Mothercare : Completion of Transformation Programme

Completion of Transformation Programme

Released : 05.11.2019 17:07

RNS Number : 3782S

Mothercare PLC

05 November 2019

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AS DEFINED IN EU REGULATION NO 596/2014 AND IS MADE IN ACCORDANCE WITH THE COMPANY'S OBLIGATIONS UNDER ARTICLE 17 OF THAT REGULATION

Mothercare plc

Completion of Transformation Programme

Further to the announcement made by Mothercare plc ("Mothercare", "the Company" or "the Group") earlier on 5 November 2019 r e l a t i n g t o t h e a p p o i n t m e n t o f Z e l f H u s s a i n , T o b y B a n f i e l d , a n d D a v i d B a x e n d a l e o f P r i c e w a t e r h o u s e C o o p e r s L L P ( t h e "Administrators") as administrators to its subsidiaries, Mothercare UK Limited ("Mothercare UK") and Mothercare Business Services Limited ("MBS), the Company now announces further steps in the restructuring of the Group to return to being a sustainable and profitable business.

Mothercare remains a significant and profitable international franchise operation generating significant revenues through an asset light model, with over 1,000 stores operating in over 40 territories.

Today we are setting out our plans to refocus the Group on our core competencies of brand management, product design and development and sourcing to grow the Mothercare business with our franchise partners around the world.

The core elements of the Company's transformation programme comprises:

1. The transfer to Mothercare Global Brands Limited (a wholly owned subsidiary of Mothercare plc) from the Administrators of: the Mothercare brand, its trademarks and associated intellectual property; the novation of the commercial agreements relating to our international franchise operations; and the transfer of the Group's pension scheme deficit.
2. A significantly strengthened financial position through the following new arrangements announced today:

1. Placing of £3.2m new equity raised today at 10 pence per share alongside an agreement in principle for the provision of an additional £5.5m tranche of unsecured convertible loan notes

1. Existing £24m bank debt facilities will be paid down by the administration process

1. Up to £50m of further financial capacity potentially available to the Group from third parties including a standby underwritten equity issue and a new term loan facility, amongst other sources

1. Revised payment schedule agreed with our pension scheme trustees, reducing contributions over the next 18 months

3. Ongoing dialogue in the UK with potential partners to maintain a presence for our customers both in store and online. Although no developments can be guaranteed, we expect to announce further details of these negotiations in due course.

Through these necessary actions we anticipate Mothercare's return to being a cash generative and profitable business in FY21, entering the next financial year bank debt free.

Clive Whiley, Chairman of Mothercare, said:

"Following the completion of our transformation programme, Mothercare ‐ one of the leading global brands for parents and young children ‐ should have a bright future ahead as a solvent and cash generative Group, notwithstanding the administration of Mothercare UK and MBS.

"The actions we are announcing today have been carefully thought through and have not been taken lightly. Yesterday, all of our stakeholders faced an uncertain future given Mothercare UK's perilous financial situation that threatened the Group as a whole. Today's actions seek to return Mothercare to a stable and sustainable footing, and to preserve value for many of our stakeholders ‐

most notably our pension fund, our global franchise operations and lending group ‐ who might have otherwise faced significant losses.

"Unfortunately despite our best efforts, unremitting focus and the continuing support of our key stakeholders, we have been unable to find a way through the challenges facing Mothercare UK and MBS. We are doing everything we can to support the longstanding and hardworking colleagues during what is clearly a difficult period.

"The UK high street is facing a near existential problem with intensifying and compounding pressures across numerous fronts, most notably the high levels of rent and rates and the continuing shifts in consumer behaviour from high street to online. Mothercare UK is far from immune to these headwinds. Despite the changes implemented over the last 18 months contributing to a significant reduction in net debt over the same period, Mothercare UK continued to consume cash on an unsustainable basis.

"We know it is right for the Group as a whole, to ensure that Mothercare will remain a leading global brand for parents and young children with a bright and solvent future within the international franchise business. The changes announced are the final steps in the recovery of Mothercare as a Group. As a result of which, we believe Mothercare will return to being a profitable and sustainable business as we enter the next financial year. We look forward to returning to growth and cash generation in FY21 and beyond."

Mothercare plc
Mark Newton‐Jones, Chief Executive Officer	01923 206004
Glyn Hughes, Chief Financial Officer
Numis (Financial Adviser and Underwriter)
Luke Bordewich, Oliver Cox	020 7260 1000
MHP Communications
Simon Hockridge, Tim Rowntree, Alistair de Kare‐Silver	020 3128 8789 / 8742
PricewaterhouseCoopers LLP
PwC Press Office	020 7213 1768

Background to and reasons for the restructuring and refinancing

As stated in May at the time of our final results for the period ended 30 March 2019, this financial year's key strategic aim is to complete the transformation of the business. This comprised two key and related elements. First, to secure a financial structure for the whole of the Mothercare Group which maintains a sustainable business model with a capacity to secure future growth. Second, to evolve, adapt and optimise the structure, format and model for our UK retail operations within a Mothercare UK franchise. Our objective has been to preserve stakeholder value as we strive to optimise the level of sustainable long‐term revenues and profitability going into 2021 and beyond.

