RNS No 0654u
COSTAIN GROUP PLC
10th October 1997
COSTAIN GROUP PLC
Open Offer; preliminary results
for the year ended 31st December, 1996
and interim results
for the six months ended 30th June, 1997
Open Offer
* Costain Group PLC, the international engineering and
construction group, announces a proposed 1 for 1.593357
Open Offer of 130,000,000 New Ordinary Shares at a price
of 40p per share to raise approximately #47.5 million (net
of expenses and including the Debt Conversion).
* Costain's three largest shareholders, Intria, Kharafi and
Raymond have undertaken to take up 42.5 million, 13.9
million and 0.6 million New Ordinary Shares respectively,
representing in total #22.8 million of the amount being
raised. They have also undertaken to vote in favour of the
proposals in respect of their 77.4% combined shareholding.
* Skanska, one of the leading European engineering and
construction groups, has agreed to underwrite 25.6 million
New Ordinary Shares, representing #10.2 million of the
total amount being raised; this is expected to result in
Skanska holding 7.6% of the Enlarged Share Capital.
* The Group's Banks have agreed to underwrite the remaining
47.5 million shares, on the basis of a debt to equity
conversion of #19 million of debt.
* The Company has granted its Banks call options over 16
million New Ordinary Shares at a price of 40p.
* Skanska has been granted call options over a further 144.6
million Ordinary Shares, exercisable at any time within
three years of the completion of the Open Offer. Of these
options, half are to subscribe for New Ordinary Shares at
40p per share, the proceeds of which would be retained by
Costain. The remaining options are to purchase existing
shares from Intria, Raymond and the Company's Banks at 50p
per share.
* If Skanska exercised its options in full (and the Banks
exercised their options), Skanska's shareholding in
Costain would increase to 40%, in which case it would be
required to make a full offer for the Group.
* Skanska will have the right to bid jointly with Costain
for any building and civil engineering projects worth #20
million or more for which Costain might bid anywhere in
the world. Costain will be given reciprocal rights for
Skanska projects within the United Kingdom.
* Nominees of Intria, Kharafi, Raymond and Skanska will join
the Board; Peter Costain and Mohd Hussein bin Abdul Hamid
will step down.
* As a result of the Open Offer, on a pro forma basis
shareholders' funds will be increased to #26.0 million and
the Group will have net cash balances of #58.6 million
(including #28.7 million being the Group's share of cash
held in joint ventures) as at 30th June 1997.
* An EGM to approve the proposals will be held on Monday,
3rd November, 1997. The Company expects Costain's shares
to be relisted by Friday, 7th November, following
completion of the Open Offer.
Preliminary results for the year ended 31st December, 1996
* Turnover of #744.5 million (1995: #842.4 million).
* Loss on ordinary activities before interest, exceptional
items and taxation of #40.7 million (1995: #37.8 million
loss).
* Exceptional items of #12.3 million following the sales of
US Coal (loss of #3.1 million) Spitalfields (write-down of
#10.6 million), Land & Marine (loss of #0.3 million) and
Costain Industrial Services (profit of #1.7 million).
Interim results for the six months ended 30th June, 1997
* Turnover of #317.2 million (1996: #356.9 million).
* Loss on ordinary activities before interest and taxation
of #3.7 million (1996: #13.0 million loss).
Commenting on the announcement, John Armitt, Chief Executive of
Costain Group PLC said:
"Costain's Board welcomes the proposals announced today as we
believe them to be a necessary and positive step which should
bring significant benefits to the Group. The strengthening of
the balance sheet, the clarification of the Group's financial
situation and the lifting of the share suspension should
reassure our customers and trading partners, enabling us to
compete for new business.
"The further investment and support by our major shareholders
gives us presence and improved opportunities to win business in
certain of our important trading markets.
"In addition, we welcome the establishment of a closer
relationship with Skanska and the confidence that its
investment signifies.
"The fund raising will enable us to focus our efforts on
improving Costain's operating performance by harnessing the
considerable operational and technical expertise within the
Group in a more stable environment."
NB. The full text of the Preliminary and Interim results
statements will be released via the Stock Exchange
Regulatory News Service (RNS).
Enquiries:
Costain Group PLC
John Armitt, Chief Executive 0171 705 8514
Tim Westman 0171 705 8536
Brunswick
James Hogan 0171 404 5959
Vicky French-Brooks
CHAIRMAN'S STATEMENT
Introduction
Costain, the international engineering and construction Group,
today announced an Open Offer to raise approximately #47.5
million (net of expenses but including the Debt Conversion),
its preliminary results for the year ended 31st December, 1996
and its interim results for the six months ended 30th June,
1997.
