Tanfield Group PLC Snorkel Investment Update (3232B)

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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September 20, 2018 02:00 ET (06:00 GMT)