Hercules Property - Acquisition, etc
November 10 1999 - 2:09AM
UK Regulatory
RNS Number:5602A
Hercules Property Services PLC
10 November 1999
HERCULES PROPERTY SERVICES PLC
ACQUISITION OF DEACON INSURANCE SERVICES (HOLDINGS) LIMITED
ADOPTION OF THE HERCULES PHANTOM SHARE OPTION SCHEME
- Conditional acquisition of Deacon Insurance Services
(Holdings) Limited, a specialist residential property
insurance intermediary, for #14.25 million (less an
adjustment for net liabilities)
- The Acquisition to be satisfied through the issue of
718,495 new ordinary shares at 278.36p each and the balance
in cash
- The Acquisition substantially extends Hercules's existing
insurance activities - it currently procures cover for #2.5
billion of property, and this will grow to nearly #9.5
billion
- It is anticipated that the Acquisition will be earnings
enhancing in the current financial year
- Combined turnover of Hercules' enlarged insurance
intermediary business will be in excess of #11 million
annually
- Deacon offers three core areas of insurance services:
- Insurance cover for residential landlords and managing
agents of blocks of flats (contributing the majority of
Deacon's total income)
- Redundancy insurance for new home buyers through
housebuilders
- Contents and buildings insurance
- The acquisition of Deacon provides substantial cross-
selling opportunities for other Hercules group companies
- Commenting on the Acquisition Larry Lipman, Chairman of
Hercules, said: "This is the largest acquisition Hercules
has made to date and will both substantially expand the
group's insurance activities and provide significant cross-
selling opportunities for other group companies. We regard
this acquisition as a major step forward for Hercules."
Enquiries:
Larry Lipman, Chairman
Hercules Property Services PLC 0208 202 7276
Paul Davis, Finance Director
Hercules Property Services PLC 0208 202 7276
Jagjit Mundi, Managing Director of Corporate Finance
Investec Henderson Crosthwaite Corporate Finance 0207 597 5970
Baron Phillips
Baron Phillips Associates 0207 224 1302
INTRODUCTION
Hercules announces that it has entered into a conditional agreement to acquire
Deacon Holdings, which owns an established specialist property insurance
intermediary. The consideration payable for the Acquisition will be #14.25
million less the amount of the aggregate net liabilities of Deacon Holdings
(as calculated without including fixed assets) at 30 November 1999. At 30
September 1999, the aggregate net liabilities of Deacon Holdings so calculated
were approximately #2.45 million. The consideration for the Acquisition is to
be satisfied as to #2 million through the issue of the Consideration Shares
and as to the balance in cash on Completion. On Completion, Hercules will also
procure that Deacon Holdings repays approximately #2.6 million of bank
borrowings (which amount, for the avoidance of doubt, is included in the net
liability figure of approximately #2.45 million stated above).
The cash required by the Company to complete the Acquisition (including
expenses incurred in connection with the Proposals of approximately #0.7
million) is to be funded as to #11.8 million from new bank borrowings and as
to approximately #1.15 million from the existing cash resources of the
Hercules Group.
Application will be made for the Consideration Shares to be admitted to the
Official List. If the Resolutions to be put to shareholders at the EGM are
approved, it is expected that Admission will become effective and trading on
the Official List in the Consideration Shares will commence on 8 December
1999.
THE ACQUISITION
Summary information on the Deacon Group
The Deacon Group is an established independent provider of insurance services
to the UK property market, the business of which was founded in 1989. It is
headquartered in Bournemouth, England and comprises three companies: Deacon
Holdings (the holding company), Deacon IS Limited (the principal trading
company) and ABI (a Guernsey based insurance company).
The Deacon Group offers three core products:
* insurance services to residential management companies and managing agents
of blocks of flats with combined insured value of nearly #7 billion. This
activity generates the major part of the Deacon Group's revenue;
* redundancy insurance for new home buyers, which is supplied to
housebuilders who then provide the insurance free to new home buyers as a
purchasing incentive; and
* arrangement of buildings and contents insurance for residential properties.
More detailed information on the history and business of the Deacon Group is
set out below.
Financial information
Summary financial information on the Deacon Group is set out below.