The Open Offer of 130,000,000 New Ordinary Shares is being made
at a price of 40p per New Ordinary Share and is being made to
Qualifying Shareholders on the basis of 1 New Ordinary Share
for every 1.593357 Existing Shares held on the Record Date.
Intria, the Company's largest shareholder, has undertaken to
the Company to take up 42,500,000 New Ordinary Shares under the
Open Offer. Kharafi has undertaken to the Company to take up
13,875,000 New Ordinary Shares. Raymond has undertaken to take
up 562,500 New Ordinary Shares. The number of New Ordinary
Shares to be subscribed by Intria and Kharafi and Raymond
amounts in aggregate to 56,937,500, representing #22.8 million
of the total amount being raised.
Intria, Kharafi and Raymond, whose existing shareholdings
currently amount in aggregate to 160,366,813 Ordinary Shares,
representing approximately 77.4 per cent. of the Company's
existing share capital (and whose aggregate shareholding post
the Open Offer is expected to represent 64.5 per cent. of the
Enlarged Share Capital), have given irrevocable commitments to
vote in favour of the resolutions to be proposed at the
Extraordinary General Meeting.
Skanska, one of the leading European engineering and
construction groups, has agreed to underwrite 25,562,500 New
Ordinary Shares, representing #10.2 million of the total amount
being raised and which is expected to result in Skanska holding
7.6 per cent. of the Enlarged Share Capital. In order to secure
Skanska's agreement to underwrite part of the Open Offer
Skanska has requested, and the Company and certain of the
existing holders of Ordinary Shares have agreed to grant the
Skanska Options. These are call options in favour of Skanska
over a total of 144,615,042 Ordinary Shares. Because of the
Company's exceptional circumstances, the Company has obtained
permission from The London Stock Exchange to include options
over 72,307,521 unissued Ordinary Shares, representing slightly
more than 20 per cent. of the Enlarged Share Capital. In
addition, the Company and Skanska have entered into the Skanska
Memorandum of Understanding. Further details of the
arrangements with Skanska are set out below.
The Banks have underwritten the remaining 47,500,000 New
Ordinary Shares on the basis of a debt for equity conversion.
This represents #19.0 million of debt which will be converted
into equity. Dependent upon the level of take up by Qualifying
Shareholders other than Intria, Kharafi and Raymond under the
Open Offer, the underwriting by the Banks could result in the
Banks holding in aggregate up to 15.2 per cent. of the Enlarged
Share Capital. In order to secure the Banks' agreement to the
Debt Conversion, the Banks have requested and the Company has
agreed that they be granted call options by the Company over an
aggregate of 16,000,000 additional New Ordinary Shares of 10p
each in Costain at an option price of 40p per New Ordinary
Share.
The Directors are pleased that Intria, Kharafi and Raymond have
committed to take up New Ordinary Shares under the Open Offer
and that they have committed to vote in favour of the
resolutions to be proposed at the Extraordinary General Meeting
and that the Banks have shown their willingness to provide
further ongoing support for the Company by agreeing to
underwrite the remaining New Ordinary Shares and by the
provision of revised banking facilities under the New
Facilities Agreement.
The Directors and the Company's major shareholders are also
pleased that Skanska, with whom the Group is already working in
joint venture, has taken this opportunity to consolidate its
existing relationship with the Group by agreeing to underwrite
part of the Open Offer.
Costain's preliminary results for the year ended 31st December,
1996 show that the Group made a loss on ordinary activities
before exceptional items, interest and taxation of #40.7
million on a turnover of #744.5 million. In addition, there
are #12.3 million of exceptional losses and losses on the sale
of fixed assets, including a write-down in the carrying value
of Spitalfields.
Costain's interim results for the six months ended 30th June,
1997, show that the Group made a loss before interest and tax
of #3.7 million on turnover of #317.2 million.
For a number of reasons, and in particular those associated
with working capital and the operational strength of the
business, and all of which are fully set out below, the Board
has concluded that it is essential that the Company raise new
capital. The Board believes that this new capital will provide
the Group with necessary working capital in order to continue
trading and enable it to reassure its customers and creditors,
reduce gearing and maintain the support of the Banks.
The Board also believes that the basis on which the Open Offer
has been structured is in the best interests of the Company and
its shareholders and that this is the only realistic proposal
available to the Group to achieve these aims.
Attention is drawn to the various risk factors identified in
this letter.
