CHARTER plc Proposed disposal of Howden Airdynamics, Inc. and Western Design Howden, Inc.
05/11/2003
CHARTER plc (“Charter”, the “Company” or the “Group”) Proposed disposal of Howden Airdynamics, Inc. and Western Design Howden, Inc. (“the US Defence Businesses”) (the “Disposal”)
The Board of Charter announces that the Company has entered into an agreement to sell the US Defence Businesses to two wholly owned indirect subsidiaries of Meggitt PLC (“Meggitt”) for a cash consideration of approximately US$45.0 million (£26.8 million).
The Disposal is conditional principally upon the approval of Charter’s shareholders and this approval is to be sought at an extraordinary general meeting of the Company.
A circular containing, details of the Disposal, notice of the extraordinary general meeting and a form of proxy, will be posted to Charter’s shareholders as soon as practicable. Completion will be subject to there being no fundamental change in the US Defence Businesses and to the receipt of the necessary US Government “Exon-Florio” clearance, which is being sought.
David Gawler, Chairman and Chief Executive, commenting on the Disposal said:
“Charter is pleased to announce a significant further step in its cash generation programme with the sale of its US Defence Businesses to Meggitt. This disposal represents significant progress towards generating additional funds, which will be utilised to reduce the Group’s indebtedness.”
| Charter plc |  |
(020) 7404-5959 |
| David Gawler | ||
| David Eilbeck | ||
|
||
| Hoare Govett Limited | (020) 7678-8000 | |
| Philip Dayer | ||
| Neil Collingridge | ||
|
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| Brunswick | (020) 7404-5959 | |
| Andrew Fenwick | ||
| Pamela Small | ||
The circular will shortly be available to the public for inspection at the UK Listing Authority’s Document Viewing Facility, which is situated at the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS (telephone number +44 (0) 20 7066 1000), during normal business hours on any weekday (Saturdays and public holidays excepted).
Solely for the convenience of the reader, this announcement, unless otherwise stated, contains translations of pound sterling amounts to US dollar (and, where appropriate, vice versa) based on a rate of £1.00 = US$1.6810, being the closing mid-point spot exchange rate set out in the Financial Times on 4 November 2003, the latest practicable date prior to this announcement.
Hoare Govett Limited, which is regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for Charter plc in connection with the matters set out in this announcement and for no one else and will not be responsible to anyone other than Charter plc for providing the protections afforded to clients of Hoare Govett Limited or for providing advice in relation to the matters set out in this announcement and the other matters described herein.
1. Background to and reasons for the Disposal
During the first half of 2003, the Group met its day-to-day working capital requirements through a £127.0 million syndicated revolving credit facility and on 30 June 2003, the drawings under the facility totalled £94.2 million. In addition, it had in issue loan notes (the “Loan Notes”) totalling US$206.3 million (£122.7 million) at 30 June 2003. At that date the Group’s net debt stood at £194.3 million. On 10 March 2004, the Group is scheduled to repay US$72.3 million (£43.0 million) of the Loan Notes.
As announced on 22 July 2003, the Group renewed its syndicated revolving credit facility, that was due to expire on 31 July 2003, with an initial loan facility for the amount of £120.0 million (the “Loan Facility”). The terms of the Loan Facility, which expires on 31 March 2005, require, inter alia, that on or before 30 November 2003, the amount of the Loan Facility is reduced by £20.0 million and that on or before 10 March 2004, the Loan Facility will reduce by a further £26.0 million. However, under the terms of the Loan Facility, the Company may, in certain limited circumstances, request that the Loan Facility be increased as at 10 March 2004 by an amount of up to £20.0 million.
The Group therefore needs to generate sufficient funds by 10 March 2004 to meet the scheduled loan note repayment of US$72.3 million (£43.0 million) and to accommodate the above-mentioned scheduled reductions in the Loan Facility. The Directors plan to meet these commitments through a combination of:
- asset disposals (and indeed the Company is committed under the terms of the Loan Facility to use all reasonable endeavours to generate at least £52.0 million of net proceeds from such disposals by 10 March 2004);
- cash flow from the Group’s operations; and
- alternative sources of finance.
The Company has identified a number of specific non-core assets, including the US Defence Businesses, which it currently intends to sell as part of the raising of the necessary funds.
The US Defence Businesses, which were acquired as part of the acquisition of Howden Group PLC in 1997, form part of the Specialised Engineering Division of the Group. For some time, your Board has believed that the US Defence Businesses were not a core activity within the Charter Group. Accordingly, it is appropriate that they should form a constituent part of the cash generation programme.
As part of the cash generation programme, the Company recently announced the following disposals:
- the leasehold head office property in Central London for £3.9 million;
- properties in Gothenburg, Sweden for £2.6 million; and
- freehold property in the Netherlands for £6.5 million.
2. Information on the US Defence Businesses
The US Defence Businesses comprise two US companies: Howden Airdynamics, Inc. (“Howden Airdynamics”) and Western Design Howden, Inc. (“Western Design Howden”).