Year ended
30 September 30 September 30 September
1997 1998 1999
#000 #000 #000
Turnover - continuing activities 4,238 4,365 5,121
Operating profit - continuing 175 733 715
activities
Profit on ordinary activities 315 926 691
before taxation
Profit on ordinary activities before taxation stated above is after charging,
inter alia, the following items:
Year ended
30 30 September 30
September September
1997 1998 1999
#'000 #'000 #'000
Exceptional item: movement on provision 250 - 615
for pension mis-selling
Exceptional item: legal and - 270 -
professional fees
Amounts included within directors' 792 215 321
emoluments representing payments to
major shareholders, Mr Ducker and Mr
Zeale
Amortisation of goodwill - - 241
Bank loan interest - - 182
The bank loan interest figure above relates to interest charged on the loan
that Hercules will procure that Deacon Holdings repays on Completion.
Further terms of the Acquisition
The principal shareholder of Deacon Holdings, David Ducker, has agreed to take
718,495 Ordinary Shares at 278.36p per share to satisfy #2.0 million of the
consideration due to him. The balance of the consideration for the Acquisition
and the repayment of Deacon Holdings's bank borrowings will be satisfied in
part by new bank borrowings and in part from the existing cash resources of
the Hercules Group. Of the cash consideration, the sum of #2.1 million is to
be held in a retention account.
The Consideration Shares will be issued credited as fully paid and will, on
issue, rank pari passu in all respects with the existing Ordinary Shares save
that they will not rank for the final dividend in respect of the year ended 30
June 1999.
The Acquisition is conditional, inter alia, on the passing of Resolutions 1
and 4 at the EGM and on Admission.
Reasons for the Acquisition
The Board believes that the Acquisition represents an exciting opportunity for
the Hercules Group to develop further its portfolio of property-related
services, and should prove earnings enhancing (on a pre-goodwill basis) in the
current financial year. The Directors believe that the principal benefits of
the Acquisition for Hercules will include:
* the acquisition of an established, profitable business, the activities of
which will substantially strengthen and broaden the insurance services
provided by the Enlarged Group. Following Completion, the Enlarged Group will
procure cover for buildings with an insured value of nearly #9.5 billion and
have an insurance intermediary with annual turnover of in excess of #11
million;
* increased cross-selling opportunities to existing clients of both the
Deacon Group and the Hercules Group companies;
* greater purchasing power in the insurance arm of the Enlarged Group's
business, thereby offering the possibility of the Enlarged Group's extracting
improved terms from its insurance wholesalers;
* cost savings which may be extracted, inter alia, from a combination of the
operations of Heritage (Hercules's existing property insurance intermediary
business) and the Deacon Group into one principal location;
* strengthened management of the Enlarged Group's insurance business through
the addition of the Deacon Group's experienced management team to Heritage's
existing management; and
* a substantially strengthened sales force which will be available to promote
the products of Hercules's existing operations.
The integration of the Deacon Group
The operations of the Deacon Group will, following Completion, be combined
with those of Heritage. The Directors believe that this will facilitate rapid
integration of the two businesses. The Deacon brand will be retained alongside
that of Heritage as the Directors believe that it is well-known in the
industry and has an established reputation for quality.
The four key members of the Deacon management team have agreed to enter into
new full-time service agreements with Deacon IS on Completion. It is also
proposed that they will each be granted, under the proposed Phantom Share
Option Scheme, phantom options equivalent to one year's salary in each of the
first four years of their employment. The Directors believe that the grant of
such options to the incoming senior management team of the Deacon Group will
act as an incentive to ensure their ongoing commitment to the further
development of the Enlarged Group.
The financial results of the Deacon Group will be consolidated into the
Hercules Group's accounts from the date of Completion.
TERM LOAN FACILITY
Pursuant to a facility agreement dated 9 November 1999, Barclays Bank PLC has
agreed to make a term loan facility of #11.8 million available to the Company
for the purposes of implementing the Proposals. Drawdown of funds by the
Company pursuant to this agreement is conditional, inter alia, on:
(i) the passing of Resolutions 1 and 4 at the EGM; and
(ii) Admission.
CURRENT TRADING AND PROSPECTS
The Hercules Group's trading in the current financial year is in line with the
market's expectations. In addition, the Deacon Group's trading in September
1999 (the first month of its current financial year) was, in the opinion of
the Vendors, satisfactory. In light of this and the potential benefits of the
Acquisition referred to above, the Directors are enthusiastic about the future
financial and trading prospects of the Enlarged Group.