In view of these factors, neither the Board not its financial
adviser, Deutsche Morgan Grenfell, is making any recommendation
to Qualifying Shareholders as to whether they should subscribe
for any New Ordinary Shares offered to them under the Open
Offer.
The Directors believe that the Group has sufficient working
capital for its present requirements but, as set out in the
paragraphs under "Working Capital" below, there may be
circumstances where that may not continue to be the case. For
this reason and for the reasons set out under "Current Trading
and Prospects", the New Ordinary Shares will constitute a high
risk investment.
The subscription price of 40p for the New Ordinary Shares has
not been based on the market price of the Ordinary Shares at
the date of the suspension of the Company's listing or on any
expectation as to the price at which New Ordinary Shares may
trade following the commencement of dealings in the New
Ordinary Shares. The Directors express no opinion as to
whether the New Ordinary Shares will trade at, above or below
the subscription price when dealings commence on the London
Stock Exchange. Qualifying Shareholders are strongly urged to
consult their own independent financial advisers before
deciding whether to subscribe for New Ordinary Shares under the
Open Offer.
Listing of shares on the London Stock Exchange
On 7th November 1996, the Company requested and obtained a
suspension of the listing of its Ordinary Shares on the London
Stock Exchange pending an announcement regarding its continuing
asset disposal process and subsequent financial arrangements.
As a result of the factors outlined under the heading ''Reasons
for the Open Offer'' below, the Company has not yet been able
to seek a relisting. The Company has requested that the listing
continues to be suspended until completion of the Open Offer,
at which time the Company's financial position will have been
clarified. The Directors currently expect that the lifting of
the suspension will occur by 7th November, 1997.
Reasons for the Open Offer
Since the publication of a circular to shareholders in
December, a number of events have occurred which have been the
principal reasons for the Group's current requirement to raise
additional capital.
The first of these relates to US Coal. Although targeted to
complete at the end of December 1996, the sale of US Coal was
not completed until 14th March, 1997 when it was completed with
retrospective financial effect from 31st January, 1997.
As a result of trading losses since December 1996, the
consideration for the sale of US Coal was reduced from the
estimated US$34.0 million (#21.2 million), referred to in the
December Circular, to US$32.5 million (#20.3 million). The
conditional sale agreement relating to US Coal provided for
US$5.0 million (#3.1 million) of the consideration to be
deferred over a five year period. Costain and Rencoal
subsequently agreed that a further US$5.0 million (#3.1
million) of the consideration be deferred, to be paid in 20
quarterly instalments commencing in April 1998. Cash payable to
Costain on completion was therefore reduced from US$29.0
million (#18.1 million) to US$22.5 million (#14.0 million). In
addition, Costain agreed to leave in place a US$7.5 million
(#4.7 million) letter of credit to secure certain lease
obligations and also to leave in place a further US$7.7 million
(#4.8 million) of letters of credit which Rencoal had been
unable to obtain the cancellation of prior to completion. The
providers of the latter, but not the former, category of
letters of credit have the benefit of a counter-indemnity from
a US surety company in addition to their counter-
indemnification rights against Costain. In relation to both
categories the Company has the benefit of an indemnity from
Rencoal. The latter category of letters of credit currently
amounts to US$3.0 million (#1.9 million). These additional
retained contingent liabilities, the reduced consideration and
the additional deferred element of the consideration have been
funded by Costain from existing and additional facilities.
Amounts in US dollars in this paragraph have been translated
into pounds sterling at the rate of exchange prevailing on 14th
March, 1997.
The conditional sale agreement (as amended) provided for the
consideration paid by Rencoal to be adjusted by reference to
the net assets being purchased as at 31st January, 1997.
Between late April and early October Costain and Rencoal were
in dispute as to the amount by which the consideration payable
by Rencoal should be adjusted.
The conditional sale agreement provided for arbitration in the
event of dispute. However, the Directors believed that an
arbitration of this dispute would involve significant
uncertainty over a considerable period and would create a major
obstacle to the Group's ability to raise additional capital and
therefore to seek a relisting of its Ordinary Shares on the
London Stock Exchange.
Having taken extensive legal and accounting advice and
following a protracted period of negotiation, the Group agreed
to a purchase price reduction of US$9.7 million (#6.0 million)
in order to settle this dispute. This agreement is conditional
upon the approval of certain banks which, in turn, is
conditional upon completion of the Open Offer and the payment
by the Company of US$1.15 million (#0.7 million) owed by it to
those banks. As a result of this settlement the cash
consideration received by the Group is US$22.8 million (#14.0
million) (of which $22.5 million (#13.9 million) was paid on
completion). In addition, the Group has released its
entitlement to a completion adjustment of US$2.0 million (#1.2
million) and waived the right to receive extra-contractual sums
and assumed a liability owed by Rencoal to a third party,
together amounting to a further US$1.7 million (#1.0 million).
