Introduction
On 8 October 2003 Red Apple Investments, LLC announced the terms of a mandatory
cash offer for the Ordinary Shares of Investec European Growth and Income Trust
Limited (the "Company") under Rule 9 of the Code (the "Offer") at a price of
3.25p per Ordinary Share. Following discussions between the Company's Board of
Directors and Red Apple, an offer document has been despatched to Ordinary
Shareholders and, for information only, ZDP Shareholders. The document contains
Red Apple's Offer to the Company's Ordinary Shareholders together with the
response of the Company's Board to the Offer. Set out below is the Board's
response to the Offer.
Whilst the Board makes no recommendation as to whether Ordinary Shareholders
should accept the Offer, set out below are a number of factors that the Board
considers Ordinary Shareholders should take into account when determining
whether or not they should accept the Offer. The Directors believe that the
decision of Ordinary Shareholders as to whether to accept the Offer depends
upon their views on the potential future performance of the Company, which in
turn is critically dependent on the performance of European and UK equity
markets generally and the extent to which this might have an influence on the
Board's decision on the allocation of the Company's Revenue Reserve as more
fully explained under the section headed "Considerations for Ordinary
Shareholders" below.
No offer is being made by Red Apple for the ZDP Shares. Red Apple is not
required to make an offer for these shares as they are treated by the Code as
being non-equity share capital. The Board has had discussions with Red Apple
and has secured some protections in respect of the rights of the ZDP
Shareholders.
Shareholders should note that the figures and examples set out below are for
illustrative purposes only and are not intended to be forecasts of the future
performance of the Company or the likely returns to shareholders nor are they
intended to provide any indication as to the steps that the Board (however it
may be constituted) may or may not take in the future. To the extent that any
of the figures or examples relate to the period after 30 September 2002, they
are calculated based on the Company's unaudited financial results.
Background
By a series of transactions on 8 October 2003, Brookdale Global Opportunity
Fund and Brookdale International Partners, L.P., both concert parties of Red
Apple, acquired in aggregate 5,500,000 Ordinary Shares representing
approximately 8.3 per cent. of the Company's issued Ordinary Share capital.
This brought the aggregate shareholding of Red Apple and its Concert Parties to
25,373,000 Ordinary Shares representing approximately 38.3 per cent. of the
voting rights of the Company.
For the purposes of the Offer, Red Apple's Concert Parties are Brookdale Global
Opportunity Fund, Brookdale International Partners L.P., Weiss Asset
Management, LLC, Weiss Capital, LLC and Professor Andrew Weiss.
Rule 9 of the Code essentially provides that any person, acting alone or with
other persons, who acquires shares which carry 30 per cent. or more of the
voting rights of a public company must make an offer to all of the other
holders of equity shares. Accordingly, Red Apple is required to make an offer
to all of the Company's Ordinary Shareholders, and has therefore announced a
cash offer to Ordinary Shareholders of 3.25 pence per Ordinary Share.
The Company
Structure
The Company is a Guernsey incorporated split capital investment company with a
fixed life to 1 October 2007. The Company has two classes of shares: Ordinary
Shares and ZDP Shares. There are currently 66,250,000 Ordinary Shares and
8,204,150 ZDP Shares in issue.
Rights of Ordinary Shares and ZDP Shares
A summary of rights attaching to each class of share is as follows:
(a) Dividends
Under the Company's Articles of Association, Ordinary Shareholders have no
prior claim to the distributable profits of the Company unless and until
dividends are declared. Ordinary Shareholders only have a prior claim to any
distributable profits when the Board has declared a dividend, and then only to
the extent of that dividend. No dividends are payable on the ZDP Shares.