DIVIDEND POLICY
The Company has now declared interim and final dividends for the last two
financial years. The Directors' intention is that the Company will follow a
progressive dividend policy in forthcoming years while continuing to retain
sufficient of its earnings to facilitate the Board's plans for the continued
growth of the Enlarged Group both organically and through acquisition.
EXTRAORDINARY GENERAL MEETING
The Company intends to convene an extraordinary general meeting of the Company
for 9.00 a.m. on 6 December 1999. At the EGM, resolutions will be proposed
for the following purposes:
Resolution 1: to approve the Acquisition
Resolution 2: to approve the Phantom Share Option Scheme
Resolution 3: to grant to the Directors authority to allot equity securities
and to disapply shareholders' pre-emption rights
Resolution 4: to increase the Company's borrowing powers
CIRCULAR
A circular setting out the details of the Proposals and including a notice of
the EGM will be posted to shareholders later this week.
FURTHER INFORMATION ON THE DEACON GROUP
BACKGROUND AND HISTORY
The business of the Deacon Group was established in 1989 and, since that time,
it has evolved from being a small generalist insurance broker to a well-known
UK specialist property insurance intermediary. The Deacon Group consists of
Deacon Holdings (the group holding company), Deacon IS (the principal trading
company) and ABI (a captive insurance vehicle based in Guernsey).
THE BUSINESS OF THE DEACON GROUP
The Deacon Group offers a range of insurance services to the property market.
Its three core insurance products are:
* comprehensive insurance services for managing agents and management
companies of blocks of flats including the provision of buildings insurance
and related products such as engineering and directors' and officers'
liability. This activity generates the major part of the Deacon Group's
revenue;
* redundancy insurance for new home buyers (this product is purchased by
housebuilders who offer it free to home buyers as an incentive to purchase a
new house); and
* individual buildings and contents insurance for a range of customers.
The insurance policies sold by the Deacon Group are underwritten by a few
large, reputable UK insurance organisations. In certain areas, the
underwriting arrangements are carried out on a profit-sharing basis.
Marketing has historically been centred around mailshots supported by
telephone-based sales operatives to generate new business. In recent months,
however, the focus of business generation has switched to telesales.
As well as issuing the insurance documentation (under the "Deacon" brand) the
Deacon Group also has delegated authority from certain underwriters to settle
claims on their behalf within prescribed limits. By taking responsibility for
the customer relationship, the Deacon Group aims to provide a consistently
high level of service and promote its brand name.
Further information on each of the main insurance activities mentioned above
is set out below.
(a) Buildings insurance
The Deacon Group is a well-known provider of insurance services to residential
management companies, managing agents and freeholders of blocks of flats and
its products currently cover buildings with an insured value of nearly #7
billion. Policies offered under the "Deacon" brand cover damage to buildings
and outbuildings and accidental loss for contents of communal areas. The
policies are underwritten by large UK insurance companies.
(b) Engineering and inspection insurance
This insurance is complementary to the buildings insurance outlined above and
has been designed specifically for residential blocks of flats with lifts. The
policies cover all relevant statutory liabilities and certain insured
mechanical and electrical risks including communal lighting, central heating
systems, air conditioning and children's playground equipment, as well as
emergency breakdown cover.
(c) Directors' and officers' liability insurance
This product, which is designed and priced specifically for directors and
officers of management companies whose primary business is the management of
residential blocks of flats, offers indemnity against legal action arising
from, inter alia, negligence in carrying out management duties.
(d) Redundancy insurance
Redundancy insurance is sold through housebuilders and is endorsed by the
Housebuilders' Federation. Housebuilders offer redundancy insurance free to
house purchasers. The relevant building company then advises the Deacon Group
which then provides details of the insurance to the purchaser's solicitor.
(e) Individual buildings and contents insurance
Sales of this product have historically been aimed at the management companies
for blocks of flats and to a lesser extent, the redundancy insurance customer
base described above. For this reason, such rates have involved little
incremental marketing cost as the Deacon Group has not actively marketed the
product across a broader customer base. However, it is possible that this
product may be saleable to a wider range of customers.
COMPETITION
Operating in a niche area within the insurance market, the Deacon Group has
relatively few direct competitors. Competition is primarily from independent
intermediaries, insurers selling direct, mortgage providers (in the
housebuilders' insurance field) or through local brokers. However, the
Directors believe that the reputation built up by the Deacon Group, as well as
the quality of the service provided, place the business in a position to build
upon its success in its chosen markets.