As part of the settlement, Rencoal waived all other rights
which it may otherwise have had under the warranties contained
in the conditional sale agreement. There is no provision under
the conditional sale agreement for further adjustment of the
consideration.
The second reason for the Group's requirement to raise
additional capital is that the Group has experienced a delay in
receipt of monies to which it believes it is entitled under
certain contracts in South East Asia and the Middle East.
Claims under these contracts are being vigorously pursued.
The third reason is that due to its financial position, the
Company has not been able to apply for the suspension of the
listing of its shares to be lifted. This has resulted in
considerable uncertainty about the Group. This has, in turn,
prevented the Group from benefiting from the upturn in the UK
construction industry through a failure to secure a
corresponding level of new orders which continues to have an
adverse impact on the Group's cash flow and profits. The
Directors believe that it will become increasingly difficult to
secure new orders without the successful completion of the Open
Offer. In addition, because of the suspension of the Company's
listing and the consequent uncertainty as to the financial
position of the Group, the Group has experienced some creditor
pressure.
The fourth reason is that, because the Company's shares were
not relisted on or before 30th June, 1997, the put and call
options entered into between the Company and Luhur and Kharafi,
described in the December Circular, have lapsed.
As a result of the above, the Group had consolidated net
liabilities before the Open Offer of #21.4 million as at 30th
June, 1997. The events referred to above have led the Board to
conclude that it is essential that the Company raises new
capital.
Aims of the Open Offer
The Board believes that the new capital which the Group is
raising will provide the Group with necessary working capital
in order to continue trading and enable it to reassure its
customers and creditors, reduce gearing and maintain the
support of the Group's Banks. It also believes that the basis
on which the Open Offer has been structured is in the best
interests of the Company and its shareholders and that this is
the only realistic proposal available to the Group to achieve
these aims. In addition, the Open Offer will address the fact
that the net assets of the Company have fallen to below 50 per
cent. of its called up share capital.
Benefits of the Open Offer
The Board views the Open Offer as a necessary and positive step
which it believes should bring significant benefits to the
Group through:
* the clarification of the Group's financial affairs and the
lifting of the suspension of the listing of the Company's
shares, which should reassure customers, suppliers, sub-
contractors and joint venture partners, better enabling
the Group to compete for new business;
* the strengthening of the Group's balance sheet through the
injection of new equity capital which will be a major
factor in such reassurance and is expected to result in
the Group's pro forma shareholders' funds being increased
to #26.0 million as at 30th June, 1997;
* the investment and support for the Group shown by the
Group's existing major shareholders and Skanska which is
expected by the Directors to help the Group to win future
work in certain of its important trading markets;
* the strengthening of the Group's relationship with
Skanska; and
* the easing of the financial pressure which the Group has
suffered in recent months, which should allow the new
senior management team, led by the recently appointed
Chief Executive, to focus its efforts on improving the
operating performance of the Group.
Open Offer
Under the terms of the Open Offer, Qualifying Shareholders are
offered the opportunity to subscribe for New Ordinary Shares at
a price of 40p per share on the following basis:
1 New Ordinary Share for every
1.593357 Existing Shares
held at the close of business on the Record Date.
Subscription and Underwriting
Intria has committed to subscribe 42,500,000 New Ordinary
Shares under the Open Offer. Kharafi has committed to subscribe
13,875,000 New Ordinary Shares. Raymond has committed to
subscribe 562,500 New Ordinary Shares. The proceeds from the
subscription by Intria, Kharafi and Raymond will be used to
finance working capital. Any New Ordinary Shares not subscribed
by Qualifying Shareholders other than Intria, Kharafi and
Raymond and not subscribed by Skanska will be subscribed by the
Banks pursuant to the Bank Underwriting Agreement.
Skanska has agreed to underwrite 25,562,500 New Ordinary Shares
as primary underwriter. The proceeds from the subscription by
Skanska will be used to finance working capital.
Pursuant to the Bank Underwriting Agreement, the Banks are
conditionally obliged to subscribe, as secondary underwriters,
for up to 47,500,000 New Ordinary Shares, amounting to up to
15.2 per cent. of the Enlarged Share Capital. The actual number
of New Ordinary Shares taken up by the Banks will depend on the
extent to which Qualifying Shareholders (other than Intria,
Kharafi and Raymond) apply for New Ordinary Shares. This
subscription by the Banks is on a debt for equity conversion
basis.
