Proposed Demerger of South Staffordshire Plc and acquisition of the - - PowerPoint PPT Presentation

Proposed Demerger of South Staffordshire Plc and acquisition of the minority interest in Homeserve

Brian Whitty Group Chief Executive

Transaction Overview

• Demerger of South Staffordshire Plc (the “Water Group”) from South

Staffordshire Group Plc (the “Continuing Group”)

• Acquisition of the 25% minority interest in Homeserve in a share-for-share

exchange.

• Change the Continuing Group’s name from South Staffordshire Group Plc to

Homeserve plc

Background to today’s announcement

• The Group has successfully developed a support service offering

which now represents 2/3 of operating profits

• Moved into FTSE Support Services sector in 2001
• Achieved 13% CAGR in earnings since 1995, during which time

regulated water profits grew by 2.5% pa

• Principal driver of this growth has been the Homeserve division,

which contributed 47% of group operating profit in FY03.

• Group has become too diverse with different growth profiles and

investment characteristics

• Recognition of the need to address the minority interest in

Homeserve

Overview of the Proposals

• Demerger of regulated water supply and complementary non-

regulated businesses of Echo, Rapid, Underground Pipeline Services and Aqua Direct by means of a tax free dividend

• Change of name for the Continuing Group to Homeserve plc.
• Water Group to be named South Staffordshire Plc.
• Share consolidation to maintain current share price of existing group

and water group

• Acquisition of the 24.98% minority holding in HomeServe in a share

for share exchange by the Continuing Group

• Shareholder approval required at EGM on 5th April 2004

Overview of the Demerger

South Staffordshire Group Plc

Homeserve plc

• Home Service
• Home Hotline
• Regency
• Highway
• International Operations
• Commercial Outsourcing

South Staffordshire Plc

• Regulated Water
• Echo
• Rapid
• Aqua Direct
• Underground Pipeline Services

Benefits of the Demerger

• Allow the different business profiles and identities of the two

companies to develop independently

• Provide greater clarity and focus for management, customers and

business partners

• Permit each business to maintain different and appropriate capital

structures and dividend policies

• Give greater choice to shareholders through the ability to invest in

two businesses with distinct investment characteristics

Board structure for the Continuing Group

Senior Independent Director Non-Executive Director N/A Non-Executive Director John Maxwell Justin Jewitt Executive Chairman CEO FD Executive Director CEO Homeserve CEO FD Executive Director Brian Whitty Richard Harpin Andrew Belk Robert Harley New Role Current Role Homeserve Plc

• Board currently in process of recruiting a further independent Non-Executive Director

Board structure for the Water Group

Non-Executive Non-Executive Non-Executive Group Non-Executive N/A N/A Panton Corbett Michael Hughes Roger Gabb Executive Chairman FD MD of South Staffordshire Water MD of Echo/Rapid Group Non-Executive Director Group Company Secretary MD of South Staffordshire Water MD of Echo/Rapid David Sankey Adrian Page Jack Carnell John Catling New Role Current Role South Staffordshire Plc

• The Board intends to appoint a Senior Independent Non-Executive Director when

appropriate

Trading Update

• Remain confident in financial and trading prospects for the Group for

the full year to 31 March 2004

• Activities of HomeServe and Commercial Outsourcing continue to be

heavily weighted to second half of the financial year

• Overall dividend pay out (for the current year) will not reduce as a

consequence of the demerger

• Cost of demerger estimated at £4m

Andrew Belk Group Finance Director

Proforma Profit and Loss Account for Year Ended 31st March 2003

£’m Existing Demerger of Share Other Proforma Group Water Group Exchange Adjustments Continuing Group

Turnover 265.8 (73.3)

• 1.9

194.4 Operating Profit 50.5 (21.4)

• 0.6

29.7 Interest (6.0) 4.6

• (0.3)

(1.7) Profit Before Tax 44.5 (16.8)

• 0.3

28.0 Taxation (12.8) 4.4

• 0.1

(8.3) Profit After Tax 31.7 (12.4)

