DFS Furniture plc Acquisition of Sofology and refinancing (9958M)

TIDMDFS

RNS Number : 9958M

DFS Furniture plc

03 August 2017

For immediate release

THIS STATEMENT CONTAINS INSIDE INFORMATION

DFS Furniture plc ("DFS" or the "Group")

Acquisition of Sofology and Refinancing on Improved Terms

DFS is pleased to announce it has exchanged contracts to acquire all the outstanding share capital of Sofology Limited ("Sofology") for an initial enterprise value of GBP25 million, on a debt-free cash-free basis, subject to a potential further earn-out payment ("the Acquisition"). The Acquisition is subject to regulatory approval, detailed below.

Acquisition Highlights

-- Sofology is a specialist sofa retailer with a network of 37 stores in the UK which together with a strong web presence offers customers a technology-led omni-channel proposition

-- The acquisition will further broaden the Group's appeal to customers, through Sofology's distinctive consumer proposition, and as part of the Group's portfolio of strong furniture brands

-- Near-term potential synergy benefit of c. GBP4 million annually identified, with further longer-term benefits from intensifying use of infrastructure and future revenue synergies expected

-- Anticipated to be earnings accretive in first full year post acquisition, with material medium to longer-term value creation expected

   --     Sofology CEO and management team will continue to lead the business post completion 

Acquisition Rationale

The acquisition of Sofology will add a strong distinctive brand and business to the Group's current portfolio, building upon the success of the Dwell and Sofa Workshop acquisitions. This acquisition is consistent with the Group's existing proven strategy of developing its brand portfolio to broaden appeal to more customers.

Sofology has a strong technology-led omni-channel retail approach operated through its network of 37 stores and transactional website. Following over GBP5 million of investment in technology development over the last eighteen months, it benefits from innovative retail solutions in omni-channel tracking and attribution, visualisation technology and personalized marketing content delivery, with the potential for this technology to be shared across the Group.

Using the strength of DFS's efficient operating platform the Acquisition is expected to create near-term scope for material value creation through the sharing of scale benefits in the purchasing of advertising, interest-free-credit, upholstery and other services. These synergy benefits will begin to be realised in Sofology's business shortly after completion, with a near term potential benefit of c. GBP4 million annually. Further earnings opportunities will be available in the medium to long-term through revenue synergies and also better utilisation of both companies' warehouse facilities and delivery fleets, with the potential for the enlarged group to benefit from tighter delivery radials and thus increased van loads, in line with approach taken with Sofa Workshop. No store closures will occur as a result of the Acquisition and the store opening programmes of both DFS and Sofology will continue given the proven ability of the two brand fascias to trade successfully alongside each other in multiple locations.

Exceptional one-off costs of releasing the synergies of approximately GBP5 million are expected to be incurred over the next three years, principally associated with further technology and additional people investment to ensure both businesses benefit from leading technology and systems.

Driven by its differentiated brand proposition and investment in technology and stores, Sofology has grown well recently with overall revenue growth of 5% over the six months to 30 June 2017. Sofology reported revenue of GBP143 million and, following the impact of exchange rates on cost of goods sold and disruption following the Sofology rebrand, an EBITDA loss of GBP2.7 million over the twelve months ending 31 December 2016 with statutory loss before tax of GBP8.9 million over the same period. EBITDA over the twelve months to 31 December 2015 was GBP2.9 million. Its gross assets were valued at GBP36.2 million as at 31 December 2016.

The Group anticipates the Acquisition will be EPS accretive in its first full financial year post acquisition and will generate returns materially above its cost of capital in the second full financial year post acquisition.

Jason Tyldesley the CEO of Sofology, together with the current Sofology management team, will continue to lead the business post completion. In line with the approach we have taken with the acquisitions of Dwell and Sofa Workshop, we anticipate that Sofology will retain its current headquarters in Golborne, and maintain full independent control over its customer experience and all customer facing activities.

Acquisition Structure

Sofology is being acquired from its shareholders for an initial enterprise value of GBP25 million payable upon completion. In addition, there will be potential further consideration payable approximately twelve months following completion, based upon a multiple of seven times the underlying earnings before interest, tax depreciation and amortization ("underlying EBITDA") generated by Sofology over a future twelve month period less the GBP25 million consideration that will have already been paid.