To the extent that New Ordinary Shares are taken up by
Qualifying Shareholders other than Intria, Kharafi and Raymond
under the Open Offer such shares will not be taken up by the
Banks, but the subscription monies will be used to repay Group
indebtedness to the Banks.
Arrangements with Skanska
The Group forged a relationship with Skanska in the mid 1990s.
Since then the two companies have jointly tendered for projects
in the UK and internationally. Costain and Skanska are
currently working together on the building of Bridgend Parc
Prison, a major project under the UK government's private
finance initiative. In addition, Costain and Skanska are
building a hotel in the UK for a Scandinavian group and,
together with Kharafi, a hotel in Tanzania.
In order to secure Skanska's agreement to underwrite part of
the Open Offer, the Company and Skanska have entered into the
Skanska Memorandum of Understanding and the Skanska Option
Agreements referred to below. Under the terms of the Skanska
Memorandum of Understanding, Skanska will, for a period of 6
years following the Open Offer, subject to client agreement and
a number of other conditions, have the right to bid jointly for
projects with Costain anywhere in the world with a bidding
value of #20 million or more for which a Costain Group company
would otherwise have bid alone. Costain will be given a
reciprocal right in respect of Skanska projects of the same
size within the United Kingdom. The agreement also applies to
certain operating subsidiaries of the Company. This agreement
does not apply to Costain Oil, Gas & Process (''COGAP''),
although Costain has undertaken to use reasonable endeavours to
involve Skanska in the building or civil engineering element of
any COGAP project where the building of civil engineering
element of the contract is predicted to exceed #20 million.
For as long as Skanska retains at least 6.5 per cent. of the
then issued share capital of Costain, Skanska has been granted
the right to appoint a director of the Company, subject to the
Company's approval. The initial Skanska nominee is Mr Mikael
Ekdahl, who is secretary to the board of and a member of the
group management of Skanska and who will be appointed a
director of the Company on completion of the Open Offer.
As a result of these arrangements, Costain and Skanska will
work more closely together following the Open Offer.
The Skanska Options
Skanska has requested, and the Company and certain of the
existing holders of Ordinary Shares have agreed, to grant the
Skanska Options. These are non-assignable call options in
favour of Skanska over a total of 144,615,042 Ordinary Shares.
Of these options, the Company has granted options to subscribe
a total of 72,307,521 New Ordinary Shares at a subscription
price of 40p per Ordinary Share. All subscription monies from
the exercise of these options will be retained by the Company.
If all of the Skanska Options granted by the Company are
exercised, #28.9 million will be raised. The remaining options
are to purchase existing Ordinary Shares and have been granted
by Intria, Raymond and the Banks over, in aggregate, 72,307,521
Existing Ordinary Shares at a purchase price of 50p per
Ordinary Share. All these options are exercisable during the
period of three years commencing on the completion of the Open
Offer. The option arrangements with Skanska contain anti-
dilution rights which may, under certain circumstances, require
an increase in the number of New Ordinary Shares under option
with a view to Skanska maintaining the right to acquire 40 per
cent. of the then issued share capital. However, these anti-
dilution rights are subject to legal and regulatory constraints
including a limit imposed by the London Stock Exchange on the
number of options granted over unissued share capital of 20 per
cent. Each of Intria and Raymond has agreed to grant to
Skanska certain preemption rights in the event of a bid by a
third party.
If Skanska subscribes 25,562,500 New Ordinary Shares pursuant
to the Skanska Underwriting Agreement, and if Skanska exercised
the Skanska Options in full immediately following the Open
Offer and assuming the exercise of the Bank Options in full,
Skanska would hold 40 per cent. of the then issued share
capital of the Company. Skanska has acknowledged that any
exercise by it of the Skanska Options which takes its
shareholding to 30 per cent. or above of the then issued share
capital would result in it being obliged to make an offer to
all holders of Ordinary Shares to purchase all Ordinary Shares
not then held by Skanska, in accordance with the City Code on
Takeovers and Mergers, at not less than 50p per Ordinary Share.
The Bank Options
In order to secure the Banks' agreement to the Debt Conversion,
the Banks have requested, and the Company has agreed to grant,
call options to the Banks to require the Company to issue
16,000,000 Bank Option Shares to the Banks at an option price
of 40p per Bank Option Share exercisable at any time during the
period of 40 months following completion of the Open Offer. The
number of shares which the Company would be required to issue
under the Bank Options is subject to increase if there are
certain increases in the share capital of Costain.