• 0.4

19.7 Minority Interest (2.9)

• 2.9
• Profit

28.8 (12.4) 2.9 0.4 19.7 EPS 45.9p 32.0p Number of Shares 62.8m 61.8m

• All figures pre goodwill and exceptional items
• Goodwill on share exchange of £3m
• Exceptional transaction costs of £4m

Proforma Operating Profit for Year Ended 31st March 2003

HomeServe 121.3 25.2 Regulated Water 58.8 16.0 Commercial Outsourcing 77.4 4.5 Commercial Outsourcing 26.6 5.4 Inter-Division (4.3)

• Inter-Division

(12.1)

• 194.4

29.7 73.3 21.4

• All figures before goodwill and exceptional items

£’m Turnover Operating Turnover Operating Profit Profit

Overview of the Acquisition of the Minority Interest in Homeserve

• Acquisition of 24.98% minority interest in Homeserve in exchange for

new listed shares in the Group post demerger

• Terms of proposed share exchange:
• Issue of 11.6m new shares (post demerger and post consolidation,

representing 18.6% of enlarged share capital)

• One-off cash payments to Richard Harpin and Jeremy Middleton
• f £0.15m each in compensation for enhanced dividend rights
• New shares issued ex dividend, minorities to receive full dividend

payable to 31st March 2004 from Homeserve subsidiary

• Richard Harpin subject to 2 year restriction on sale
• Share exchange conditional on Demerger
• Expected to be earnings enhancing pre goodwill

Proforma Earnings Enhancement Year Ended 31st March 2003

Continuing Group: Pre Share Exchange Post Share Exchange £’m £’m

Operating Profit 29.7 29.7 Minority UITF Charge (1.2)

• 28.5

29.7 Interest (1.7) (1.7) PBT 26.8 28.0 Tax (8.3) (8.3) 18.5 19.7 Minority Interest (4.1)

• UITF adjustment

1.2

• (2.9)
• Continuing Group Profit

15.6 19.7 Proforma Number of Shares 50.2m 61.8m EPS 31.1p 32.0p

• All figures pre goodwill and exceptional items

Proforma Net Asset Statement at 30 Sept 2003

As at 30 Sept 2003 Existing Demerger of Pre Demerger Share Other Proforma £’m Group Water Group Reorganisation Exchange Adjustments Continuing Group Fixed Assets –Tangible 176.6 (143.0) (2.0)

• 31.6

–Goodwill 121.2

• 59.0
• 180.2

Net Other Creditors (7.1) 15.8 (3.1)

• 5.6

Deferred Consideration (21.5)

• (21.5)

Deferred Income (17.8) 4.3

• (13.5)

Net Debt (106.4) 96.4 (2.9) (0.3) (4.0) (17.2) Deferred Tax (10.1) 7.6

• (2.5)

Net Assets 134.9 (18.9) (8.0) 58.7 (4.0) 162.7

1 3 2 4

• Deferred consideration includes Regency £4m, Highway £17.5m
• Highway deferred consideration provided for profits in 2005/6 will be reduced from £13.5 to £4m

Proforma Net Debt as at 30th September 2003

£’m Existing Demerger of Pre Demerger Share Other Proforma Group Water Group Reorganisation Exchange Adjustments Continuing Group

Cash 8.8 (1.0)

• 7.8

Borrowings <1 year (23.9) 6.6 (2.9) (0.3) (4.0) (24.5) Borrowings >1 year (91.3) 90.8

• (0.5)

Net Debt (106.4) 96.4 (2.9) (0.3) (4.0) (17.2)

• Water Group borrowings >1 year include the Index Linked Bond including

issue costs and rolled up interest

• Water Group bank facilities £30m
• Continuing Group bank facilities £54m

Dividends, Tax and Capex

• Final dividend for 2003/4 for Continuing Group and Water Group combined

expected to be unchanged for demerger

• Future dividend policy

– Continuing Group expects to maintain progressive dividend policy – Water Group committed to 1.8 dividend cover in current year – Water Group expected to grow dividends broadly in line with earnings

• Effective tax rate for year to 31 March 2003 28.7%

– Water Group effective rate 26.4% – Support Services effective rate 30.8%

• Capex for the year was £27m analysed as follows for year to 31 March 2003:

– Water Group £20m – Support Services £7m

Richard Harpin HomeServe Plc Chief Executive

Homeserve Strategy

“To be a world leading provider of insured repair solutions to customer homes via major Business Partners.”

