Connect : Disposal of Tuffnells, Trading and Chairman Update

15 April 2020

This announcement contains inside information

Connect Group PLC

(the 'Group' or the 'Company')

Proposed Sale of Tuffnells, Trading Update and Chairman Update

Connect Group PLC announces that, following the strategic review of Tuffnells announced on 6 November 2019, the Board has determined to sell the business, concluding that this will maximise shareholder value, and be in the best interests of the Company and all its stakeholders.

Principal terms of the proposed transaction

After conducting a thorough and competitive sale process, the Group's wholly-owned subsidiary, Smiths News Holdings Limited (the Seller) has entered into a conditional share purchase agreement with Palm Bidco Limited (the Purchaser) to dispose of The Big Green Parcel Holding Company Limited and each of its subsidiaries, including Tuffnells Parcels Express Limited which trades as 'Tuffnells', on a debt free, cash free basis at completion of the proposed transaction (Completion), for aggregate deferred consideration of £15 million. This consideration is payable in three tranches between 18 months following Completion and the third anniversary of Completion, but is not subject to the satisfaction of any conditions.

In order to facilitate the proposed turnaround of Tuffnells and, in light of the difficulties in obtaining external debt financing at this time due to current market conditions caused by the consequences of the COVID-19 pandemic, the Group has agreed, as a term of the sale, to make available to Tuffnells from Completion a term loan facility of up to £10.5 million secured against the 7 English properties in which Tuffnells has a freehold interest (including one long leasehold interest). Loans drawn under the facility will be repayable in two instalments, with £5 million repayable within 18 months from Completion and all other outstanding amounts repayable on the second anniversary of Completion. Each loan drawn under that facility will carry interest at the rate of 10% per annum, payable quarterly in arrears.

Completion of the proposed transaction is conditional upon the approval of the Company's shareholders at a General Meeting or the Company obtaining sufficient written voting undertakings from shareholders, to the effect that they approve the proposed transaction and would vote in favour of the resolution that will be proposed (the Resolution) so as to ensure that the Resolution would be passed at the General Meeting, were it to be held. The share purchase agreement does not contain any other conditions or contractual rights for either party to terminate it.

In the event that the proposed transaction is not approved by the Company's shareholders, or the general meeting is not held or voting undertakings (as set out above) not obtained, the Seller has agreed to pay a break fee to the Purchaser of £100,000. Further, in the event of a future sale of Tuffnells by the Purchaser within 24 months of Completion, 50% of the net proceeds of any sale shall be paid to the Seller, and if a future sale occurs within 36 months of Completion, all outstanding deferred consideration shall be paid in full at that time.

Reasons for the disposal

Following the outcome of the strategic review, the Board considers that Group ownership of Tuffnells affords no material synergies to the Group's other businesses including Smiths News or to Tuffnells itself. Retaining Tuffnells would, in the Board's view, hinder the Group's ability to leverage cost efficiencies in managing its central overheads and disposing of Tuffnells is expected to improve the prospects of the Group refinancing its current external debt facilities on more advantageous terms than would be possible while Tuffnells remains part of the Group. While a medium-term recovery of Tuffnells could be achieved under the Group's ownership, Tuffnells would be expected, in the meantime, to remain a significant financial drag on overall profit and surplus free cash for the Group during the turnaround of the business and hinder the Board's stated ambition to reduce net debt leverage.

Benefits of the Proposed Transaction

The proposed transaction is expected to have immediate and tangible benefits to the Group including:

· Elimination of the significant on-going financial drag on the Group's profit (statutory and adjusted) and cash flow as a result of Tuffnells' financial underperformance;

· An expected material increase in the Group's adjusted earnings per share on a pro forma basis and an expected material reduction in net cash outflows following Completion;

· Facilitating the Board's ambition to reduce net debt leverage and to focus on a more prudent and disciplined approach to capital management;

· An anticipated improved ability to refinance the Group's debt facilities on more advantageous terms than would be possible whilst Tuffnells remains part of the Group;

· Removing the distraction of a turnaround plan that has absorbed management time, energy and resources, which the Board believes are better applied to the future strategy of the Group; and

· A refocusing of the Group to concentrate on its core strengths and expertise in newspaper and magazine distribution.