The exercise of these options could result in the Banks holding
in aggregate 19.0 per cent. of the enlarged share capital of
the Company (before the exercise of the Skanska Options).
Proceeds from any options exercised by the Banks will be used
by the Company to repay indebtedness to the Banks. If all of
the options are exercised, #6.4 million of indebtedness to the
Banks will be repaid.
Shareholder interests post the Open Offer
Following completion of the Open Offer, assuming no take up
under the Open Offer by Qualifying Shareholders other than
Intria, Kharafi and Raymond, but not taking into account the
Bank Options or the Skanska Options, the issued share capital
of the Company is expected to be held as follows:
Intria 37.2%
Kharafi 19.7%
Raymond 7.6%
Skanska 7.6%
Other shareholders (including the Banks) 27.9%
______
100.0%
======
As explained, there are a number of arrangements in place
between the Group's major shareholders, the Banks and the
Company which may alter the shareholdings of the major
shareholders significantly. In particular, attention is drawn
to the possibility of the exercise of the Skanska Options and
the Bank Options as described above.
Each of Intria, Kharafi, Raymond and Skanska has confirmed to
the Panel on Takeovers and Mergers that it is not acting in
concert with any of the others.
Conditionality
The Open Offer is conditional upon:
* the passing of the resolutions set out in the Notice of
Extraordinary General Meeting;
* the Shareholder Undertakings, the Skanska Underwriting
Agreement and the Bank Underwriting Agreement having
become unconditional in all respects and none of them
having been terminated in accordance with their respective
terms; and
* the admission of the New Ordinary Shares to the Official
List.
Spitalfields
Completion of the sale of Spitalfields took place on 12th
September, 1997. The proceeds of #23.1 million raised from the
sale were reduced from #23.4 million as a result of receipts by
Costain from the Spitalfields joint venture in the course of
1997. The proceeds and the receipts by Costain from the
Spitalfields joint venture will, on completion of the Open
Offer, be applied as to #14 million against funding the Group's
future working capital requirements. If the Open Offer is not
completed, the Banks have a right to retain this #14 million.
The balance is to be applied towards reducing the Group's debt.
Banking arrangements
The Company has reached agreement with the Banks on the Debt
Conversion and the provision of revised banking facilities
under the New Facilities Agreement, for the period up to 31st
December, 2000. These revised facilities are conditional upon
completion of the Open Offer. A fee of #1.5 million will be
payable to the Banks on 31st December, 2000 or upon an earlier
prepayment.
In addition, facilities with the Company's banks in the US have
been revised and extended to 31st December, 2000, conditional
upon completion of the Open Offer.
US residual liabilities
Following the US Coal sale the Group retains certain
liabilities, including contingent liabilities, relating to its
former activities and its limited continuing business in the
US. These liabilities and contingent liabilities have been the
subject of detailed analysis by management in the US and the
UK. Legal advice has been taken where appropriate. Provision
for these liabilities has been made in the financial statements
of the Group and in the Group's cash flow projections.
Working capital
The Directors have prepared monthly projections of the Group's
cash flow up to 31st March, 1999. On the basis of the
successful completion of the Open Offer and the revised
facilities agreed with the Banks and the assumption that the
Company's shares will then be relisted on the London Stock
Exchange and subject to the paragraphs set out below, the
Directors believe that the Group has sufficient working capital
for its present requirements.
Events can occur in contracting which would require funding
over and above the level of reasonable sensitivities assumed by
management but no allowance has been made for such unforeseen
events.
If unforeseen adverse circumstances arise beyond the
sensitivities allowed for, the Group would seek to enter into
further discussions with its Banks in an attempt to secure any
shortfall between the Group's available facilities and its
working capital requirements. This may involve the disposal of
certain Group assets and the entry into discussions with the
Banks and major shareholders.
Attention is drawn to the end of the section headed
"Introduction" above.
Financial effects of the Open Offer
The Open Offer is expected to raise approximately #47.5 million
(net of expenses but including the Debt Conversion). The
proceeds from the subscription by Intria, Kharafi, Raymond and
Skanska will be used to finance working capital. The proceeds
from the subscription by the Banks and Qualifying Shareholders
other than Intria, Kharafi and Raymond will be used to repay
indebtedness to the Banks.
The implementation of the Open Offer is expected to result in
the Group's pro forma shareholders' funds being increased to
#26.0 million and the Group would have had a pro forma net cash
balance of #58.6 million (of which #28.7 million was the
Group's share of cash held by joint ventures) as at 30th June
1997.