(b) Rights on a winding-up
On the winding-up of the Company, the Ordinary Shareholders are entitled to the
Company's assets remaining after payment of its liabilities (including amounts
outstanding under its bank loan) and payments to ZDP Shareholders of the then
current capital entitlement attaching to the ZDP Shares (increasing from 100.0p
as at 20 October 2000, being the launch date of the Company, to 182.0p as at 1
October 2007). The capital entitlement of the ZDP Shares accordingly ranks in
priority to the capital entitlement of the Ordinary Shares, but behind the
Company's bank loan.
(c) Voting rights
Ordinary Shareholders are entitled to vote on all matters at general meetings
of the Company. Furthermore, the prior consent of Ordinary Shareholders,
obtained at a separate class meeting, is required in respect of certain
specified matters which are potentially prejudicial to them as a class. ZDP
Shareholders have the right to receive notice of, but not to attend or vote at,
any general meeting of the Company. Again, the prior consent of the ZDP
Shareholders, obtained at a separate class meeting, is required in respect of
certain specified matters which are potentially prejudicial to them as a class.
Dividend policy
The Company's dividend policy, as set out in the Listing Particulars, is to
distribute substantially all of the Company's gross revenue less all of its
Running Costs in the form of dividends to Ordinary Shareholders. Running Costs
are defined as all the ongoing costs and expenses of the Company other than 95
per cent. of fees payable by the Company to its investment manager and 95 per
cent. of the interest on its bank loan.
To date, dividends amounting to 12.2p per Ordinary Share have been paid. The
Ordinary Shares were issued at an initial price of 100p. However, in light of
the asset cover requirements contained within its bank loan covenants, the
Company suspended the distribution of dividends in July 2002.
Accounting policy
The Company's audited accounts are prepared under International Financial
Reporting Standards ("IFRS"). Under IFRS, the Company prepares a Statement of
Operations which, unlike a Statement of Return prepared in accordance with UK
GAAP, does not differentiate between revenue and capital and also includes net
investment gains.
As the Company has no capital account or revenue account, it has no formal
policy on the allocation of expenses. However, the effect of the dividend
policy as described above is that if the full amount of dividends permissible
in accordance with the policy were distributed by way of dividend, 95 per cent.
of the management fees and interest costs of the Company would be borne by what
a UK investment trust would normally term its "capital reserve".
The amount that would, in the case of a UK incorporated investment trust
company, be its accumulated revenue reserve, that is the accumulated amount of
the Company's undistributed gross revenue less Running Costs, is termed the
Company's Revenue Reserve for the purposes of this letter. The Revenue Reserve
amounted to �4.6 million as at 23 October 2003.
Total Assets and Portfolio Composition
As at 23 October 2003, the Company had unaudited total assets (including all
undistributed Revenue Reserve) of �44.6 million. This figure was calculated in
accordance with IFRS, pursuant to which investments are valued at their bid
price rather than their mid-market price. The unaudited total assets of the
Company were made up as follows:
European and UK equities �13.5 million
Shares of other split capital investment companies �7.3 million
Cash and cash equivalents �24.5 million
Gross Assets �45.3 million
Less accruals (�0.7 million)
Total assets �44.6 million
(Note: the accruals figure does not include costs relating to the Offer which
amount to approximately �200,000)
Borrowings
At launch, the Company entered into a seven year term loan (the "Bank Loan")
with Bank of Scotland and Dresdner Bank AG, London Branch pursuant to which the
Company borrowed an aggregate principal amount of Euro86.275 million (which was
equivalent to �50 million at that time). The interest rate on borrowings under
the Bank Loan was set at an annual rate equal to LIBOR plus an interest rate
margin of 87.5 basis points. At the same time, the Company entered into
interest rate swap agreements which effectively fixed the total interest
payable by the Company on the Bank Loan at 6.45 per cent. per annum.
In July of this year the Company repaid Euro43.5 million of its Bank Loan. Rather
than terminating its existing swap arrangement and thereby suffering an
immediate cash out-flow in respect of swap breakage costs, the Company entered
into an offsetting interest rate swap arrangement in respect of the Euro43.5
million that had been repaid.