Use of proceeds

When received, the aggregate proceeds of the proposed transaction would be used by the Group to defray the cost of settling Tuffnells' cash overdraft at Completion and the transaction costs, fees and expenses relating to the proposed transaction, with the excess used to reduce net debt. The Group's existing funds will be utilised to meet these immediate cash requirements.

Information on the Purchaser

The Purchaser is a recently incorporated special purpose vehicle Palm Bidco Limited, backed by investors brought together by the specialist restructuring advisory firm Broad Oak Support Services LLP (BOSS) to support an extended Tuffnells management team, which is anticipated to be led by a new CEO Ignacio Garat. Mr Garat has over 20 years' experience in the sector, and has successfully led a number of complex, large-scale transformation programmes for companies including Fedex and TNT Express.

BOSS was founded in 2008 and has undertaken an extensive number of projects in a broad range of sectors. Its partners have acted on behalf of private equity firms, banks, corporate clients and owner-managers, implementing turnaround and restructuring services for public and private businesses in the UK and international markets.

It is expected that Alastair Watson, founding partner of BOSS, will join the Tuffnells board following Completion.

Information on Tuffnells

Tuffnells is a leading UK distributor of mixed freight, specialising in items of irregular dimension and weight (IDW). From a network of 36 depots and a head office in Sheffield it serves approximately 4,000 businesses.

In the financial year ended 31 August 2019, Tuffnells reported an adjusted operating loss of £14.1 million on revenues of £164.4 million, which represented 11.2 per cent. of aggregate Group revenues in that same period (£1,467.9 million). The value of Tuffnells' gross assets at 31 August 2019 was £53.6 million. Subsequent to this date, the Company announced sale and leaseback transactions of selected Tuffnells freehold and long leasehold properties on 23 September 2019 and 7 November 2019.

Key individuals to Tuffnells

As the current Executive Chairman of Tuffnells, Michael Holt is deemed to be an individual key to the operation of Tuffnells. Mr Holt is a current non-executive director of the Company and is expected to continue to have an active role in the supervision or management of Tuffnells following Completion. Further, in addition to a service agreement with the Purchaser or Tuffnells providing for a salary and cash bonus entitlement, it is anticipated that Mr Holt will receive an entitlement, at nominal cost, to 5% of the equity in the Purchaser by way of incentivisation for his future contributions to the business.

Mr Holt has declared this personal interest in the proposed transaction to the Board in line with his statutory duties under the Companies Act and his obligations under the Company's Articles of Association. Following such declaration, the Board determined that Mr Holt had and will remain subject to a conflict of interest in respect of the proposed transaction. In light of this Mr Holt has not participated in the Board's decision to approve the proposed transaction or recommend that shareholders vote in favour of it.

Proposed Refinancing and Working Capital

As part of the strategic review, the Company concluded that it would also be appropriate to enter discussions with its lenders with a view to renewing, or extending the current term of, the Group's debt facilities given their expiry on 31 January 2021, when the Group's existing cash resources alone will not be sufficient to repay the facilities in full. External debt advisors have been appointed. Discussions have been held with the Company's existing lenders and a number of alternative refinancing models have been explored, in each case seeking to secure longer term financing of the Group on commercially acceptable terms.

The Board, however, considers it inappropriate at this time to enter new or extended financing arrangements which the Directors do not believe are sufficiently commercially acceptable, having regard to all the Group's stakeholders and the current market conditions. As such, the Group has decided to defer the refinancing process given the current uncertainty and tightening of the debt markets, including as a result of the onset of the COVID-19 pandemic. The Group expects to re-commence the refinancing process following Completion of the proposed transaction (which has been consented to by the requisite majority of the Company's existing lenders) and when the debt markets and general market conditions each settle following their current period of heightened volatility.