1996 Preliminary results
Costain Group PLC today announced its preliminary results for
the year ended 31st December, 1996 which show that the Group
made a loss on ordinary activities before interest, exceptional
items, interest and taxation of #40.7 million (1995: #37.8
million loss) on a turnover of #744.5 million (1995: #842.4
million). In addition, there are #12.3 million of exceptional
losses and losses on the sale of fixed assets, including a
write-down in the carrying value of Spitalfields.
After interest of #9.3 million (1995: #11.4 million), the pre-
tax loss for the year is #62.3 million (1995: #142.6 million
loss).
No dividends have been declared for the year in respect of
Ordinary Shares.
1997 Interim results
Costain Group PLC today announced its interim results for the
six months ended 30th June, 1997 which shows that the Group
made a loss before interest and tax of #3.7 million (1996:
#13.0 million loss) on turnover of #317.2 million (1996: #356.9
million).
On 19th August, 1997, Intria, a 40 per cent. shareholder in
Costain, published a circular containing, inter alia, certain
financial information, required by the Kuala Lumpur Stock
Exchange, relating to Costain. It should be noted that this
information has not been made publicly available by Costain and
does not constitute a profit forecast by Costain and should
therefore not be relied upon.
Dividends
As a result of losses sustained in 1995 and 1996, Costain had a
deficit of #125.0 million on its profit and loss account at
31st December, 1996. Until this deficit is eliminated, the
Company will not be able to distribute any future profits by
way of dividend.
Strategy
The Board's primary objectives are to return the Group to
profitability, to establish a sound balance sheet and to focus
on the Group's core engineering and construction businesses in
key UK and overseas markets, where it has a long established
reputation and expertise in major civil engineering and
construction projects.
The Board's strategy for restoring the Group to a position of
sustainable profit and growth is built around the Group's
specialist skills in the:
* civil engineering sector, where it concentrates on
infrastructure works associated with marine, public
health, road building, railways, airports, energy and
defence works;
* building sector, where it concentrates on providing a
range of construction services, principally in the retail,
office and industrial buildings sectors; and
* process engineering and contracting sector, where it
offers a wide range of engineering procurement and
construction services to the process and energy
industries.
The Group has six main operating divisions. These are: Costain
South East Asia, where the Group will focus on Hong Kong,
Malaysia and Indonesia; Costain Oil, Gas & Process, where the
Group aims to strengthen its position in the gas processing
sector, particularly in South East Asia and the Middle East;
Costain Southern Africa, where the Group aims to continue to
build on its position as the leading contractor in Zimbabwe and
target other work in the region; Costain Civil Engineering and
Costain Construction, which work mainly in the UK and are
expected by the Directors to build upon their current market
positions, whilst adapting their business mix to meet changing
market demands; and Costain Middle East which is concentrating
on higher margin work and, as part of this strategy, has
initiated an overhead reduction programme tailored to a more
selective approach to bidding.
The Group's strategy, based on a focused approach to the
engineering and construction market, will be combined with a
more selective approach to work, concentrating on projects
which offer the prospect of higher margins, including suitable
privately financed projects in the UK and overseas and
partnering and alliancing projects with some key clients.
The Directors believe that the association with Skanska will
enhance the major work opportunities available to the Group. In
particular, the Directors hope that the Skanska Memorandum of
Understanding will enable the Group to bid jointly with Skanska
for projects which would not otherwise have been open to the
Group in the period following the Open Offer.
Board
On 2nd April, 1997, the Group announced the appointment of Mr
John Armitt CBE as Chief Executive. Mr Armitt was formerly
managing director of Union Railways, which is responsible for
developing the #3 billion Channel Tunnel Rail Link between the
Channel Tunnel and London - currently the largest
infrastructure project in the UK. Before that Mr Armitt spent
26 years with John Laing plc, latterly as chairman of its Civil
Engineering and International Divisions, where he was
responsible for a wide range of major projects in the UK and
overseas.
Mr Peter Costain decided earlier this year to resign from the
Board on 30th September, 1997. He has subsequently agreed that
his resignation will take effect from the date of this
document. He spent 34 years with the Group, including 14 years
spent developing the business of Costain Australia and 15 years
as Group Chief Executive and the last two years acting in a
part-time non-executive role.
Mr Mohd Hussein bin Abdul Hamid has tendered his resignation
from the Board with effect from the date of this document.
It has been agreed that Mr Peter Burton will chair a nomination
committee of the Board, with the intention of appointing an
additional UK based non-executive director.