As at 23 October 2003, the remaining amount on the Bank Loan was approximately
�29.8 million. If the remaining Bank Loan were to be repaid and the original
swap and offsetting swap arrangements described above terminated, the Company
would incur breakage costs. Assuming that termination had occurred on 23
October 2003, these breakage costs ("loan breakage costs") would have totalled
approximately �6.2 million in aggregate.
Due to falling equity markets, and a consequent fall in the net assets of the
Company, the Company has elected over the last two years to retain cash on
deposit in an offset arrangement (the "Offset Arrangement") in order to build
up some protection against the asset cover requirements under its Bank Loan
covenants. The average amount placed in the Offset Arrangement over the two
financial years ended 30 September 2002 and 2003 has been approximately �32.1
million. Following the partial repayment of the Bank Loan as described in the
paragraph above, the amount placed in the Offset Arrangement stood at �24.1
million (out of the �24.5 million in cash and cash equivalents) as at 23
October 2003.
Share entitlements
As at 23 October 2003, the total assets of the Company of �44.6 million less
the outstanding Bank Loan of �29.8 million gave rise to net assets of
approximately �14.8 million. Excluding the Revenue Reserve of approximately �
4.6 million, the assets available to cover the capital entitlement of ZDP
Shares (before taking into account loan breakage costs) were approximately �
10.2 million. On this basis, the entitlements and available assets per share in
the Company were as follows:
Accrued capital entitlement of ZDP Shares 129.6p per ZDP Share
Assets available to cover the capital entitlement of ZDP Shares 124.4p per ZDP
Share
Assets available to Ordinary Shares 0.0p per Ordinary Share
The final capital entitlement of ZDP Shares as at 1 October 2007 is 182.0p per
ZDP Share. For the final capital entitlement of the ZDP Shareholders to be
covered as at that date, the net assets (excluding Revenue Reserve) of the
Company would have to amount to approximately �14.9 million, an increase in net
assets of approximately 46 per cent. over the remaining life of the Company to
1 October 2007 (although in this regard Ordinary Shareholders should consider
the effect of gearing and other factors set out in the section headed "Capital
growth" below).
Under IFRS, the Company, in determining the amount available to cover the
capital entitlement of ZDP Shares, needs to take into account the fair value of
the potential liability arising on the Company's interest rate swap
arrangements. On that basis, the assets available to cover the capital
entitlement of the ZDP Shares as at 23 October 2003 stood at 105.32p per ZDP
Share. Shareholders should note that the Revenue Reserve is not excluded from
this calculation under IFRS.
The decision as to the attribution of the Revenue Reserve between the Ordinary
Shares and ZDP Shares will depend on a number of factors discussed under the
section headed "Considerations for Ordinary Shareholders" below.
Share prices
The closing mid-market quotations for an Ordinary Share on 7 October 2003 (one
day prior to the commencement of the Offer Period) and on 29 October 2003 were
as follows:
7 October 2003 1.875p
29 October 2003 3.25p
Considerations for Ordinary Shareholders
As previously explained, Red Apple is offering 3.25p in cash for each Ordinary
Share. For the reasons set out below, the Board does not believe it is
appropriate to provide a recommendation to Ordinary Shareholders as to whether
or not they should accept the Offer. However the Board considers that Ordinary
Shareholders should take into account a number of relevant factors. These
factors primarily relate to (i) the extent to which the Company may earn
distributable revenue over the remainder of its life; and (ii) the basis upon
which the Board, or any future Board, may resolve to pay out any or all of such
distributable revenue to Ordinary Shareholders in the form of dividends. These
factors are discussed below.