Since May, we have undertaken a root and branch review of the Group and UK Retail within it, which has included numerous discussions with a wide bandwidth of potential partners regarding our UK Retail business. Despite our best efforts, it has become clear that the UK Retail operations of Mothercare UK are not capable of returning to a level of structural profitability and returns that are sustainable for the Group as it currently stands and/or attractive enough for a third party partner to operate on an arm's length basis. Furthermore, the Company has concluded that it is unable to continue to satisfy the ongoing cash needs of Mothercare UK, which threatened the viability of the Group as a whole. Accordingly, Mothercare UK and MBS were placed into administration on Tuesday 5 November, and Administrators were therefore appointed to Mothercare UK and MBS at that point.

We set out today the fundamental restructuring of the continuing Group which allows for the elimination of the ongoing operational losses in our UK Retail operations. Discussions continue with a number of parties regarding potential franchise arrangements in the UK, to ensure that the Group has an ongoing retail presence in the UK.

Since our trading update in July covering the first quarter of our financial year, the broad dynamics of the Group's business remain unchanged. Our international business remains profitable and cash generative, with continued strength in our key markets (including India, Indonesia and Russia) offsetting slightly weaker performance in the Middle East, partly reflecting the continued macroeconomic uncertainty in some of those markets.

The performance of Mothercare UK in the UK has remained challenging with ongoing slower UK margin recovery given both the macroeconomic uncertainty and highly competitive retail conditions online and on the high street, notwithstanding the major changes that we implemented last financial year and the revised strategy in place.

The Group expects to report its interim results on 10 December, when we will provide a full update on our performance in the first half.

Description of the restructuring

Following the appointment of Administrators to Mothercare UK and MBS earlier today, the Group has today reached agreement with the Administrators for the transfer of certain liabilities and assets from Mothercare UK to the Company's subsidiary Mothercare Global Brand Limited. These include amongst other things the rights and intellectual property attaching to the Mothercare brand and associated trademarks, the novation of the commercial agreements relating to our international franchise operations and the transfer of Mothercare UK's liabilities in respect of the Group's pension fund (including the deficit therein).

The discussions we have held with the Administrators anticipate that a program will be put in place for the closure of Mothercare UK's 79 directly operated stores, its UK retail operations (including online) and the associated support areas of Mothercare UK and MBS. The Board understands that the Administrators have appointed Gordon Brothers as liquidation agent to assist with the administration process and store closure programme. The £24m of loans owed to the Group's lending group are secured over the Group as a whole, and these amounts will be addressed through the Administrators' clearance and liquidation of the stock in Mothercare UK.

This will leave the Group as a focused international brand operator with no directly operated stores and greatly reduced direct costs. The Group, upon completion of this restructuring and the elimination of the UK Retail operational losses, is expected to be profitable, cash generative and bank debt free.

We expect the following direct financial impacts to arise from this restructuring:

• Elimination of c.£30m of operating losses from the closure of the UK Retail division
• Cash exceptional costs relating to this transaction will be £5m, arising in FY20
• Net debt at 13 October 2019 stood at c.£24.6m, and we expect to be bank debt‐free by the year end

Through implementing the new operating model, together with changes in the associated cost structures, our international retail franchise operations (on an ongoing and proforma basis and assuming completion of this restructuring) would make operating profits of £10‐15m.

Revised financing arrangements:

As part of the restructuring referred to in this announcement, we have also strengthened our financial position which ensures Mothercare is in a position to complete this restructuring and return to a viable future. The core elements of Mothercare's financing are as follows:

1. We have raised £3.2m before expenses via a placing of 32,359,450 new ordinary shares of one penny each at an issue price of 10 pence per share ("the Placing") from existing shareholders. Further details of the Placing are set out in a separate announcement released today;
2. We have reached agreement in principle with two existing investors on the terms for the issuance of £5.5m in convertible unsecured loan notes. These convertible loan notes will be issued on substantially the same terms as the convertible unsecured loan stock issued in May 2018, with the exception of the conversion price of 10 pence per share in this instance. The convertible loan notes are convertible into new ordinary shares in the Company at the option of the relevant shareholder, conditional upon, among other things, the approval by the Company's shareholders of the conversion of the relevant convertible loan note as a related party transaction;

3 . We have entered into a standby underwriting agreement with Numis Securities Limited for the provision of a standby underwriting commitment in respect of a potential further equity capital raising of up to £25m. The Board will continue to assess the need for such a further equity issue in light of the progress of the restructuring and the administration of Mothercare UK. However, if it is considered to be in the best interests of the Company to proceed with such an issue, it is expected that it would be launched before the end of January 2020 and would be structured as a placing and open offer. There can be no certainty that the Company will launch such an equity issue, nor as to the terms that may be agreed to. A further announcement will be made in due course as appropriate;