Taking into account the underlying profitability and cash generative nature of the Group, predominantly comprising the Smiths News business, which generated adjusted EBITDA of £48.6m and free cash flow of £36.8m in the year ended 31 August 2019, the Board is confident that, following Completion of the proposed transaction, the Group will be in a stronger position from which to negotiate the proposed refinancing than would be the case either prior to the proposed transaction or were the proposed transaction not to proceed.

Chairman succession

Following the announcement on 31 January 2020 that the Chairman of the Connect Group, Gary Kennedy, intended to step down from the Board on conclusion of the strategic review of Tuffnells, the Board can confirm that Mr Kennedy intends to step down from the Board following completion of the proposed transaction at the time the next interim financial results are reported, provided his successor has been appointed by that date. A formal search process to identify and appoint his successor is underway and a number of potential candidates have been identified and interviewed.

Shareholder Circular and General Meeting

Due to the size of the proposed transaction in relation to the Company, the transaction is classified as a Class 1 transaction for the purposes of the FCA's Listing Rules, and therefore requires the approval of the Company's shareholders. A Class 1 circular containing both further details of the proposed transaction and a notice convening a General Meeting will be sent to shareholders as soon as practicable, with further details of the transaction and next steps for shareholders.

However, the Company also acknowledges the FCA's Statement of Policy published on 8 April 2020 in which the FCA has temporarily modified the Listing Rules to address the challenges of holding general meetings during the COVID-19 pandemic. Pursuant to these modifications to the Listing Rules, the FCA may grant the Company a dispensation from holding the General Meeting if, prior to the date of the General Meeting, the Company obtains written undertakings from shareholders holding more than 50% of the Company's issued share capital confirming that they approve of the proposed transaction and would vote in favour of the Resolution at the General Meeting, if that meeting were to be held.

If the Company obtains undertakings from shareholders holding more than 50% of the Company's issued share capital prior to the date of the General Meeting such that the FCA grants the Company a dispensation from holding the General Meeting, the Company will make a regulatory announcement of this fact, in which it will be confirmed that the Company will not proceed with the General Meeting and the proposed transaction would proceed to Completion shortly after the date of that announcement.

The Board considers the proposed transaction to be in the best interests of the Company and its shareholders as a whole and, accordingly, the Board unanimously recommends that you vote in favour of the Resolution that will be proposed.

Since, Michael Holt will, on Completion, continue to have an active role in the supervision or management of Tuffnells and an equity interest in the Purchaser, he has not participated in the Board's decision to approve the proposed transaction or recommend that shareholders vote in favour of it.

Gary Kennedy, Group Chairman, commented:

'After conducting a detailed strategic review, we have concluded that the sale of Tuffnells is the right option for the Group and in the best interests of all stakeholders.

Despite the trading difficulties in recent years, Tuffnells remains a leading player in its specialist field with every opportunity to thrive under new and committed ownership. Within the Group, its disposal will remove the distraction from our strong and profitable news and magazines distribution business, enabling further efficiencies as the Group resizes its central functions.

Looking ahead, we remain focused on strengthening the Group's balance sheet, while deploying our surplus free cash flow capital to deliver a reduction in net debt and maintaining attractive total shareholder returns.'

Trading Update

In light of the COVID-19 pandemic and the actions being taken around the world to contain it (which have, to date, materially impacted the Group as announced in the Trading Update issued by the Company on 18 March 2020 in relation to the postponement of the UEFA 2020 European Football Championship and the marked softening of demand from the Group's airline and travel supply clients), there is likely to be significant and material uncertainty for the Group and/or for Tuffnells as the UK enters uncharted waters and as a result of the likely impact of the ongoing macro-economic volatility and uncertainty surrounding global markets.

