Xafinity PLC Proposed Acquisition of Punter Southall Holdings

Xafinity PLC (LON:XAF), the pensions actuarial, consulting and administration business, today announced the proposed acquisition from Punter Southall Group Limited (“PS Topco”) of its actuarial consulting, pensions administration and investment consulting businesses (the “Target Group”) for a total consideration of up to approximately £153 million (the “Acquisition”).

The consideration for the Acquisition will be satisfied through the payment of £92,520,000 in cash, the issue of 25,766,871 Completion Shares, the transfer of the operating company of Xafinity’s HR Trustees business to PS Topco at an agreed value of £8,480,000, and the potential issue of up to 6,134,969 Earn Out Shares pursuant to a contingent deferred consideration mechanism.

The cash component of the consideration is proposed to be financed by a combination of (a) a Firm Placing and Placing and Open Offer (the “Capital Raising”) to raise in aggregate approximately £70 million (before expenses) and (b) funds drawn down under New Debt Facilities totalling £80 million (which replaces an existing debt facility of £38 million and will provide £42 million of incremental debt capacity).

The Target Group comprises three businesses: (i) the Actuarial Consulting Business, which provides actuarial advice to the trustees or employer sponsors of approximately 425 UK occupational pension schemes; (ii) the Pensions Administration Business, which administers pensions for approximately 380,000 scheme members belonging to more than 200 UK occupational pension schemes; and (iii) the Investment Consulting Business, which provides specialist consulting services, including investment strategy, risk management and investment governance, to the trustees or employer sponsors of over 115 UK occupational pension schemes.

The Target Group reported revenue for the year ended 31 December 2016 of approximately £51 million and Adjusted EBITDA of approximately £11 million.

The Acquisition is conditional upon, among other things, Xafinity Shareholders’ approval and receipt of proceeds from the Capital Raising, and is expected to complete on 11 January 2018.

Highlights of the Acquisition

·      The Xafinity Directors believe that the strategic rationale for the Acquisition is compelling and that the Acquisition represents an opportunity for Xafinity to progress its strategy of consolidating the mid-market in actuarial, investment and administrative services to trustees and sponsors of UK DB Schemes, by creating a new leading player with increased capability to challenge the Global Consultancies.

·      The Xafinity Directors believe that the Target Group’s businesses are highly complementary to Xafinity’s.  In particular, the Xafinity Directors believe that the two groups’ actuarial, investment consulting and administration businesses, each of which has a strong market reputation, a diversified client base, long-standing client relationships and a collegiate employee culture, are very well suited to a combination within the Enlarged Group.

·      The Xafinity Directors believe that the Acquisition will enable clients of both Xafinity and the Target Group to benefit from the combined capabilities of the Enlarged Group.  In the Board’s view, Xafinity has market-leading offerings in certain areas, including de-risking activity through its Centre of Excellence, in technology (with the development of “Radar”, Xafinity’s actuarial and investment software) and in relation to the DC market with the National Pension Trust.  Xafinity has had success introducing these offerings to its own client base and, the Xafinity Directors believe, such services are also likely to be attractive to the Target Group’s clients following Completion.  Similarly, there are areas of expertise within the Target Group that are stronger than Xafinity’s relative capabilities (for example, in the area of pension scheme administration, where significant growth has been achieved, taking on some of the largest contracts in the market, and advice on corporate mergers and acquisitions activity through Punter Southall Transaction Services).  The Xafinity Directors consider that the Acquisition would enable both firms to ‘level up’ in such areas across the Enlarged Group.

·     The markets in which both the Xafinity Group and the Target Group operate are fragmented. The Xafinity Directors believe that the combination of Xafinity’s businesses with the Target Group will create the largest “pure-play” pensions consultancy firm in the UK.  As a result, the Board believes the Enlarged Group would have a high profile in the pensions industry which is expected to lead to an increase in the number of invitations and opportunities received by Xafinity to tender for services to trustees of DB Schemes for the provision of actuarial, administration and/or investment consulting services.  The Xafinity Directors believe that the Enlarged Group would have access to a greater proportion of market opportunities in future by providing a compelling alternative to the Global Consultancies, by virtue of its increased scale and profile.

·     The disposal of Xafinity’s HR Trustees business as part of the consideration for the Acquisition removes a potential barrier to growth for Xafinity, because Xafinity’s addressable market is reduced by HR Trustees’ clients due to the potential conflict of interest that would or could arise if HR Trustees and Xafinity were to share a client.