Repair Policy

Managing specialist repair networks nationally to business partners and customers Affinity partner branding

Home Service

• Track record in membership and profit

growth.

• Confident of future policy growth
• Policy acquisition costs held up well
• Scottish Water launch completes

coverage.

• Success of supply pipe cover –

underground external water pipes up to £2000

• Potential of new gas supply pipe cover

Home Service

• Retention rates continue to be in excess of

87%

• Continued growth in outbound telesales to

200 staff. Potential to grow to 250

• Overcoming the blocks among 50% of

homeowners (9m) to buying plumbing and drains cover

– “I’m already covered by my household insurance” – “I haven’t experienced a plumbing emergency – it won’t happen to me”

• Launch of Instant Cover

International

France

• Excellent new policy growth and retention.
• Excellent cross sell results on plumbing and

drains and electrics.

• New office, 32 staff, including outbound telesales

team. USA

• US launched in test in November 2003, 100%
• wned, commission arrangement with Aqua
• America. Underwriting and claims by Mapfre

Assistance.

• Outstanding take ups in US on supply pipe at

$49.95.

• 38% upsell to full plumbing cover on inbound at

$129.95.

Highway

• Current trading performance.
• Significant procurement savings set up for

04/05.

• Removal of ‘paper chase’ with Phase 2 of new

Mercury system and headcount reduction from Summer 04.

• Operational blueprint and quality of Branch

Managers.

• Three major Insurers on plumbing and

drainage from April 2004.

• Four major Insurers left to be won on ‘core’

business.

Regency

• Conversion of Harveys business from

structural to new 3 and 5 year optional programme.

• Furniture market down but greater focus
• n warranty conversion.
• No evidence of reduced warranty

penetration following OFT/ Competition Commission Report.

• Furniture warranty opportunity in mail
• rder.
• Regency at Home test with Household
• Insurers. Offer to be extended.

Commercial Outsourcing

Onsite/Middleton Doorman

• Achieved growth in recent years from new

regional/national contracts, but have experienced reduced margins in competitive market

• Opportunity to capitalise on increased waste

water spend expected after next regulatory review Mail Solutions

• Continues

to

• perate

in increasingly competitive market. Home Service represents 16% of turnover.

• Additional

transactional contract work secured for data processing, print and distribution offering

David Sankey Executive Chairman South Staffordshire Plc

South Staffordshire Plc – The Water Group

• South Staffordshire Water Plc
• Echo Managed Services including Rapid
• Aqua Direct
• Underground Pipeline Services

Regulated Business

• Water Only, no sewerage
• Long History
• Reputation for excellence in Industry

Non-Regulated

• Only 20% of Water Group profits, relatively

small

• Water Industry based expertise, low risk

Water Group Strategy

Regulated

• Stable and predictable profit growth
• Maintain high levels of efficiency
• Maintain high quality standards

Non-Regulated

• Selectively grow profitable and cash generative non-regulated

businesses

South Staffordshire Water Plc

Regulated Water

• Regulated water supply represents 80% of the

Group

• One of the largest water only companies
• Supplies 1.2m people, c. 500,000 households and

42,000 commercial customers

• 20 largest customers represent 4% Sales
• Experienced Management Team in depth
• Ranked by OFWAT as second in Industry for levels
• f service, second most efficient and second lowest

charges

• Water resource level now good following normal

rainfall in December and January

South Staffordshire Water Plc

Periodic Review

• Draft Business Plan for next 5 years 2005/2009 submitted to OFWAT in August

2003

• 12.8% increase over 5 year period, 6.9% in Year 1. (Second lowest in Industry)
• Increase of 40% in rate of mains renewal (£2m per annum)
• Capital Investment Programme £118m before capital contributions of £15m, in line

with AMP3

• Cash neutral over 5 year period, based on 1.8 x dividend cover
• Cost of capital assumed at 6.3%, including small company premium
• Final Business Plan to be submitted in April
• Interim determination due June 2004, Final Determination November 2004.