Following the Trading Update issued by the Company on 18 March 2020, the UK Government announced on 23 March 2020 further restrictions on social movement and the closure of certain retailers, which led to a marked reduction in volumes across both Smiths News and Tuffnells. Having taken actions (including costs controls) to mitigate the impacts of these volume declines, overall performance to the end of March 2020 was in line with the Board's revised adjusted profit before tax expectations. The extent of the impact over time cannot be quantified with any certainty at this stage but the Group continues to monitor the situation and will update the market in due course.

Across the Company's key operations, business continuity plans have been enacted and the Board is immensely proud of the Group's colleagues in working through this difficult period.

Smiths News

Smiths News has a particular social responsibility during this time, being the exclusive supplier of newspapers and magazines to over 24,000 retailers, many of which provide an important lifeline to their communities. The UK Government has designated operational employees in the business as key workers and the Group is strenuously seeking to maintain service while continuing to safeguard the wellbeing of colleagues and customers.

Following the UK Government's introduction of further restrictions on social movement, demand for newspapers and magazines has been adversely impacted by both the restrictions on movement and the temporary closure of approximately 10% of the retailers we supply, including high street and travel outlets. The situation remains fluid with the volume of newspaper sales approximately 20% to 25% lower for the two weeks following the UK Government announcement on 23 March 2020 in comparison to the same period prior to the announcement. The position with magazines, which have longer 'on-sale' periods, cannot be confirmed at this stage. In light of the revenue mix, the impact on net margin is considerably lower and Smiths News is continuing to take appropriate measures to mitigate the impact of the decline in volume on net margin, including the combining of routes and the consolidation of deliveries.

Overnight operations have been impacted by an increase in worker sickness and absence as well as the need for safeguarding procedures in what remains a highly time-sensitive distribution. Further action has been taken to temporarily close the operations and furlough all but a skeleton level of staff at both the Group's DMD business (which supplies global airlines and travel points) and the Group's InStore field marketing business.

The Group has stress tested the impact of a range of scenarios including a sustained and worsening reduction in sales. However, it is not possible to quantify with any certainty the impact of COVID-19 on Smiths News' full year adjusted profit before tax.

Tuffnells

Trading in Tuffnells has followed a similar downward trend to Smiths News, with a reduction of approximately 25% to 32% in volumes for the two weeks following the UK Government's announcement on 23 March 2020 as compared to the same period prior to the announcement. The Board expects that business-to-consumer deliveries will see some uplift, however the overall position remains uncertain and variable by region.

Employees of Tuffnells have also been designated as key workers for its delivery of certain medical and hygiene supplies, while the wider operations of Tuffnells are helping to free up consignment capacity elsewhere in the market. Despite the efforts of staff, operations have been impacted by a combination of worker sickness and the need for additional safeguarding measures. Actions to mitigate the downward impact on financial performance include the temporary closure of some smaller depots, consolidation of routes, some reasonable compromises to the timing of deliveries and the furloughing of certain employees. Tuffnells' business model also allows for flexibility in the use of sub-contracted and agency staff.

Central Support and other cost measures

Across the Company, home working has been implemented for critical support staff, including finance and HR functions.

Our customer support centre in India has been impacted by local restrictions, however we have made temporary provision for online support and have implemented plans that are providing additional customer services capacity in the UK.

In addition to the actions taken in Smiths News' and Tuffnells' operations, reductions in capital expenditure, project costs and the suspension of discretionary payments, are in active contemplation.

Furloughing of colleagues

In the light of the reduced sales volumes and increased costs, and in anticipation of the Government's restrictions on social movement continuing for the foreseeable future, the Company has taken action to furlough a significant number of colleagues under the UK Government's Coronavirus Job Retention Scheme across each of the central support functions, Smiths News and Tuffnells. The roles impacted are considered to be non-critical to the safe delivery of our current operational priorities or essential business support.

Having suspended the operations of DMD and InStore, a skeleton staff will maintain essential services while all other colleagues in these ancillary businesses, including senior managers who have not already been redeployed to support core Smiths News operations, have been furloughed.