POSSIBLE CHANGES TO THE REGULATORY ENVIRONMENT
The regulatory environment for insurance intermediaries and brokers is
changing. A new self-regulating body, the General Insurance Standards Council
("GISC"), will regulate insurance intermediaries and the Directors believe
that this will happen during the course of 2000. Current proposals envisage
that all UK insurance intermediaries and those selling insurance in the UK
will be regulated by the GISC. It is expected that the GISC will put in place
a new code of practice and practice requirements, and it has recently
published a consultation document in respect of these.
Having considered these proposals, the Directors do not believe that they will
have a material effect on the business of the Enlarged Group.
EXPECTED TIMETABLE OF PRINCIPAL EVENTS
1999
Latest time and date for receipt of Forms of Proxy 9.00 a.m. on 4 December
Extraordinary General Meeting 9.00 a.m. on 6 December
Date of Admission and Completion 8 December
DEFINITIONS
The following definitions apply throughout this document and the Form of Proxy
unless the context otherwise requires:
"ABI" Alexander Bartholomew Insurance Limited
"Acquisition" the proposed acquisition of the entire issued share
capital of Deacon Holdings by the Company, pursuant
to the Acquisition Agreement
"Acquisition Agreement" the conditional agreement dated 9 November 1999 and
made between (1) D. Ducker and others (2) A. J.
Atherton and (3) Hercules relating to the
Acquisition
"Act" the Companies Act 1985 (as amended)
"Admission" the admission of the Consideration Shares to the
Official List becoming effective in accordance with
the Listing Rules
"Company" or "Hercules" Hercules Property Services PLC
"Completion" completion of the Acquisition, expected to take
place on or about 8 December 1999
"Consideration Shares" the 718,495 new Ordinary Shares to be issued to
David Ducker pursuant to the Acquisition Agreement
"Directors" or "Board" the board of directors of Hercules
"Deacon Holdings" Deacon Insurance Services (Holdings) Limited
"Deacon Group" together, Deacon Holdings, Deacon IS and ABI
"Deacon IS" Deacon Insurance Services Limited
"Enlarged Group" the Hercules Group as enlarged by the Acquisition
"Extraordinary General the extraordinary general meeting of the Company to
Meeting" or "EGM" be convened to be held on 6 December 1999
"Form of Proxy" the form of proxy for use by Shareholders in
connection with the Extraordinary General Meeting
"Hercules Group" Hercules, its subsidiaries and subsidiary
undertakings
"Heritage" Heritage Insurance Services Limited, a wholly-owned
subsidiary of the Company
"Investec Bank" Investec Bank (UK) Limited
"Investec Henderson Investec Henderson Crosthwaite Corporate Finance, a
Crosthwaite Corporate division of Investec Bank
Finance"
"Listing Rules" the Listing Rules of the London Stock Exchange
"London Stock Exchange" London Stock Exchange Limited
"Official List" the Official List of the London Stock Exchange
"Ordinary Shares" Ordinary shares of 5p each in the capital of the
Company
"Phantom Share Option the proposed Hercules Property Services PLC Phantom
Scheme" Share Option Scheme
"Proposals" the Acquisition and the adoption of the Phantom
Share Option Scheme
"Resolution 1" Ordinary resolution 1 to be proposed at the EGM, the
approval of which (inter alia) is necessary to
effect the Acquisition
"Resolution 2" Ordinary resolution 2 to be proposed at the EGM, the
approval of which is necessary to effect the Phantom
Share Option Scheme
"Resolution 3" Special resolution 3 to be proposed at the EGM, the
approval of which (inter alia) is necessary to
authorise the Directors to allot equity securities
for cash or otherwise and to disapply shareholders'
pre-emption rights
"Resolution 4" Special resolution 4 to be proposed at the EGM, the
approval of which is necessary to increase the
Company's borrowing powers
"Resolutions" together, Resolution 1, Resolution 2, Resolution 3
and Resolution 4
"Shareholders" the holders of existing Ordinary Shares
"Vendors" David Ducker, Nick Baldwin, John Cran, Julie Purkiss
and the Spread Trustee Company Limited acting in its
capacity as trustee of the A. J. Atherton 1997
settlement
END
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