(a) Revenue to 1 October 2007
A prime consideration for Ordinary Shareholders is the amount of additional
revenue that will be earned by the Company over the remainder of the Company's
life to 1 October 2007. This will be dependent upon a number of factors
including:
- the investment policy pursued by the Company
- the level of income that the Company receives from its investments
- the total of the Company's bank debt and the amount of interest it pays on
such debt
- the amount of the Company's bank debt employed in making portfolio
investments
- the level of the Company's running expenses
None of these items can be predicted with any certainty and therefore it is not
possible to give any forecast as to the likely level of distributable revenue
that might be earned in the period to 1 October 2007. For information purposes,
the unaudited revenue, after deducting Running Costs, accruing to the Revenue
Reserve (excluding 95 per cent. of interest earned on the Cash Offset Amount)
amounted to �1.6 million during the twelve months ended 30 September 2003.
However, Shareholders should note that the level of income earned from the
Company's investments may reduce later in the life of the Company as a number
of split capital trusts whose shares are held within the Company's portfolio
reach the end of their planned lives prior to 1 October 2007.
(b) Allocation of Revenue Reserve
Another key consideration is how much of the existing Revenue Reserve (and any
future distributable revenue) Ordinary Shareholders may expect to receive by
way of dividend over the remaining life of the Company. There is no provision
in the Company's articles of association that requires the Board to distribute
any or all of the amount standing to the credit of the Revenue Reserve, either
during the Company's life or as a special dividend immediately prior to the
liquidation of the Company. It will therefore be for the Board to decide when
and to what extent any distributable revenue should be paid out to Ordinary
Shareholders in the form of dividends, and to what extent it should instead be
retained to cover the capital entitlement on ZDP Shares.
It is uncertain on what basis this allocation of the Revenue Reserve and future
distributable revenue will eventually be made, as the Board's decision will
depend upon a number of factors which may or may not prove to be of
significance over the remaining life of the Company and the future relevance of
which cannot be fully determined at this time. Furthermore, if the Offer is
successful, the composition of the existing Board will change and any new Board
may take a different view as to future dividend distributions. However, in
order to give Ordinary Shareholders some guidance, the Board feels it
appropriate to highlight a number of considerations, both general and specific,
relating to the process of allocating the Revenue Reserve and future
distributable revenue. These are set out below:
(i) Duty to act fairly - The Board has a duty to act fairly and balance the
interests of both classes of shares. In this respect, based on legal advice,
the Board, as part of its decision-making process, will generally have regard
to:
- what the Ordinary Shareholders have already received by way of dividend and
the effect of the proposed distribution policy on the amount that is likely to
be received by the Ordinary Shareholders in the future;
- the extent, if any, to which the accrued capital entitlement of ZDP
Shareholders is not covered by the available assets of the Company; and
- the revenue likely to be earned in the future and the likely prospect for
capital growth.
Shareholders should note that the Board's duty to balance the interests of both
classes of Shareholders does not necessarily mean it should seek to ensure an
equal return on their investment or an equal apportionment of the Revenue
Reserve and future distributable revenue between each class of share.
(ii) Shareholder expectations - Another factor that the Board will take into
account is the reasonable expectations of both classes of shareholders, which
will be based on the content of the Listing Particulars. At the time of the
Company's launch, Ordinary Shareholders would have expected all revenue profits
of the Company available for distribution to be paid to them by way of dividend
over the course of the Company's life. However, Ordinary Shareholders would
also have been aware of the expectations of ZDP Shareholders at the time of
launch, that the final capital entitlement of the ZDP Shares would need to be
fully covered at the end of the Company's life.
(iii) Cash offset - As explained earlier, in light of the level of asset cover
required by the covenants in its Bank Loan, the Company elected to retain a
quantity of cash (the "Cash Offset Amount") to place on deposit in an Offset
Arrangement. During the two financial years ended 30 September 2002 and 2003,
approximately �1.8 million of interest had accrued on the Cash Offset Amount.
