Management Consulting Group PLC Proposed disposal and trading update (5436G)

TIDMMMC

RNS Number : 5436G

Management Consulting Group PLC

23 November 2015

23 November 2015

Management Consulting Group PLC ("MCG or "the Company")

Proposed disposal of certain operations of Kurt Salmon and trading update

Highlights

-- MCG is in advanced discussions for the sale of certain operations of Kurt Salmon, in France and other geographies, to Solucom SA ("Solucom")

-- Following completion of a mandatory consultation with the respective Works Councils of MCG and Solucom, the parties expect to finalise negotiations and thereafter enter into a binding agreement

-- The proposed disposal is expected to realise gross cash proceeds of approximately GBP60 million, enabling the Group to repay existing indebtedness

-- The proposed disposal represents an attractive value for shareholders, the proposed gross consideration representing approximately 80% of the Group's current market capitalisation

-- The transaction will rebalance the Group's portfolio in geographic terms, reducing exposure to the French market and refocusing MCG on growth opportunities in North America and Asia

-- The remaining Kurt Salmon business will benefit from tight focus on the retail and consumer goods industry vertical where it is a market leader, together with the US healthcare business

   --      The Disposal will not be earnings accretive 

-- Accounting for the IFRS loss on sale will have a significant negative impact on the Company's distributable reserves and consequently, if the disposal proceeds, the Company will not be in a position to pay the interim dividend of 0.23 pence per share which was announced on 31 July 2015

-- MCG today also announces a trading update, reporting deterioration in the outlook for Alexander Proudfoot for 2015 and continuing positive progress in Kurt Salmon.

MCG today announces that it is in advanced discussions with Solucom for the sale of certain operations of Kurt Salmon (the "Target Business"), comprising the Kurt Salmon businesses in France, Belgium, Luxembourg, Switzerland and Morocco, together with certain related operations in the United States, to Solucom, for a total proposed cash consideration of approximately EUR84 million (equivalent to approximately GBP60 million) payable on completion of the sale (the "Disposal").

The Kurt Salmon business retained by MCG will continue to serve international retail and consumer goods clients on a global basis, including through the established Kurt Salmon businesses in Germany and the United Kingdom which are not part of the Target Business subject to the proposed Disposal, alongside the operations in North America and Asia. MCG will also retain the Kurt Salmon healthcare practice based in the US.

As required under French law, a mandatory consultation is in progress with the respective Works Councils of Kurt Salmon and Solucom in relation to the Disposal (the "Works Council Consultations"). Following completion of the Works Council Consultations MCG and Solucom expect to finalise negotiations and thereafter enter into a binding agreement. A further announcement will be made in respect to this process in due course.

The Disposal, if entered into, is of sufficient size relative to the Group to constitute a Class 1 transaction for MCG under the Listing Rules and will therefore be conditional upon, amongst other things, the passing of a resolution (the "Disposal Resolution") approving the Disposal by Shareholders at a general meeting (the "General Meeting"). The Disposal would also be conditional upon:

(i) there having been no material adverse change in relation to staff retention rates and current year forecast operating results of the Target Business from the date of entering into definitive agreements in relation to the Disposal; and

(ii) the French Anti-trust Authority (Autorité de la Concurrence) approving the Disposal.

MCG will use the expected net proceeds of approximately EUR82 million (equivalent to approximately GBP58.5 million, after estimated transaction costs of GBP1.5 million), to repay the Group's net bank indebtedness under the Company's Revolving Facility, which is expected to be approximately GBP50 million at Completion, and will retain the remaining net proceeds for general corporate purposes.

The purchase price is based on an agreed enterprise value for the Target Business of EUR98.5 million. The proposed gross cash proceeds of approximately EUR84 million (equivalent to approximately GBP60 million), (which will be subject to post-closing adjustments relating to amounts of debt, other debt like items, the appropriate level of existing provisions, cash and working capital at completion of the Disposal) represent approximately 80% of the Group's market capitalisation. By comparison, the revenue and profit before tax of the Target Business for the year ended 31 December 2014 represented approximately 40% of the Group's revenue and 38% of the Group's profit before tax for that year. The Target Business had total assets of GBP25.9 million (Group: GBP334.8 million) as at 30 June 2015 (unaudited) and generated profit before tax of GBP1.9 million for the year ended 31 December 2014.

