Proposed delisting from AIM (1062D)

TIDMHEP

RNS Number : 1062D

Hephaestus Holdings PLC

17 March 2011

Hephaestus Holdings PLC ("Hephaestus" or the "Company")

Proposed delisting from AIM

Suspension of Trading on AIM

Update on Financial Strategy and Investing Policy

Proposed Establishment of trading facility on Sharemark

The Board of Hephaestus has made Application to the London Stock Exchange to delist trading in the Company's shares from AIM with effect from 19 April 2011. This announcement sets out the reasons for such a proposal. A circular will be sent to shareholders shortly convening a General Meeting to approve delisting.

In addition, the board has entered into negotiations to make an acquisition which, under the AIM Rules, would be categorised as a Reverse takeover if completed. As a consequence, in accordance with the AIM Rules for Companies, trading in the Company's shares has been suspended. Shareholders are being informed of this potential acquisition at an earlier stage than usual because, once the delisting becomes effective, shareholders will lose the ability to approve or vote against the potential acquisition in General Meeting.

Background

Following the disposal of the Group's businesses last year, Hephaestus has begun to implement the dual strategy set out by in the circular to shareholders dated 21 October 2010 and approved by shareholders at the General Meeting on 5 November 2010. This strategy consists of (a) maximising the value of and realising various legacy financial assets (the "Financial Strategy") and (b) executing a focused investment strategy in the engineering and industrial technology sectors (the "Investing Policy").

On 1 February 2011 Chris Heminway was appointed Chief Executive of the Company to implement the strategy. Chris has extensive experience of the engineering and industrial technology market through a career encompassing equity research, corporate finance, consulting and investment. He has worked with industrial businesses and financial investors alike on strategic evaluations, acquisitions, and disposals, and has run his own businesses since 2005. He joined the RTS Board in September 2009 and controls ITI Industrial Investments (UK) Limited ("ITI UK") which owns 28.7 per cent of the Company.

The Board of Hephaestus has today released its preliminary audited results for the year ended 31 December 2010. These showed a retained loss for the year after tax of approximately GBP1.1 million (2009: profit of GBP10,000) following disposal of its trading businesses. The Group's results comprised a profit after tax of GBP0.37 million from continuing operations and a loss on discontinued operations of GBP1.48 million. Loss per share was 1.77p (2009: 0.02p EPS). As at 31 December 2010, the Group had consolidated net assets of approximately GBP2.1 million, equivalent to 3.42p per share and net cash of approximately GBP2.1 million.

Financial Strategy

The Company continues to unwind its inefficient structures, realise assets and minimise or extinguish liabilities, whether contingent or actual. This process of restructuring is however expected to take further significant time, effort and cost. In particular, the Company is taking steps to wind up a large number of redundant subsidiary companies in the UK and overseas, requiring related inter-company asset transfers, and seeking to simplify its tax affairs, which are involving expenditure in time and in professional fees.

After some good progress in the resolution of legacy affairs of the Group in recent months, the Company has concluded realisation of three financial assets.

On 7 January 2011, the Company announced the settlement of its long running dispute with a major customer of its Flexible Systems business and as a result received a payment of GBP300,000. Also in January 2011, Flexible Systems received an R&D tax credit of approximately GBP121,000 in cash relating to the 2007 and 2008 years. Following these events, RTS Flexible Systems will become dormant and the company and its sole director are taking advice on the implications for its outstanding creditors.

In February 2011, the Group received deferred consideration from the acquirers of the RTS Life Science business equal to the tax credit relating to the former Life Science subsidiary of around GBP143,000 in cash. This receipt completes the outstanding R&D tax credit claims for the Group. The various 2006 claims have been definitively disallowed after an unsuccessful appeal to the Adjudicator's Office.

Following these receipts, the principal financial assets remaining within the Group are its net cash balances and its investment in the Doerfer Loan Notes. The Company also has some outstanding tax issues arising from its previous involvement in Finland, which are outlined below.