This interest has been treated as income and therefore forms part of the
Revenue Reserve. At the same time the Company has had to pay approximately �4.1
million of interest on that portion of the Bank Loan which is equal to the Cash
Offset Amount ("Equivalent Loan Amount"). Given that the Company's effective
accounting policy is to charge 95 per cent. of all interest costs to capital,
up to 95 per cent. of the �4.1m interest would therefore be borne by ZDP
Shareholders to the extent that their final capital entitlement was not
otherwise covered at the end of the Company's life.
The Board considers that it is not appropriate for ZDP Shareholders to bear up
to 95 per cent. of the interest costs on the Equivalent Loan Amount (to the
extent that their final capital entitlement is uncovered) while Ordinary
Shareholders potentially benefit from all interest earned on the Cash Offset
Amount. Accordingly, to the extent that the final capital entitlement of the
ZDP Shares remains uncovered, the Board is of the view that it would be fair
and appropriate, in balancing the interests of both classes of shareholders,
that approximately �1.71 million (i.e. 95 per cent. of the �1.8m interest
earned on the Cash Offset Amount) in the Revenue Reserve be earmarked to cover
the capital entitlement of the ZDP Shares and not be made available for
dividends.
iv. Other costs - the Board will also need to weigh up the interests of each
class of shareholder in determining the basis upon which other material
costs incurred by the Company over the remainder of its life should be
treated. If the Board believes that such costs have been incurred
exclusively or most substantially for the benefit of one class of
shareholder to the detriment of the other class, then it is likely that the
Board will seek to place such costs upon the benefiting shareholders.
Examples of material costs include the professional and other advisory costs
incurred by the Company in relation to the Offer (which amount to approximately
�200,000 and which, for the avoidance of doubt, have not been taken into
account for the purposes of the figures and calculations contained in this
letter), and the cost of maintaining the Offset Arrangement. As regards the
latter, if the Company were to use the Offset Amount to reduce the Bank Loan
(and pay loan breakage costs) instead of placing it on deposit and continuing
to pay interest on the Bank Loan, the Company would save on the bank margin
component of the interest payable on the Equivalent Loan Amount. During the two
financial years ended 30 September 2002 and 2003, this bank margin cost
amounted to approximately �560,000. Currently, 95 per cent. of the bank margin
costs fall to ZDP Shareholders (to the extent that their final capital
entitlement remains uncovered) and only 5 per cent. is borne by Ordinary
Shareholders. Given its duty to balance the interests of shareholders, the
Board may decide that it would be appropriate to deduct a larger proportion of
the bank margin costs from the Revenue Reserve in light of the relative extent
to which each class of shareholder benefits from the maintenance of the Offset
Arrangement.
The factors set out above are only examples of the issues which the Board will
need to take into account in determining the extent to which dividends will be
paid out of the Revenue Reserve over the remaining life of the Company. In
considering whether to accept the Offer, Ordinary Shareholders will need to
form a view as to the effect which these considerations will have upon the
Board's future dividend decisions. As an additional factor, Ordinary
Shareholders will have to consider not only the level of dividends which they
could potentially receive under the current Board if they reject the Offer and
the Offer is not successful, but also what level of dividends they are likely
to receive under a future Board (however constituted) if they do not accept the
Offer and the Offer is successful.
As at 23 October 2003, there was approximately �4.6 million notionally standing
to the credit of the Revenue Reserve. For illustrative purposes, assuming the
Revenue Reserve were to be fully attributable to Ordinary Shareholders, this
would equate to 6.9p per Ordinary Share. Conversely, if the Revenue Reserve
were to be fully attributable to ZDP Shares, this would equate to 56.1p per ZDP
Share. On the basis that �1.71 million of the Revenue Reserve should be
earmarked to cover the capital entitlement of the ZDP Shares for the reasons
described in (iii) above, a maximum of �2.9 million of the Revenue Reserve
(equivalent to approximately 4.4p per Ordinary Share) currently remains
available for distribution by way of dividend. To the extent that the full �4.6
million is not employed to cover the final capital entitlement of the ZDP
Shareholders, the remaining amount will in any event be available for
distribution to Ordinary Shareholders either by way of dividend or upon the
winding-up of the Company.