The Disposal is expected to generate a one-off IFRS loss on sale of approximately GBP50 million, principally as a result of the write-off of goodwill held in the consolidated balance sheet of the Group which is allocated to the Target Business. The accounting impact of this IFRS loss will have a significant negative impact on the Company's distributable reserves and consequently, if the disposal proceeds, the Company will not be in a position to pay the interim dividend of 0.23 pence per share, which was announced on 31 July 2015 and was expected to be paid on 6 January 2016. The Company will review the position after completion of the Disposal and it is likely that it will, as soon as reasonably practicable, seek to implement a reconstruction of reserves to enable dividend payments to be resumed. The Board will consider future dividends once this process is complete.

Trading update

The Board issued a trading update with its Interim Results statement on 31 July 2015, noting that Alexander Proudfoot was likely to deliver weaker third quarter revenues and that the outcome for the year as a whole for that business remained uncertain and would depend on the rate of order input in the coming months. Alexander Proudfoot's performance in the third quarter, as expected, was disappointing, including in the North American operations which had performed well in the first half. The order intake in the last four months has been weak and the Board does not now expect a significant improvement in performance over the rest of 2015. It is clear that reduced demand from natural resources' clients has contributed to this weakness, with revenues from this sector so far this year being approximately 40% lower than the same time last year. Action is being taken to accelerate change in the underperforming operations, in Europe and Africa in particular, which will involve some restructuring initiatives. However, the outlook for Alexander Proudfoot for 2015 as a whole has deteriorated from the position set out in the Interim Results statement and the Board currently expects that Alexander Proudfoot will deliver second half revenues in 2015 which are significantly lower than those in the first half of the year, and an operating loss for the year as a whole.

In the Interim Statement the Group reported net indebtedness of GBP41.7 million at 30 June 2015. As a result of result of weakness in Alexander Proudfoot the level of net indebtedness is currently higher than the half year position.

As noted in the Interim Statement, Kurt Salmon's North American business, focused on the US retail and consumer goods practice, reported slightly lower year on year revenues and operating profit margins in the first half, and this continued into the third quarter. Nevertheless we continue to see healthy demand from US retail sector clients and the Board expects that the broadly positive underlying trends in the Kurt Salmon business will continue to apply over the remainder of the financial year and into 2016. In the other geographies which form part of the Kurt Salmon business that will retained by MCG, the retail and consumer goods and healthcare practices have performed in line with expectations.

In relation to the Target Business, Kurt Salmon delivered an improved performance in its French business in the first half of 2015 and this positive trend has continued. The signs of improved confidence in the French market that were evident in the first half have continued to drive demand for Kurt Salmon's consulting services and we expect this positive momentum to continue during the remainder of 2015 and into 2016. In the other geographies which form the rest of the Target Business, performance has been in line with our expectations.

Alan Barber, Chairman of MCG, commented:

"The proposed disposal will significantly reduce Group indebtedness and create a business with a more balanced portfolio in geographic terms, focused on growth markets. The recent performance of Alexander Proudfoot has been disappointing, but the proposed disposal will enable the Group to continue to build a firm growth platform to support its recovery. The retained Kurt Salmon business will benefit from a tight focus on two industry verticals where the business has a strong position. We believe that the proposed transaction is firmly in shareholders' interests and will position MCG to concentrate its effort and resources on the businesses which are being retained."

Enquiries:

For further information please contact:

 
 MCG                                   Tel: [phone] 
 Nick Stagg, Chief Executive 
 Chris Povey, Group Finance Director 
 
 FTI Consulting                        Tel: [phone] 
 Ben Atwell 
 

Notes to editors:

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