of the preferred interest position. Furthermore, the Board are not
of the belief that the agreements that were entered into state that
the preferred interest position has an expiry date, as there is no
mention of an explicit or defined expiry date in the agreements.
Therefore, the Board are resolute that the agreements require
payment of the preferred interest position should Xtreme seek to
exercise the call option.
The Board acknowledge that inconsistencies exist in key
documents that were prepared at the time and therefore they cannot
rule out that these inconsistencies may have led to a level of
ambiguity, but caveat that if ambiguity does exist as a result of
the inconsistencies, this has no bearing on the intent of the
agreements in the eyes of the Remaining Board Members of Tanfield
and the Company's shareholders at the time of authorising the
transaction.
Whilst there is no formal dispute with Xtreme currently, the
Board has inferred from its correspondence with Mr Brooks that this
may occur in due course. Should Xtreme attempt to exercise its call
option and dispute that the adjusted preferred interest position is
payable, the Board will vigorously defend its position that the
preferred interest is payable.
The Board of Tanfield is continuing to seek legal advice in
relation to this matter and will update shareholders when
appropriate.
For further information:
Tanfield Group Plc
Daryn Robinson 020 7220 1666
WH Ireland Limited - Nominated Advisor / Broker
James Joyce / Chris Viggor 020 7220 1666
The information contained within this announcement is deemed by
the Company to constitute inside information under the Market Abuse
Regulation (EU) No. 596/2014.
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END
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