The full capital value of the Doerfer Loan Notes at year end was $3.5m, having been renegotiated downward during 2010 reflecting the financial position of the borrower and its historic inability to make repayments. The Loan Notes now have a repayment schedule extending to 2014 at an interest rate of 10 per cent. The Loan Notes are required to be carried at fair value and, having been fully provided for since the end of 2008, had a carrying value of GBP250,000 as at 31 December 2010. When considering the fair value of the Doerfer Loan Note, the Directors have taken into account their assessment of recoverability of the financial asset. The Directors base their judgements of recoverability of assets on the latest available information and past experience. Income from the Loan Notes remains uncertain given the financial position of the borrower, which remains dependent on the continued support of its senior lender.

As previously disclosed, the Group has made two protective claims to group relieve losses arising in Finland against UK taxable profits under the principle in the Marks and Spencer EU group relief case. The validity of these claims has now been confirmed in principle by the Company's professional advisers, and the Company is taking fresh advice on the potential quantum of these claims for the Group.

It has also been previously noted that an assessment for tax has been raised by the Finnish tax authorities. The authorities continue to pursue the Company but the assessment was reduced to slightly over EUR1m in 2010. In February 2011, the Company lost its appeal against the assessment at the Finnish Tax Correction Board and must now appeal to the Finnish Administrative Court. The Directors remain of the view, having historically received professional advice to support this, that the Company has a sound case for defeating any claim in its entirety, which they additionally believe to be unenforceable under the terms of the UK Finland Double Tax Treaty, and accordingly no provision for a potential liability has been made in the Company's financial statements as at 31 December 2010.

Overheads

Following the disposal of the Group's businesses and the restructuring of the remaining parts of the Group, the Company's Head Office has been moved to London and the size of the Board and support staff considerably reduced from previous years' levels. The Company's annual overhead, including the full cost of the Board, nevertheless remains high in relation to the Company's net cash assets. A significant portion of this overhead is directly or indirectly related to maintaining the Company's AIM listing. These include costs of advisers, listing costs and the increased compliance costs.

Investing Policy

The Board has stated that it will regularly assess its Financial Strategy in order to allocate the Company's net cash between the requirements of its Investing Policy and its availability for distribution to Shareholders. The Board is investigating a number of acquisition opportunities that it considers to be attractive and has therefore determined that the Company should currently direct all of its financial resources to its Investing Policy. While the possibility exists to issue shares in Hephaestus in consideration or part consideration for acquisitions, the Board does not currently anticipate undertaking a transaction which will result in a substantial issue of shares to shareholders of an acquiree company, in part due to the uncertainties arising from unresolved legacy issues outlined above.

The Company also does not possess sufficient distributable reserves to pay a substantial dividend.

The Directors have been working diligently to carry out the Investing Policy. The Company has recently entered exclusive negotiations on an acquisition opportunity (the "Target") which the Directors believe to be a suitable acquisition which conforms to the Investing Policy. Should the acquisition be successfully concluded, your Board believes that it can form the cornerstone of a group specialising in Surface Technology and considers the acquisition to be a platform for significant shareholder value creation. The identity of the Target cannot be revealed at this stage for reasons of commercial sensitivity and the fact that the Company has entered into a confidentiality undertaking with the vendor. However, once the delisting becomes effective, shareholders will lose the ability to approve or vote against the potential acquisition in General Meeting, As a consequence, the Directors have determined that Shareholders, in considering whether to vote in favour of the delisting, would find it helpful to understand the activities of the Target and how its acquisition would affect the Company and so further information on the Target is set out below.

There is no certainty, however, that the acquisition will be successfully concluded, Moreover, due to AIM documentation requirements (as discussed further below), the acquisition cannot proceed if Hephaestus remains quoted on AIM as the Company will be unable to meet the vendor's required completion timetable.