(c) Dividends
It had been the original intention of the Board to meet in early November to
approve the Company's preliminary announcement and at the same time consider
the declaration of a modest dividend in respect of the financial year ended 30
September 2003. However, in light of the Offer and, in particular, the
possibility of the crystallisation of loan breakage costs for the reasons
described below, the Board does not feel it is appropriate to make any such
declaration at present.
(d) Capital growth
Shareholders should consider the likely rate of growth of the capital assets of
the Company during the period up to 1 October 2007. This will depend upon the
performance of European and UK equity markets over the next four years. If
equity markets perform sufficiently well that the final capital entitlement of
the ZDP Shares is likely to be covered, or substantially covered, by the
capital assets of the Company, then Ordinary Shareholders could expect to
receive all, or substantially all, of the Revenue Reserve. As stated above, in
order for the final capital entitlement to be covered, the net assets of the
Company as at 23 October 2003 of �10.2 million (excluding the Revenue Reserve)
will have to increase to approximately �14.9 million (excluding Revenue
Reserve) over the next four years to 1 October 2007. In this regard,
Shareholders should consider the extent to which the Company's gearing may
magnify any increase or decrease in the Company's net asset value.
In considering the likely rate of growth in the Company's capital assets,
Ordinary Shareholders should take into account the fact that 95 per cent. of
the interest cost of the Company's remaining loan of �29.8 million (�24.1
million of which is subject to the Offset Arrangement) is effectively charged
against capital. If this loan were to be kept for the remainder of the
Company's life then, after netting off 95 per cent. of the interest accruing on
the Offset Arrangement (based on the Cash Offset Amount of �24.1 million as at
23 October 2003) and using as a proxy the four-year Euro swap rate of
approximately 3.5 per cent. per annum as at 23 October 2003, the effective
charge to capital in respect of the interest costs on the remaining Bank Loan
would be approximately �4.0 million.
Shareholders should also take into account that instead of breaking the
original swap arrangement, the Company entered into an offsetting swap
arrangement. In doing so, the Company effectively fixed a net liability between
the offsetting swap arrangement and the corresponding proportion of the
original swap arrangement over the remainder of the Company's life to 1 October
2007. If 95 per cent. of the net liability from the swap arrangement were to be
charged to capital in line with the effective accounting policy for interest
costs, the effective charge to capital in respect of the net liability will be
approximately some �3 million over the remainder of the Company's life.
If the equity markets do not perform sufficiently for the final capital
entitlement of ZDP Shares to be likely to be substantially covered, the Board,
in seeking to balance the interests of all shareholders as far as possible
(particularly taking into account the Offset Arrangement described above),
might resolve not to pay by way of dividend the full amount potentially
available in the Revenue Reserve for Ordinary Shareholders. In addition, if the
Company were to breach its asset cover covenants under its Bank Loan or if its
net assets were to fall to a level where it is in danger of breaching such
asset cover covenants, the Company could not or might not be able to, as the
case may be, distribute any dividends.
(e) Portfolio composition
In making an assessment as to the potential value of the Company's gross assets
as at 1 October 2007, Ordinary Shareholders should note that �7.35 million
(35.3 per cent. of the invested portfolio excluding cash and cash equivalents)
of the Company's gross assets is invested in shares of other split capital
investment companies. These shares are the subject of structural gearing, and
accordingly, market movements are amplified both in rising markets and
particularly in falling markets. The last two years have seen high levels of
volatility in such shares. Should equity markets decline again for a sustained
period, these shares can be expected to react unfavourably both in terms of
capital value and ability to pay dividends which could result in significant
falls in value of this part of the Company's portfolio and could adversely
affect its ability to generate revenue for the Company. Conversely, if equity
markets should rise, the structural gearing inherent within split capital
investment companies would enhance the Company's capital value and its ability
to generate income.