·     The Target Group achieved revenue of approximately £51 million and adjusted EBITDA (including PS Group central cost allocations of £4.3 million) of approximately £11 million for the year ended 31 December 2016.  In connection with the Acquisition, the Company and PS Topco have agreed a Transitional Services Agreement, under which PS Topco will continue to provide overhead services support and services to the Target Group for up to two years after Completion for a basic charge of £2.125 million per annum.

·     The Acquisition is expected by the Xafinity Directors to be earnings enhancing for the Group for the financial year ending 31 March 2019 and materially earnings enhancing thereafter.

Paul Cuff & Ben Bramhall, co-CEOs of Xafinity plc, said: 

“We are delighted to announce the merger of Xafinity and the actuarial, administration and investment consulting divisions of Punter Southall.  The deal will create the largest “pure-play” pensions consultancy firm in the UK market.  We both have a personal and long-standing affiliation with Punter Southall, and we believe that the addition of their like-minded and high-quality staff will contribute significantly to Xafinity’s position in the market.  This transaction marks another significant step in our strategy towards becoming the pre-eminent mid-tier pensions consultancy firm in the UK, with the combination of these businesses providing an expanded, yet focused, offering for clients that will position us as the primary alternative to the big three Global Consultancies.”

John Batting, CEO of Punter Southall’s Actuarial Consulting Business, said: 

“This morning’s announcement is very exciting news for clients and employees of the actuarial, administration and investment consultancy businesses at Punter Southall. This deal will bring together complementary businesses that will ultimately provide increased scale and expertise, an enhanced range and quality of service. Paul and Ben’s history with Punter Southall, and their clear understanding of our reputation and culture has been vitally important to this merger, and I am confident that our current employees will benefit from this unique opportunity to be part of a publicly listed company poised for an exciting growth journey.” 

 The Acquisition

Xafinity has entered into a conditional agreement with PS Topco to acquire Punter Southall Holdings Limited (“Target Holdco”), the holding company of the Target Group.  The Company will also acquire certain minority interests in the Target Group pursuant to the Acquisition.

The consideration due under the Acquisition Agreement will be satisfied through:

·      a payment of £92,520,000 in cash;

·      the issue of 25,766,871 Completion Shares (valued, for the purposes of the Acquisition, at 163 pence per Completion Share, being approximately £42 million in aggregate), representing approximately 12.6 per cent of the Company’s Enlarged Share Capital following the completion of the Capital Raising and Completion;

·      the transfer (pursuant to the Disposal Agreement) by Xafinity Consulting to PS Topco of the entire issued share capital of HR Trustees at an agreed value, for the purposes of such transfer, of £8,480,000; and

·      the issue of up to 6,134,969 Earn Out Shares (valued, for the purposes of the Acquisition, at the same price per share as the Completion Shares, being a maximum of approximately £10 million in aggregate) following Completion, pursuant to a contingent deferred consideration mechanism.

The consideration is subject to a post-Completion adjustment, the quantum of which will be calculated by reference to the net working capital position and the cash and debt positions of, respectively, the Target Group and HR Trustees. The Group’s HR Trustees business accounted for approximately five per cent of the Group’s revenues for the year ended 31 March 2017 at £2.55 million.

Shareholder approval

The Acquisition is of sufficient size relative to the Group to constitute a Class 1 transaction under the Listing Rules, and is therefore conditional, among other things, on the approval of all of the Resolutions by the Shareholders at the General Meeting to be held at 10.30 a.m. on 4 January 2018.  Although the Disposal is conditional on Completion, it does not, of itself, require the approval of Shareholders.

The Capital Raising

The Capital Raising, which has been fully underwritten by Liberum, comprises the issue of 41,176,470 Capital Raising Shares at an Offer Price of 170 pence per share (representing approximately 23.1 per cent of the Enlarged Share Capital following completion of the Capital Raising) to raise gross proceeds of approximately £70 million.  It is expected that the Capital Raising Shares will be admitted to the premium segment of the Official List and to trading on the London Stock Exchange’s Main Market, and that dealings in the Capital Raising Shares will commence, at 8.00 a.m. on 5 January 2018.

The Firm Placing and the Placing are being conducted by way of an accelerated bookbuild on the Company’s behalf by Liberum and Zeus Capital as Joint Bookrunners.  The bookbuild will open with immediate effect following this Announcement.  The timing of the closing of the bookbuild, the final size of the Firm Placing, the final size of the Placing and Open Offer and final allocations of Capital Raising Shares are at the discretion of Liberum.  A further announcement will be made following closing of the book, confirming the final details of the Capital Raising.

