Following unsuccessful attempts to raise new equity, in
September 2012 the Board announced that it was seeking potential
offerors by means of a formal sale process in accordance with Rule
2.6 of the Takeover Code. As a result, a number of initial
approaches were made by various parties; some potential offerors
were attracted to the Risk Carrier Business, others to the Services
Business, but all were willing only to value the Tawa Group at a
level which fell short of what the Board felt could be recommended
to Shareholders. It appears to the Board that the public markets
better appreciate the profit driven Services Business and that the
private markets better appreciate the Risk Carrier Business.
The Risk Carrier Business is currently valued at a significant
discount to its stated net asset value (GBP77 million as at 30 June
2013). On 29 November 2013 Tawa issued a statement to the effect
that claims against QX Re's reinsurance facility had increased by
more than was expected and that it was highly likely to have to
provide in full against the value of its investment in QX Re. On a
pro forma basis therefore, the net asset value of the Risk Carrier
Business as at 30 June 2013 has fallen by GBP18 million to GBP59
million. The net asset value of the Tawa Group as at 30 June 2013
would therefore have been GBP71 million compared to Tawa's market
capitalisation on 16 December 2013 of GBP17 million.
Notwithstanding the possible write down in equity of QX Re, the
Directors believe that the Tawa Group as a whole is undervalued by
the market. As a consequence the Board has considered a number of
options with a view to maximising Shareholder value. These have
included seeking new equity capital, accessing private equity
funding and continuing to build the businesses.Potential Benefits
of the Demerger
Against this background, and recognising that the results of the
Risk Carrier Business have, in recent years, prevented the Board
from declaring dividends, the Board, having taken appropriate
advice, believes that the Demerger should deliver additional value
to Shareholders over time and has therefore concluded that the
Demerger is in the best interests of Tawa as a whole. The Board has
designed the Demerger with the intention of delivering additional
value to Shareholders by:
-- allowing the separate valuation of each business based on a
typical EBITDA multiple valuation for the Services Business and
based on a net asset valuation for the Risk Carrier Business;
-- allowing Tawa and TAL to pursue their strategic objectives
independently with greater individual control over resources and
opportunities;
-- developing bespoke management structures, focussed on the particular needs of each company;
-- allowing the Services Business to become a focussed managed services business;
-- increasing the potential for the Board to declare dividends
in respect of the Services Business; and
-- allowing the Services Business to separately raise capital as required.
The Demerger will create two distinct entities with different
strategic, operational and economic characteristics and with
separate management teams and boards of directors.
3. Information on the Services Business
The corporate entities forming the Services Business include Pro
UK (including a branch in Zurich), Pro US and the Chiltington
Group, which includes Ass Assekuranz Service - und
Sachverständigengesellchaft mbH in Germany and Chiltington
Internacional SA in Argentina. The 380 staff and the four
territories covered (UK, Continental Europe, USA and South America)
give the Services Business the capacity to provide international
service to Tawa's key clients including in Asia where Tawa recently
opened a Singapore-based run-off management operation to manage one
of its client's businesses.
The Services Business is now operating under a single brand,
Pro, having replaced the Chiltington brand. Pro is a
well-established provider of services to the insurance industry,
including underwriting support, claims management, broking support
and consulting services, which are provided to a broad array of
international clients across the insurance market. Services are
provided from the UK (250 staff) USA (70 staff), Germany (40 staff)
and Argentina (20 staff).
As part of its expansion into servicing the Lloyd's market, in
January 2012 Tawa organised a consortium with Skuld and Investment
Limited and Paraline International Ltd. to acquire Asta, the
leading turnkey Lloyd's managing agency services company. Each
consortium member owns one third of the voting rights and 30 per
cent. of the economic interest in Asta, with the remaining 10 per
cent being owned by Asta management. The consortium operates under
the terms of the Asta Shareholders Agreement. After 15 January
2015, each Asta shareholder has the benefit of a "Shoot Out"
clause, which, if triggered by any of the three shareholders who
wants to transfer its shares, would enable the other Asta
shareholders to acquire those transferring shares. This may
therefore enable Tawa to gain a controlling interest in Asta or
realise its interest in Asta.