(f) Loan breakage costs
If the Offer is successful and there is to be a change in control of the
Company, this would entitle the lenders, Bank of Scotland and Dresdner Bank AG,
London Branch, to demand early full repayment of the Bank Loan. Based on
interest costs as at 23 October 2003, this would result in the crystallisation
of �6.2 million in breakage costs in respect of the early termination of the
swap arrangements. This in turn would require a substantial realisation of the
Company's invested portfolio to the extent an appropriate replacement facility
could not be put in place. The realisation costs of the portfolio would in such
circumstances adversely impact the net asset value of the Company and its
future revenue earning capacity.
To the extent that breakage costs are incurred on the Company's bank
indebtedness and related interest rate swap arrangements, the Board will need
to consider their effect on the ability of the Company to pay dividends. The
Company's accounting policy is governed by IFRS, which does not distinguish
between revenue and capital items, and thus there is no obligation upon the
Board to treat loan breakage costs in a particular way. It is accordingly for
the Board to determine what proportion, if any, of the breakage costs should be
deducted from gross revenue. The Board considers that it may be appropriate to
treat the breakage costs in the same way as interest costs, as the breakage
costs are in effect a compensation for future interest costs which would have
been incurred on the Bank Loan and the swap arrangements if the Company had not
repaid or terminated them early. On that basis, it is the view of the Board (as
presently constituted) that, for the purposes of the Company's report and
accounts for the remainder of its life, 95 per cent. of any loan breakage costs
incurred by the Company should not be treated as Running Costs of the Company,
and should therefore not reduce assets available for distribution to Ordinary
Shareholders. In taking this view, however, the Board is not precluded from
reassessing this effective attribution of the breakage costs in the future,
particularly at the end of the life of the Company if the capital entitlement
on the ZDP Shares is not substantially covered at that time.
Bank of Scotland, as agent on the Bank Loan, has the right to demand early
repayment of the Bank Loan if the Offer becomes unconditional. Bank of Scotland
has declined to indicate to the Board whether or not it would choose to
exercise this right.
(g) Delisting of Ordinary Shares
If the Offer is successful, Red Apple has indicated to the Board that it
intends to delist the Ordinary Shares from the London Stock Exchange and the
Channel Islands Stock Exchange. Further details are set out in paragraph 7 of
the letter from the Manager of Red Apple comprised within the Offer Document.
This will significantly reduce the liquidity of the Ordinary Shares.
Shareholders should note however that as the Company is domiciled in Guernsey,
the de-listing of the Ordinary Shares will not impact on the Company's ability
to declare dividends.
(h) Minority shareholding
If the Offer is successful, any remaining Ordinary Shareholders will have a
minority holding in a Company where there will be a significant controlling
shareholder. Shareholders should be aware, however, that while Red Apple has no
right of compulsory acquisition under Guernsey law, it has stated in the letter
from its Manager that it reserves the right, if sufficient Ordinary Shares are
acquired, whether pursuant to acceptance of the Offer or otherwise, to
requisition an extraordinary general meeting to propose a special resolution to
change the Company's Articles of Association to give itself the right to
acquire compulsorily any outstanding Ordinary Shares to which the Offer
relates. 75 per cent. of votes cast will need to be in favour of the special
resolution for it to be passed.
(i) Price of Ordinary Shares
As noted above, the mid-market price for an Ordinary Share has risen from
1.875p per Share immediately prior to the commencement of the Offer Period to
its current price of 3.25p. Ordinary Shareholders should note that, in the
event that the Offer is not successful, the Ordinary Share price may fall back
to a lower level.