Water Group – Non Regulated Business

Non-regulated businesses represent 20% of the Group

Echo Managed Services

• Specialist outsourcing and customer services business
• 90% of turnover represented by utility contracts with South

Staffordshire Water, Seven Trent and South West Water

• Opportunities for new non-water customers using outsourced

services in specialist areas

Rapid

• Billing software, originally developed for South Staffordshire

Water

• Now merged into Echo
• No new Licences in 2003/4
• Development

and maintenance continues for South Staffordshire Water, Bristol & Wessex, South West Water

Water Group – Non Regulated

Aqua Direct

• Tankered

spring water business to soft drinks manufacturers

• New Bottling Plant for supply to food retailers starts May

2004

Underground Pipeline Services

• Repairs, maintains and replaces water mains, plus small

diameter mains laying

• Mainly works for South Staffordshire Water

Adrian Page Finance Director – South Staffordshire Plc

Group Profit and Loss Account

Turnover 36.5 73.3 Operating Profit 10.1 21.4 Interest (3.1) (4.6) Profit Before Tax 7.0 16.8 Tax (1.9) (4.4) Earnings 5.1 12.4 Earnings per share 39.7p 97.5p EPS based on 12.7m shares £m 6 months Ended Year Ended 30 Sept 2003 31 March 2003

Proforma Turnover & Operating Profit – Water Group

Regulated Water 30.1 58.8 7.9 16.0 Commercial Outsourcing 13.1 26.6 2.2 5.4 Inter Company (6.7) (12.1) 36.5 73.3 10.1 21.4

£’m Turnover Operating Profit 6 mths Ended Year Ended 6 mths Ended Year Ended 30.09.03 31.03.03 30.09.03 31.03.03

• Commercial Outsourcing for the year to March 2003 includes Rapid Licence sale

and implementation fee in excess of £1m.

Net Debt, Capital Expenditure and Tax – Water Group

NET DEBT

• £93.2m at 31 March 2003 represented 65% of RCV
• £85m 23 year index linked bond, 3.75% coupon rate
• RCV at 31 March 2004 expected to be £161m
• S&P rating

CAPITAL EXPENDITURE

• 2003/4 relatively high capex year, 2004/5 relatively low
• AMP4 capital expenditure expected to be broadly in line with AMP3

TAX

• Effective tax rate in 2002/3 26.4%
• Six months to 30 September 2003 27.6%

PROSPECTS

Regulated Water Business

• Stable and predictable profit stream
• Final determination will provide certainty for 5 years to 2010
• High level of operational performance and service.

Non Regulated Business

• Echo continued high levels of customer service to utility customers
• Potential to broaden customer base
• Aqua Direct new bottling plant for supply of mineral/spring water to food chains.

Dividends

• Historic dividend cover 1.8 times. Intention to grow future dividends broadly in

line with earnings

Brian Whitty Group Chief Executive

1

Summary

• Expected Timetable

– Documents posted to shareholders 11th March – Presentation to existing and potential investors 12th March onwards – EGM to approve demerger etc 5th April – Demerger, share exchange, consolidation effective 6th April – Dealings in Homeserve and South Staffordshire commences 6th April – Expected preliminary results and final dividends declared

• South Staffordshire

25th May

• Homeserve

26th May

• Creates two separate companies with different characteristics

– Fast growing support services business – Well respected water company with stable returns

• Minority ownership in Homeserve satisfactorily resolved