Howden Airdynamics
Howden Airdynamics designs and assembles customised high performance fans, compressors and pumps for the defence and aerospace markets. The US Department of Defence is its main customer and it has also made progress in securing commercial markets for its fans. It sells directly both to the US Department of Defence and to prime contractors of the US Department of Defence.
Howden Airdynamics’ high pressure compressor business is primarily focussed on weapon systems and breathing air compressors onboard navy ships. This business includes original equipment sales, spares and repair activities, with a growing number of high value systems entering US Navy service. Howden Airdynamics is an approved Federal Aviation Administration repair station for its commercial aviation products. Historically, Howden Airdynamics has been a components supplier but it has been repositioning itself as a systems designer and assembler to meet developing customer requirements. Howden Airdynamics is based in Corona, California and employs approximately 85 people.
In the year ended 31 December 2002, Howden Airdynamics generated turnover and profits after taxation of £15.0 million and £2.0 million, respectively, and as at 31 December 2002 had net liabilities of £0.1 million.
In the six months ended 30 June 2003, Howden Airdynamics generated turnover and profits after taxation of £7.5 million and £0.9 million, respectively, and as at 30 June 2003 had net assets of £0.7 million.
Western Design Howden
Western Design Howden develops and assembles ammunition handling systems (“AHS”) and environmental cooling systems (“ECS”) for the armed services of the US and its international allies. The business sells its products to the US Department of Defence and non-US parties through the US Government’s Foreign Military Sales program.
Western Design Howden’s AHS business comprises magazines and autoloaders for helicopters, Special Operations aircraft, combat vehicles and ground support systems. Programs include the US AH-64 Apache, the AC-130 Gunship and various large calibre autoloader developments for the US Army. Western Design Howden’s ECS business comprises ground based systems and airborne systems. Ground based systems encompass vapour cycle systems for application in military vehicles, such as the thermal management systems for the MIA2SEP Abrams Tank, which provides environmental air conditioning for crew members and equipment. The airborne system products are used in thermal control applications for lasers, electronics and radar transmitters in platforms such as the helicopter mast-mounted sight, helicopter borne countermine warfare pods, wing-mounted fighter aircraft pods, and certain high-altitude reconnaissance aircraft. The systems are designed for use in tightly packaged, highly integrated units to meet customer specifications where thermal control of complex systems is required. Western Design Howden is based in Irvine, California and employs approximately 75 people.
In the year ended 31 December 2002, Western Design Howden generated turnover and profits after taxation of £17.9 million and £2.1 million, respectively, and as at 31 December 2002 had net assets of £8.8 million.
In the six months ended 30 June 2003, Western Design Howden generated turnover and profits after taxation of £9.1 million and £1.1 million, respectively, and as at 30 June 2003 had net assets of £9.8 million.
3. Principal terms and conditions of the Disposal
The consideration for the acquisition of the shares of the companies comprising the US Defence Businesses is approximately US$45.0 million (£26.8 million). The consideration is to be paid in cash upon completion and limited representations and warranties are being given by the seller.
The total consideration will be finally determined by reference to the net asset value of the US Defence Businesses as at completion.
Completion is conditional, amongst other things, upon approval of the ordinary resolution by shareholders to approve the Disposal to be proposed at the extraordinary general meeting (the “Resolution”).
4. Loan Notes
The repayment profile of the Loan Notes is as follows:
| Issue | Coupon percentage |
|
Amount US$ million |
|
Due date | |
|---|---|---|---|---|---|---|
| 2004 | 6.78 | 72.3 | 10 March 2004 | |||
| 2005 Series B | 7.24 | 3.0 | 1 July 2004 | |||
| 2005 Series B | 7.24 | 3.0 | 1 July 2005 | |||
| 2005 Series D | 7.33 | 5.0 | 1 July 2005 | |||
| 2007 | 6.88 | 85.0 | 21 October 2007 | |||
| 2009 | 6.96 | 35.0 | 21 October 2009 | |||
| Total | 203.3 |
Certain holders of the Loan Notes due in 2007 and 2009 have informed the Company that they consider that a default has arisen under their Loan Notes as a result of the accounting irregularities that were announced by the Company on 27 January 2003 at one of the air and gas handling units in North America. These holders of Loan Notes have commenced legal proceedings in New York against the Company and its subsidiary, Charter Central Finance Limited, seeking a declaratory judgement of the court that such default has occurred. The Directors’ view, based on their knowledge of the situation and on the advice of the Company’s legal advisers, is that no such default has occurred and the note holders have been advised accordingly. In the event that the views of the Company and its legal advisers are proven to be incorrect and there is a default under the Loan Notes, this would entitle the holders of the Loan Notes to accelerate their repayment and, if the holders of the Loan Notes were to do so, then the full amounts due under the Loan Notes would become immediately due and payable. This would constitute an event of default under the Loan Facility and therefore might lead to the outstanding amount due under the Loan Facility becoming immediately due and payable. However, there is no certainty that holders of the Loan Notes or lenders under the Loan Facility would in fact accelerate the obligations due to them.