The initial consideration will be financed through the Group's existing cash resources and its new bank facility described below. We currently expect any further consideration, if due, to be satisfied from available bank facilities, however up to GBP25 million could be paid either in cash or shares at the discretion of the Group's Board of Directors. While we anticipate that the transaction will result in leverage remaining at above 1.5x in the first financial year of the deal, we remain committed to reducing leverage back to beneath 1.5x, through usual cash generation, supported by planned working capital and other cash initiatives.

Completion of the Acquisition is conditional upon the receipt of clearance from the Competition and Markets Authority ("CMA") and the Financial Conduct Authority ("FCA"). For the purposes of transaction classification under the UK Listing Rules, the total aggregate consideration payable is capped at GBP105 million.

Refinancing

Furthermore, taking advantage of its strong credit position and business fundamentals, the Group is pleased to announce an agreement to refinance its existing borrowings, retaining its total facility size and covenants, but converting the current facilities to a new lower-cost five-year GBP230 million revolving credit facility structure. The new facility, maturing in July 2022, has been arranged with a group of six banks. The financial covenants remain unchanged from DFS's current GBP200 million term loan and GBP30 million revolving credit facilities that were otherwise due to mature in March 2020. The new facility will lower the cost of the Group's debt financing from the financial year starting on 30 July 2017 by approximately GBP1 million per year. An additional GBP100 million uncommitted accordion feature also provides further potential headroom for any currently unforeseen future funding needs. Unamortised issue costs in respect of the Group's current facilities amounting to GBP 1.4 million will be written off following this refinancing as part of the Group's finance charges and will be treated as an exceptional item in the financial year ending 28 July 2018.

Further announcements

DFS is scheduled to publish its post-close trading update on 10 August 2017, with results for the full year due to be published on 5 October 2017. We will also publish a further notification once the CMA filing is made.

Ian Filby, CEO of DFS Furniture plc, commented:

"While the UK furniture retail market continues to be very challenging, we remain focused on making strategic progress to strengthen our position in living room furniture. This Acquisition represents a clear opportunity for DFS to accelerate our proven strategy of broadening our appeal, generating substantial long-term returns for shareholders underpinned by well-understood synergies.

Sofology's distinctive market position is a good fit with our existing brands. Jason and his team should be congratulated for creating a fantastic and fast-growing business and I'm looking forward to working with Jason and the team as they continue to grow Sofology as part of the Group. "

N M Rothschild & Sons Limited ("Rothschild") is acting as financial adviser to DFS. GCA Altium is acting as financial advisors to Sofology.

Enquiries: DFS (enquiries via FTI)

Ian Filby (CEO)

Nicola Bancroft (CFO)

Mike Schmidt (Director of Corporate Finance)

FTI Consulting

Jonathon Brill

Georgina Goodhew

Eleanor Purdon

[phone]

Rothschild (Financial Adviser)

Andrew Thomas

Omaier Akhtar

[phone]

About DFS Furniture plc

DFS is the market leading retailer of living room and upholstered furniture in the United Kingdom. We design, manufacture, sell and deliver to our customers an extensive range of living room furniture products. The business operates a retail network of living room furniture stores in the United Kingdom and Europe, together with an online channel. These have been established and developed gradually over more than 47 years of operating history. We attract customers to our stores and website through our substantial and continued investment in nationwide marketing activities and our reputation for high quality products and service, breadth of product ranges and price points and favourable consumer financing options.

About Sofology

Sofology is a specialist sofa retailer operating from 37 stores across the UK and through a leading web platform (www.sofology.co.uk). It was founded by the Tyldesley family in 1974 and offers a wide range of fabric, leather and reclining sofas in addition to corner sofas and sofabeds. Sofology operates six warehouses strategically located to cover the UK from North to South. The head office is located in Golborne.

BGF previously invested GBP10 million in March 2016 for a minority interest to support Sofology's expansion plans in the UK.

This information is provided by RNS

The company news service from the London Stock Exchange

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August 03, 2017 02:01 ET (06:01 GMT)