Completion of the Acquisition is expected to take place on 11 January 2018, on which date it is expected that the Completion Shares will be admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange’s Main Market.  The Capital Raising is not conditional on completion of the Acquisition.

Key Terms of the Capital Raising

The Company is proposing to raise gross proceeds of approximately £70 million by way of the Capital Raising which, in addition to the funds drawn down under the New Debt Facilities, will be used to fund the Acquisition (and expenses incurred in connection with the Acquisition).

The Company has today entered into the Sponsor and Placing Agreement under which Liberum and Zeus Capital have agreed to use their respective reasonable endeavours to procure Firm Placees for the Firm Placing Shares to be issued pursuant to the Firm Placing and Placing Placees for the Open Offer Shares not taken up by Qualifying Shareholders under the Open Offer, failing which, Liberum has agreed to subscribe for such Firm Placing Shares or Open Offer Shares itself.

The Capital Raising is conditional upon, among other things:

·      the Resolutions being passed by the Shareholders at the General Meeting;

·      the Sponsor and Placing Agreement having become unconditional in all respects save for the conditions relating to Admission of the Capital Raising Shares and not having been terminated in accordance with its terms before Admission of the Capital Raising Shares becomes effective; and

·      Admission of the Capital Raising Shares becoming effective by not later than 8.00 a.m. on 5 January 2018 (or such later time and/or date as the Joint Bookrunners, the Sponsor and the Company may agree, being not later than 8.00 a.m. on 19 January 2018).

If the conditions to the Capital Raising (further details of which are set out in this announcement, below) are not satisfied or, if applicable, waived, the Capital Raising will not proceed.

Firm Placing

The Firm Placing is proposed to raise gross proceeds of £52.1 million for the Company.  The Firm Placing Shares are not subject to clawback and are not part of the Placing and Open Offer.  The Firm Placing is subject to the same conditions as the Placing and Open Offer.

Liberum, in consultation with Zeus Capital and the Company, reserves the right to alter the relative sizes of the Firm Placing and the Placing and Open Offer.

Placing and Open Offer

The Placing and Open Offer is proposed to raise gross proceeds of £17.9 million for the Company.  The Placing Shares will be subject to clawback to satisfy valid applications by Qualifying Shareholders under the Open Offer.  To the extent that the Open Offer Shares are not taken up by Qualifying Shareholders under the Open Offer, an equivalent number of shares will be subscribed by institutional investors pursuant to the Placing.

Open Offer Entitlements

Qualifying Shareholders will have the opportunity under the Open Offer to subscribe for Open Offer Shares at the Offer Price, payable in full on application and free of expenses, pro-rata to their holding of Existing Ordinary Shares, on the following basis:

1 Open Offer Share for every 13 Existing Ordinary Shares

held by them and registered in their names at the Record Date.  Fractions of Ordinary Shares will not be allotted and each Qualifying Shareholder’s entitlement under the Open Offer will be rounded down to the nearest whole number.  Fractional entitlements to Open Offer Shares will be aggregated and will ultimately accrue for the benefit of the Company under the Placing.

Excess Application Facility

Under the Open Offer, Qualifying Shareholders will also be offered the opportunity to subscribe for Excess Shares in excess of their Open Offer Entitlements pursuant to the Excess Application Facility. The Excess Application Facility will comprise Open Offer Shares that are not taken up by Qualifying Shareholders under the Open Offer pursuant to their Open Offer Entitlements, which have been clawed back from Placing Placees.  Qualifying Shareholders’ applications for Excess Shares will, therefore, be satisfied only to the extent that corresponding applications by other Qualifying Shareholders are made for less than their pro rata Open Offer Entitlements.  If there is an over-subscription resulting from excess applications, allocations in respect of such excess applications will be scaled-back at the absolute discretion of Liberum, in consultation with Zeus Capital and the Company, who will have regard to the pro rata number of Excess Shares applied for by Qualifying Shareholders under the Excess Application Facility.  No assurances can therefore be given that applications by Qualifying Shareholders under the Excess Application Facility will be met in full, in part or at all.

Liberum, in consultation with Zeus Capital and the Company, reserves the right to alter the relative sizes of the Firm Placing and the Placing and Open Offer.

Terms used in this announcement and not defined in Appendix I to this announcement shall have the meaning given to them in the Prospectus. Appendix II to this announcement sets out the terms and conditions of the Firm Placing and Placing.