1. In relation to Mothercare's existing debt facilities, the Company has been notified that Gordon Brothers has acquired 50% of the Group's outstanding indebtedness owing under the Group's senior debt facilities from one of Mothercare's previous lending banks. The total principal sums outstanding under the Group's senior debt facilities remain at £24m, a n d i t i s expected that those facilities will continue to run through to expiry date on substantially the same terms as before. The lenders under that facility have agreed a standstill in relation to the planned loan reductions as set out in the original documents as well as waivers of a number of covenants in those facilities. It is expected that all amounts due under the senior debt facilities will be paid in full out of the stock liquidation process to be undertaken by Gordon Brothers as part of the administration of Mothercare UK;
2. Gordon Brothers have also has provided Mothercare with a term sheet for a new £15m secured term loan facility. The Board is reviewing this term sheet and may enter into such a facility upon completion of relevant documentation to provide additional liquidity for the Group as or if required. There can be no certainty that the Company will enter into this facility, or on the terms that may be agreed to. A further announcement will be made in due course as appropriate;
3. Our debtor backed facility of up to US$10m from one of Mothercare's trade partners remains available to the Group; and
4. As part of the restructuring, agreement has been reached with the Mothercare pension trustees to a reduction in the planned contributions over the next 18 months.

Taken in aggregate, these financing arrangements ‐ alongside the elimination of Mothercare UK operating losses as a result of the administration of Mothercare UK ‐ provide Mothercare with a strong, stable and viable future both through to the end of this year (when we expect to be bank debt free) and beyond.

Strategy and outlook for Mothercare

Moving forward we expect that Mothercare plc will, upon completion of the plans set out today, be a simplified, profitable and cash generative business. We will remain one of the leading specialist brands for parents and young children focused on global product design, sourcing and marketing to support our franchise partners in over 40 territories and over 1,000 stores around the globe. These operations are not expected to be affected by the administration of Mothercare UK or MBS.

Our intention is to seek to grow our franchise partner base more quickly than we have in the past, given the removal of the

distraction placed on the business by the issues and restructuring of our UK Retail operations over the past few years. We have identified the large and attractive markets where we currently have no presence, and we are now looking into who the right partners for us might be in those markets. Furthermore we can now be focussed on providing the most appropriate products and ranges for our global partner base wherever they are, rather than offering them a selection from our range ordered for our UK Retail operations as we did in the past.

In the UK, we are in dialogue with potential partners to maintain a presence for our customers both in store and online, notwithstanding the administration of Mothercare UK and anticipated closure of our current directly operated stores. Although this cannot be guaranteed, we expect to announce further details of those arrangements in due course, and we remain focused on having a substantial and sustainable business in the UK with our new partner(s) as we move forwards.

IMPORTANT INFORMATION

The information contained in this announcement is for background purposes only and does not purport to be full or complete. No reliance may be placed for any purpose on the information contained in this announcement or its accuracy or completeness. The information in this announcement is subject to change.

This announcement contains "forward‐looking statements" with respect to the financial condition, results of operations and business of Mothercare and to certain of Mothercare's plans and objectives with respect to these items.

Forward ‐ looking statements are sometimes but not always identified by the use of a date in the future or such words as 'anticipates', 'aims', 'due', 'could', 'may', 'should', 'expects', 'believes', 'intends', 'plans', 'targets', 'goal', or 'estimates'. By their very nature forward‐looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that may or will occur in the future.

There are various factors that could cause actual results and developments to differ materially from those expressed or implied by these forward‐looking statements. These factors include, but are not limited to, changes in the economies, political situations and markets in which Mothercare operates; changes in the regulatory or competition frameworks in which Mothercare operates; the impact of legal or other proceedings against or which affect Mothercare; changes in inflation or exchange rates.

All written or verbal forward‐looking statements, made in this document or made subsequently, which are attributable to Mothercare or persons acting on their behalf, are expressly qualified in their entirety by the factors referred to above.

Neither Mothercare nor any other person (including Numis) intends to update these forward‐looking statements.

No statement in this announcement is intended as a profit forecast or estimate for any period and no statement in this announcement should be interpreted to mean that earnings, earnings per share or income for the Company for the current or future financial years would necessarily match or exceed the historical published earnings, earnings per share or income for the Company.

This announcement has been issued by Mothercare plc and is the sole responsibility of Mothercare plc. No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by Numis, or by any of its affiliates or agents as to, or in relation to, the accuracy or completeness of this announcement or any other written or oral information made available to or publicly available to any interested party or its advisers, and any liability therefore is expressly disclaimed.

Numis, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for Mothercare and for no one else in connection with the matters described in this announcement and will not be responsible to anyone other than Mothercare for providing the protections afforded to clients of Numis (as the case may be) nor for providing advice in relation to the matters referred to in this announcement or any other transaction, arrangement or matter referred to in this announcement.

This announcement is not intended to, and does not constitute, or form part of, any offer to sell or an invitation to purchase or subscribe for any securities in any jurisdiction.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] visit www.rns.com.

END

MSCCKPDKOBDDNDK