The Services Business has combined historic revenues of
approximately GBP35 million based on the audited results for the
financial year ended 31 December 2012 and GBP18 million based on
the unaudited interim results for the six months to 30 June 2013.
The Services Business made a loss before tax of GBP0.3 million for
the year ended 31 December 2012 and reported a pre tax profit of
GBP1.9 million based on the unaudited interim results for the six
months to 30 June 2013. Approximately 13 per cent. of revenues in
the six months to 30 June 2013 arose through services provided to
the Risk Carrier Business. The agreements under which these
services are provided are on an arm's length basis and will
continue for a minimum of 3 years following the Demerger.
At the beginning of 2013 Tawa commissioned an international
consultancy firm to conduct a strategic review of its overall
business with a view to continuing its development while enhancing
Shareholder value. Following this review a number of projects are
underway to develop the Services Business, with an objective of
consolidating its market positioning and securing higher margin
business. The Services Business is aiming to achieve significant
growth over the next three years and its management will be
strengthened following the appointment of Mr Artur Niemczewski, as
the new chief executive officer of the Services Business. It is
intended that Mr Artur Niemczewski will be appointed to the Board
with effect from the Demerger Effective Date and become Chief
Executive Officer of Tawa at that time.
The Directors believe the key strengths of the Services Business
are:-
-- the Pro brand which is well regarded and respected in the insurance market;
-- its blue chip client base and strength of offering to major insurers;
-- its established track record of delivering solutions for complex mission critical systems;
-- its on-going long term contracts which represented
approximately 40 per cent. of Tawa's revenues in respect of the six
month period ended 30 June 2013; and
-- its interest in Asta.
4. Information on the Risk Carrier Business
Earlier this year the Tawa Group disposed of KX Re. Together
with retained assets the sale resulted in a realisation of 76 per
cent. of undiscounted net asset value, which is within the range
currently used by run-off professionals in valuing such assets. The
net asset value of the Risk Carrier Business was GBP77 million (as
at 30 June 2013). On 29 November 2013, Tawa issued a statement to
the effect that claims against QX Re's reinsurance facility had
increased by more than was expected and that it was highly likely
to have to provide in full against the value of its investment in
QX Re. On a pro forma basis therefore, the net asset value of the
Risk Carrier Business at 30 June 2013 has fallen by GBP18 million
to GBP59 million. Remaining investments are in PXRE (USA) (NAV
GBP26 million as at 30 June 2013) and Island Capital (Bermuda) (NAV
GBP14 million as at 30 June 2013). On 25 November 2013, PXRE (USA)
paid a $12 million dividend to WTH.
Following completion of the Reorganisation, the Risk Carrier
Business will be entitled to the receivables from CX Re, the level
of which is dependent on the outcome of litigation relating to the
availability of tax losses which have been surrendered to Tawa's
financial partners. Work continues on the run-off of the Risk
Carrier Business entities. Whilst retaining the potential to
generate value, these entities carry discrete and substantial risks
- PXRE (USA) on the outcome of World Trade Center claims; Island
Capital (Bermuda) on the recovery of significant subrogated claims
and QX Re on the outcome of the litigation in respect of the
rescission of a reinsurance contract.
In light of the above, the Board believes that the risk profile
of the Risk Carrier Business is no longer suited to a listed
company. Moreover the Board believes the discount of Tawa's market
capitalisation to its net asset value prevents Tawa from raising
equity.
Following the Demerger, TAL will be a distinct legal entity and
the Board anticipates that the TAL Group business strategy will
encompass the following areas:
-- continuation of the run-off and downscaling of the Risk
Carrier Business entities to seek to return value to TAL
Shareholders;
-- continuation of the efforts to maximise recoverables, for
example the recovery by Island Capital (Bermuda) of the subrogated
claims;
-- conduct of the litigation to which the TAL Group is exposed
to, pursuant to the terms of the Reorganisation; and
-- continuation of the monitoring and development of Lodestar
Marine Ltd. TAL will aim to continue assisting this business with a
view to it becoming profitable.
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