Mr David Dass, an alternate director, and a partner in the
Malaysian law firm Rashid and Lee, has agreed to join the Board
with effect from completion of the Open Offer.
Mr Saad Shehata, who has been nominated by Kharafi, and Mr
Basil Vasiliou, who has been nominated by Raymond, will be
appointed directors of the Company with effect from completion
of the Open Offer. Mr Shehata is an Egyptian engineer and Mr
Vasiliou is a New York investment banker and chairman of
Vasiliou & Company, Inc. The appointment of Mr Shehata, who is
72, is subject to the approval of shareholders at the
Extraordinary General Meeting.
As described above, Mr Mikael Ekdahl, who has been nominated by
Skanska and is secretary to the board of and member of the
group management of Skanska, will be appointed a director of
the Company with effect from completion of the Open Offer.
Senior Management
Whilst the Board intends the Group to continue to operate with
a structure based on six main operating divisions with separate
profit and loss accountability, the Directors believe that the
operational effectiveness of the Group has been strengthened by
the appointment of a commercial director reporting to the chief
executive. Although not a member of the Board, his role will be
to oversee the contractual and commercial activities of the
individual divisions.
In addition, a new executive management board led by the chief
executive has recently been formed. This comprises the chief
executive, the finance director, the commercial director, the
managing directors of each of the six main operating divisions
and the company secretary. Its role will be to implement the
strategy and policies agreed by the Board and to ensure
effective movement of resources, cross-fertilisation of ideas
and a consistent approach to key policies across the Group.
Current Trading and Prospects
The Group's current trading position has been adversely
affected by the longer than anticipated suspension of the
Company's share listing on the London Stock Exchange.
The Group's future work in hand stood at #490 million at the
end of June 1997 compared to #636 million at the same time last
year. The continuing uncertainty has led to a steady fall in
orders, which will result in a reduced workload for the
remainder of the year and in 1998, and has prevented the Group
from benefiting from the upturn in the UK construction
industry.
In the UK, Costain Construction's current work in the building
sector includes four major projects totalling more than #100
million - three of which are for financial institutions in the
City of London and one, together with Skanska, for a private
prison in Bridgend, which is due to be completed ahead of
programme.
Costain Civil Engineering is on schedule to complete the #74
million Newbury by-pass next year. It is also making progress
on the complex project to widen and strengthen the M5 Avonmouth
bridge and on the joint venture projects to build the Cardiff
Bay Barrage and the London Bridge section of the Jubilee Line
Extension. The Group has forged a range of new partnering and
alliance arrangements. Clients with whom the Group has agreed
such relationships include Thames Water, Welsh Water, Newport
County Borough Council, Gwent Consultancy and BAA.
In South East Asia, the Tsing Ma suspension bridge, for which
Costain was a major joint venture contractor, was officially
opened in April and Costain continues to play a major role in
the construction of the Chek Lap Kok international airport. The
Group are continuing to pursue a number of major opportunities
in the region. However, the Group has experienced a delay in
receipt of monies to which it believes it is entitled under
certain contracts in South East Asia. In Malaysia the Group
continue to target major projects with Intria.
Since the year-end, Costain Oil, Gas & Process has completed
its joint venture project with Costain South East Asia for the
design and construction of the large sludge treatment plant at
Stonecutters Island in Hong Kong, and in the Middle East has
completed a maintenance shutdown at Das Island and recently has
been awarded a further phase of maintenance shutdown contracts
there. It has also embarked on its third joint venture project
with Kharafi in Kuwait. Disappointingly, the business suffered
a loss overall in 1996 due to one difficult contract.
In Costain Middle East, a large defence project in Saudi Arabia
has progressed. The problem contracts referred to in the
December Circular are now either completed or nearing
completion. In Southern Africa, Costain (Africa) Limited has
recently merged its contracting activities with those of Fmi
Holdings (Private) Limited, an indigenous Zimbabwean company,
to form Fmi-Costain (Private) Limited, now the largest
indigenous contractor in Zimbabwe, in which Costain has a 49
per cent. shareholding. The Directors believe that this is
likely to lead to a wider range of work opportunities in the
country. Costain is also pursuing new opportunities elsewhere
in Southern Africa, including some with Intria and Kharafi.
However, there is a need to rebuild client confidence in the
Group's financial stability following the relisting of the
Company's shares, and 1997 is proving to be another
particularly difficult and challenging year. This is reflected
in the unaudited interim results. The benefits which the
Directors expect from the restructuring are not expected to
have an impact on the Group's 1997 trading results.
--------- M O R E T O F O L L O W ----------------------
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