Liquidity

The Company has a £175m committed bank facility comprising a £50m term facility and a £125m revolving credit facility. As at 31 March 2020 the Company had available £68m (2019: £43m) of undrawn committed borrowing facilities.

The Company therefore continues to operate within its current banking facilities with sufficient headroom despite the fall in demand and operational impact outlined above.

Summary

Given the rapidly changing market environment, it is not possible currently to quantify with any certainty the impact on full year adjusted profit before tax but the Group continues to monitor the situation and will update the market in due course. The full impact of the COVID-19 pandemic on the Group will depend on a variety of factors including the length of time the restrictions on social movement are in place and the extent to which further measures are required. The Company is nonetheless of the opinion that the operations and business model of Smiths News should be able to accommodate a relatively high degree of variability in demand while remaining profitable and cash generative.

The Company continues to monitor the situation with plans to address a range of scenarios, commensurate with the wellbeing of colleagues and the meeting of its wider social responsibilities.

Longer term, the Board believes that as and when restrictions ease, the operational and market resilience of Smiths News mean it will be well placed to swiftly return to previous levels of service and profitability.

Enquiries and further information

Connect Group PLC	Via Buchanan
Jonathan Bunting, Interim Chief Executive Officer
Tony Grace, Chief Financial Officer
Berenberg (Sponsor, Financial Adviser and Corporate Broker to the Company)	[phone]
Chris Bowman / Toby Flaux
Buchanan (PR Adviser to the Company)	[phone]
Richard Oldworth / Jamie Hooper
Rowbell PR (PR Adviser to the Purchaser)	[phone]
Alistair Mackinnon-Musson

Further information on the Group including information for investors can be obtained on the Group's website at https://www.connectgroupplc.com/

Person responsible for arranging release of this announcement:

Stuart Marriner
General Counsel & Company Secretary
Connect Group PLC

Rowan House

Cherry Orchard North

Kembrey Park

Swindon

SN2 8UH

email: [e-mail]
LEI: 2138004O33ONVOOQXB02

Important information relating to financial advisers

Joh. Berenberg, Gossler & Co. KG, London Branch ('Berenberg') which is authorised and regulated by the German Federal Financial Supervisory Authority and subject to limited regulation in the United Kingdom by the FCA, is acting solely as sponsor, financial adviser and corporate broker to the Company and for no one else in relation to the proposed transaction, and will not be responsible to anyone other than the Company for providing the protections afforded to the clients of Berenberg or for providing advice in relation to the proposed transaction, the contents of this document or any other matters described in this announcement.

Apart from the responsibilities and liabilities, if any, which may be imposed upon Berenberg by FSMA or the regulatory regime established thereunder, Berenberg does not accept any responsibility whatsoever or make any representation or warranty, express or implied, concerning the contents of this announcement, including as to its accuracy, completeness or verification, or for any other statement made or purported to be made by it, or on its behalf, in connection with the Company or the proposed transaction, and nothing in this document is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or future. Berenberg accordingly disclaims, to the fullest extent permitted by law, all and any responsibility and liability whether arising in tort, contract or otherwise (save as referred to herein) which it might otherwise have in respect of this announcement or any such statement.

Cautionary statement

This announcement does not constitute or form part of any offer or invitation to purchase, acquire, subscribe for, sell, dispose of or issue, or any solicitation of any of the same, for any security.

The release, publication or distribution of this announcement in certain jurisdictions may be restricted by law and therefore persons who are not resident in the United Kingdom should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.

Forward-looking statements

Certain statements contained in this announcement, constitute or may be deemed to be ''forward looking statements''. In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''projects'', ''would'', ''aims'', ''plans'', ''predicts'', ''prepares'', ''anticipates'', ''expects'', ''intends'', ''may'', ''will'' or ''should'' or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company or the Group or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Company or the Group will operate in the future. These forward-looking statements speak only as at the date of this announcement.