There is no certainty that the Company will be able to make an acquisition or acquisitions which constitute a reverse takeover under Rule 14 of the AIM Rules to implement its Investing Policy by 5 November 2011, the date by which the Company would be delisted from AIM. Hence, even if shareholders do not vote in favour of an earlier delisting, there is a risk that the trading in the Company's Ordinary Shares may before the end of the year be suspended or cancelled by the London Stock Exchange.

Limitations of current AIM Listing

Under the AIM Rules, any acquisition undertaken by the Company would be classified as a "Reverse Take-over" requiring a detailed re-admission document supported by an extensive and expensive due diligence exercise. Such an acquisition would require approval in general meeting by shareholders. The cost of undertaking such an exercise is estimated by the Board to be over GBP100,000 of additional professional costs. Furthermore it is highly likely that a highly acquisitive investment policy would result in further Reverse Takeovers (under the AIM Rules), necessitating further re-admission documents.

As noted above, the Company is in exclusive negotiations to acquire the Target for cash. This opportunity is only available if the Company is prepared to complete an acquisition within a relatively short time scale.

The Board of Hephaestus has also been looking at the benefits to shareholders of an AIM trading facility, especially given the Company's small market capitalisation. Given that normal market size is now 10,000 shares, equivalent to GBP287.5 at the mid market share price on 16 March 2011, and that dealing fees are around GBP10 to GBP15 per transaction, it is increasingly difficult for shareholders to deal on AIM. Analysis of trading levels recently shows that the average trading volume per business day over the past four months has been around 27,000 shares, equivalent to c. GBP775 with the largest trade being 250,000 shares (GBP8,125) and the highest daily volume being 685,501 shares. The bid-offer spread is wide in relation to the share price, typically at 0.5p (and currently 0.75p).

As noted, following the disposal of the Group's businesses and the ongoing element of restructuring of the remaining parts of the Group, overhead has been further reduced from previous years' levels: The overhead nevertheless remains high in relation to the Company's net cash assets. A significant portion of this overhead is directly or indirectly related to maintaining the Company's AIM listing, such that overhead could be reduced by in excess of GBP100,000 per annum without an AIM listing.

Proposed move to Sharemark

Taking into account the high documentation costs that would necessarily be incurred by the Company in respect of further acquisitions/reverse takeovers that it may undertake, along with the costs of maintaining its listing, the small market capitalisation of the Company and the lack of liquidity in its shares, the Board has decided that the current period of reconstruction of the Company is best undertaken off AIM and is proposing to apply for a dealing facility on Sharemark.

Sharemark is a periodic auction-based dealing facility operated by the Share Centre Limited, a member firm of the London Stock Exchange which is authorised and regulated by the Financial Services Authority. Sharemark is not a recognised investment exchange, recognised clearing house or regulated market within the meaning of the Markets in Financial Instruments Directive. The Sharemark dealing facilities constitute a Multilateral Trading Facility which is designed primarily for emerging or smaller companies to which a higher investment risk tends to be attached than to larger or more established companies. Because it operates by way of periodic electronic auctions matching buyers and sellers without the intervention of a market maker, dealing via Sharemark can provide greater visibility to private investors. Several private client brokers are approved to undertake transactions via Sharemark. The Company will be subject to continuing obligations on Sharemark, including the requirement to publish annual and half-yearly accounts and to comply with the Model Code on Directors Dealings and the City Code on Takeovers and Mergers.

In the event that the Delisting Resolution is approved and the delisting proceeds, the Sharemark facility for dealing in the Ordinary Shares is such that no public quotation will exist nor will any market-maker make a continuous price in the Company's Ordinary Shares as from the proposed date of delisting . As such, interests in Ordinary Shares are unlikely to be readily capable of sale and it may be more difficult to obtain a fair value on any such sale.

If Delisting and admission to Sharemark proceeds, Shareholders will be sent further information on Sharemark and how to deal on it prior to the first auction period.