Each of Charter and the Loan Note holders have filed cross motions for summary judgement but no hearing date has yet been set. Although the matter has been set down for trial in February 2004, it is not possible to predict with certainty when the court’s decision will be forthcoming and the motions for summary judgement may obviate the need for trial.
The Loan Note litigation referred to above and uncertainty as to whether the previous syndicated revolving credit facility would be renewed before it was due to expire on 31 July 2003 resulted in a fundamental uncertainty regarding going concern that was noted in Charter’s annual report for the year ended 31 December 2002. As set out in paragraph 1 above, the Group announced the renewal of its syndicated revolving credit facility on 22 July 2003.
5. Working capital and the importance of the Disposal
The Company is of the opinion that Charter and its subsidiaries (excluding the US Defence Businesses), following completion (the “Continuing Group”) does not have sufficient working capital for its present requirements, that is for the period of at least the following 12 months.
However, the Company is of the opinion that the Continuing Group does have sufficient working capital for the period up to 10 March 2004 when the Continuing Group is required to repay loan notes of US$72.3 million (£43.0 million) and the Loan Facility is reduced by a further £26.0 million.
In addition to the expected operational cash flows of the business, Charter has identified certain non-core assets that it currently intends to sell in order to raise part of the £89.0 million of funds required to fulfil its obligations, referred to in paragraph 1 above, to generate sufficient funds by 10 March 2004 to meet the scheduled loan note repayment of US$72.3 million (£43.0 million) and to accommodate the scheduled reductions in the Loan Facility. The Disposal forms part of this cash generation programme.
On the assumptions that:
- the Company continues to resist successfully the assertion by certain holders of the Loan Notes that a default has arisen under the Loan Notes; and
- the cash generation programme, including the Disposal, is completed successfully and on a timely basis,
then the Continuing Group will have sufficient working capital for its present requirements, that is for the period of at least the following 12 months.
As set out in paragraph 4 above, the Directors' view, based on their knowledge of the situation and on the advice of the Company's legal advisers, is that no such default under the Loan Notes has arisen. The Directors further believe that the cash generation programme will be successful. However, if it proves to be unsuccessful, the Directors plan to effect a number of other measures that may include the disposal of core assets, so as to provide sufficient working capital.
The cash generation programme, including the Disposal, is being progressed rapidly and represents a significant element of the Continuing Group's projected future cash flow. The Directors, therefore, consider that the Disposal represents a crucial step towards satisfying the Charter Group's obligations under its lending agreements and for this reason the Board recommends that shareholders vote in favour of the Resolution. If shareholders do not vote in favour of the Resolution the Directors do not believe that the Group will be able to fulfil its commitments under its financing obligations which fall due on 10 March 2004. In those circumstances the Directors will seek to negotiate revised terms with the Company's bankers and with the holders of the Loan Notes. If this proves to be unsuccessful, the Directors plan to effect a number of other measures that may include the disposal of core assets.
6. Financial effects of the Disposal
The cash consideration of approximately US$45.0 million (£26.8 million) is expected to result in net cash proceeds, after expenses, of approximately £24.8 million to the Continuing Group. The net cash proceeds will be utilised towards funding reductions in the Loan Facility and the repayment of the 2004 Loan Notes.
The pro forma net assets attributable to shareholders of the Continuing Group would have increased by approximately £17.9 million had the Disposal occurred on 30 June 2003. Based on the net book value of the assets being disposed of as at 30 June 2003 of approximately £6.9 million, the Directors expect to report a profit on Disposal before taxation of approximately £17.9 million. In addition, goodwill of £20.2 million arising from the acquisition of the US Defence Businesses and written off to reserves at that time, will be accounted for as part of the Disposal. However, this latter amount has no effect on shareholders' funds.
The Company does not expect any tax charge or credit to result from the Disposal.
The immediate underlying effect of the Disposal on the Continuing Group's earnings will be dilutive, but this statement should not be interpreted to mean that earnings per share in the first full financial year following Completion, or in any subsequent period, will match or necessarily be lower than those for the relevant preceding financial period.
7. Current trading and prospects
As reported to shareholders in the Company’s unaudited interim results for the six months ended 30 June 2003, which were announced on 4 September 2003, the Group recorded turnover of £420.2 million (2002: £451.8 million). The operating profit, before exceptional items and amortisation of goodwill, for the period was £15.4 million (2002: £21.8 million), an improvement over the £14.2 million earned in the second half of 2002.
Further progress has been made during the first half of 2003 in restructuring several of the Group’s operating businesses and in closing loss making units in Howden and Esab. In addition, the programme of disposals of non-core assets and other initiatives is expected to result in a significant reduction in the group’s net debt.
As a consequence of these measures, together with those taken in earlier periods, the Group’s ongoing cost base has been reduced. This provides the foundation for an improvement in the competitive position of the Group’s operating businesses particularly when demand improves.
Demand in most markets served by the Group in the first half of 2003 was below that experienced in the corresponding period last year and margins remain under pressure. However, some improvement is expected in certain key markets to be served by the Continuing Group in the second half, and accordingly the Directors believe that the Continuing Group’s financial and trading prospects for the year ending 31 December 2003 are satisfactory.
End