Accordingly, the Board is recommending a proposal to de-list the Company from AIM. To this end, the Company has requested the London Stock Exchange (subject to shareholder approval) to cancel admission to trading on AIM of its ordinary shares on 19 April 2011, subject to approval by shareholders in General Meeting at least five business days prior to that date. In order to become effective, not less than 75 per cent. of the votes cast at the General Meeting must be cast in favour of the Delisting Resolution. ITI UK, which holds a 28.7 per cent. shareholding in the Company, has indicated that it intends to vote in favour of the Delisting Resolution.

Implications of voting for a delisting

The Directors draw to the attention of Shareholders the following factors which should be taken into account in assessing whether to vote in favour of the delisting:

Companies listed on AIM are required to comply with the AIM Rules and are required to appoint a nominated adviser which is responsible for advising and guiding an AIM company on its responsibilities under these rules. Following delisting, the Company will no longer be required to adhere to the AIM Rules and will no longer have a nominated adviser. While membership of Sharemark imposes levels of transparency and corporate governance upon the Company, these are less stringent than for a listed company under the AIM Rules.

Shareholders will only be able to rely on the protections afforded to minority shareholders under English law, the principal such protections being the following:-

-- shareholders holding (solely or jointly) 5 per cent. or more of the total issued and outstanding share capital of the Company have the right to requisition a general meeting of shareholders of the Company.;

-- shareholders holding (solely or jointly) 25 per cent. or more of the total issued and outstanding share capital of the Company have the right to block special resolutions at General Meetings;

The Company intends to put forward proposals for a placing with clawback, underwritten by ITI UK, to fund a tender offer for shares in the Company. Further information is provided below. There is currently no certainty as to whether this will be possible, or if such a tender offer is made, and on what terms. Depending on the actions taken by Shareholders, these transactions may be dilutive to the interests of current Shareholders.

As indicated above, with the Sharemark facility there will no public quotation nor will any market-maker make a continuous price in the Company's Ordinary Shares as from the proposed date of delisting. As such, interests in Ordinary Shares are unlikely to be readily capable of sale and it may be more difficult to obtain a fair value on any such sale.

Following delisting, Shareholders will have less ability to vote against acquisitions which the Board determines are in line with the Investment Policy of the Company and are affording additional discretion to the Board in terms of their ability to complete acquisitions for cash and/or shares which might otherwise have required shareholder approval in General Meeting pursuant to the AIM rules. Shareholders' attention is drawn to the paragraph entitled Investing Policy above, which includes details of the Company's strategy going forward.

The above considerations are non-exhaustive and Shareholders and should seek their own independent advice when assessing the likely impact of the De-Listing on them.

Information on Proposed Acquisition

The Target is a UK based industrial manufacturing company which the directors of Hephaestus believe to have strong intellectual property rights, long-standing relationships with a desirable blue-chip customer base and a high proportion of export sales. In its last financial year, the Target had audited turnover of approximately GBP9.0 million and profit before tax of GBP235,000. The Management of the Target is anticipating that its profits for the twelve months ending 31 March 2011 will be breakeven after adjustment for shareholder expenses on significantly reduced turnover. Consideration for the purchase would be met from the Company's existing cash resources on the basis of a purchase consideration which would not exceed GBP1m. The Target had unaudited net assets of GBP1.4m as at 31 December 2010. The Target will require additional financial resources in order to meet its potential and to grow, to which the Company is prepared to commit.

The Company has preliminarily informed AIM of the possible acquisition of the Target. The proposed acquisition would constitute a reverse take-over under AIM Rule 14 and the Company's shares are therefore required to be suspended under the AIM Rules.

To the extent that the proposed delisting from AIM is achieved prior to the acquisition of the Target, Shareholders should note that Shareholder consent will no longer be required for the purposes of approving the acquisition and Shareholders will therefore not have an opportunity to vote on the proposal.

If the proposal to delist the Company from AIM is not approved by shareholders, the acquisition of Target will not be completed, as a result of which the Company will incur a break fee from the Vendor, together with other irrecoverable fees and costs related to the acquisition process.

Further details on Target will be included in the circular to shareholders convening a general meeting to seek approval of the proposal to delist from AIM. However it may not be possible to provide full details to shareholders, including the identity of the Target, until delisting has become effective and the acquisition has been completed.

Future Intentions concerning reintroduction to AIM

The present intention of the Board is to consider a re- introduction to AIM (or if more appropriate another market of equivalent or greater stature) when it has completed its reconstruction. However there can be no certainty that such a reintroduction would take place within the medium term, if at all, as a decision to re-list on AIM would be determined by the Company's size and suitability for listing, its ability to attract institutional investment, and the financial and commercial benefits of an AIM quotation at that time. No assurance can be given as to when and if any such re-listing may occur and Shareholders should not rely on this possibility as an exit route.

Potential Capital Raising and Share Buyback

The Board of Hephaestus recognises that some shareholders may have investment objectives and liquidity requirements which mean that they cannot, or do not wish to continue to, hold shares in the Company following delisting from AIM. The Company is therefore in discussions, with ITI UK and other larger shareholders with a view to underwriting an open offer to shareholders, primarily to finance an exit opportunity for shareholders to realise their holding in the Company, although this may also provide, if shareholders do not wish to take avail themselves of the opportunity to tender their shares, increased investment capital for the Company.

The combination of a capital raising and share buy-back would constitute a source of real liquidity for those shareholders seeking an exit compared to recent trading volumes on AIM as well as an opportunity for other shareholders to add to their shareholdings, in each case without incurring dealing costs. Shareholders would also have the ability to remain as shareholders in the Company without participating either in the open offer or the share buy-back, in which case they would suffer dilution of their existing share interests.

No terms for such a proposal have yet been agreed, nor is there any certainty that terms will be agreed, but it is expected that shareholders would be offered the ability either to subscribe for additional shares in, or to tender their existing shares for purchase by the Company, at the same price per share, which is likely to be at a discount to the closing mid-market price of 2.875p per share as at close of business on 16 March 2011.

Proposed Timetable

For timing reasons, the delisting circular and the General Meeting related thereto will be separate to any possible capital raising or share buy-back.

In the event that any capital raising would result in ITI UK owning more than 29.9 per cent of the Company following completion of the Placing and Share Buy-Back, approval would be sought from the Panel on Takeovers and Mergers ("Panel") to waive the obligations to make a general offer for the Company under Rule 9 of the City Code on Takeovers and Mergers ("Code"). As a condition of granting such a waiver, the Panel will require, amongst other things, approval of the proposals by an independent vote, on a poll, of shareholders in General Meeting excluding ITI UK and any other non-independent party at such meeting. It is not possible to be definitive as to the timing of the despatch of such a circular to shareholders.

The Company will update shareholders on the progress of its negotiations with ITI UK as soon as practicable and when it is able to provide a definitive timetable of events.

The following timetable is expected to apply to the delisting:

Friday 25 March 2011 Publication of circular convening a General Meeting of shareholders to approve delisting.

Monday 11 April 2011 General Meeting to approve delisting;

Tuesday 19 April 2011 Cancellation of listing on AIM

Following cancellation of listing, the Company will continue to publish financial information, news and updates primarily via its website and in accordance with the requirements of Sharemark. The first auction date on Sharemark is currently expected to be no later than Friday 6 May 2011, but the first auction may be delayed if the capital Raising and share buyback has not been concluded by that date.

If Shareholders are in any doubt about the contents of this announcement, or the action they should take (including any tax implications that may arise for them), they should consult an independent financial adviser authorised and regulated under the Financial Services and Markets Act 2000, or (if they are outside the United Kingdom) a suitably qualified adviser recognised under the applicable legislation.

For further information, please contact:

Hephaestus Holdings plc

Chris Heminway

07802 305579

Shore Capital and Corporate Limited (Nominated Adviser)

Andrew Raca/Toby Gibbs

020 7408 4090

This information is provided by RNS

The company news service from the London Stock Exchange

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