(j) Investment policy
Ordinary Shareholders have no certainty as to what the future investment policy
of the Company might be if the Offer is successful. In particular, Red Apple
has indicated that it intends to discuss with the Board the merits of (a)
investing in hedge funds or other vehicles managed by Weiss Asset Management,
LLC, and (b) reviewing the existing arrangements with the Company's investment
manager or appointing a new investment manager.
(k) Personal circumstances
Ordinary Shareholders should take their own individual tax position into
account when assessing whether to accept the Offer. Accepting the Offer would
crystallise a gain or a loss for the purposes of UK capital gains tax. If
Ordinary Shareholders were to remain invested in the Company until 1 October
2007 and receive dividends from the Company during that period, such dividends
would be treated as income for UK tax purposes.
Red Apple's Views
The following is extracted from the letter from the Manager of Red Apple in the
Offer Document, which sets out their reasons why Ordinary Shareholders should
accept the Offer. It should be noted that these are the views of the Manager of
Red Apple alone.
"Red Apple believes that the offer price of 3.25 pence per Ordinary Share
provides an excellent opportunity for Ordinary Shareholders to realise definite
value from their investment for the following reasons:
- The offer price represents a premium of 333 per cent. over the bid price of
0.75 pence per Ordinary Share and a premium of 72 per cent. over the mid market
price of an Ordinary Share, in each case as at the close of business on 7
October 2003 (as derived from Bloomberg) being the last practicable date of
dealings prior to the commencement of the Offer Period.
- The NAV per Ordinary Share as at 1 October 2003 was negative or zero
depending on the accounting standard used; it was -4.21 pence per Ordinary
Share based on International Accounting Standards and 0.00 pence per Ordinary
Share based on UK GAAP.
- Recent market activity would suggest that the Ordinary Shares are extremely
illiquid and therefore Ordinary Shareholders may not be able to sell large
numbers of Ordinary Shares at even 0.75 pence per Share (the bid price as at 7
October 2003).
- Notwithstanding that the Ordinary Shares are entitled to any dividends paid
by the Company, it is very difficult to state with any certainty what level of
dividend will be declared in respect of the Ordinary Shares.
- Roughly one-third of Investec European's non-cash assets are currently
invested in the shares of split investment trusts. Historically the prices of
the ordinary/income shares of split capital investment funds have been
volatile. A significant market fall, such as that which occurred in the summer
of 2002, could destroy most of their value. Under those circumstances liquidity
for the ordinary shares of split investment trusts might also dry up so that
Investec European would have to sell its shareholdings in the other split
capital investment funds at well below mid-market price.
Red Apple believes that the reason that a price of 3.25 pence per Ordinary
Share is appropriate for Red Apple, but not for most other investors, is that
the Manager of Red Apple can draw on the expertise of its team of quantitative
analysts dedicated to constructing hedges that can reduce the market risk posed
by the large portion of assets invested in the split investment trust sector
and the non-linearities in the payoff function for the Ordinary Shares. These
are fairly complicated strategies since they require forecasting the joint
distribution of the returns of the underlying securities in the Investec
European portfolio over a fairly long time period. If the Investec European
portfolio was announced on a more frequent basis, Red Apple could engage in
dynamic hedging which would further reduce its risk. If its Offer is
successful, Red Apple hopes to be able to reduce its risk in the investments in
Investec European by encouraging Investec European to announce the portfolio
composition more frequently. This would allow Red Apple to implement a dynamic
hedging strategy that responds not just to changes in valuations but also to
changes in portfolio composition. Red Apple believes that an offer of 3.25
pence per Ordinary Share would not only be of benefit to it but also to sellers
who are not able to benefit from a comparably sophisticated hedging strategy."
Position of ZDP Shareholders
No offer is being made by Red Apple for the ZDP Shares as the Code does not
require any offer to be made. The Board is concerned that, if the Offer is
successful, the Company should be run in a way that would respect the rights of
both the Ordinary Shareholders and the ZDP Shareholders. The Board has
discussed these concerns with Red Apple and has obtained from Red Apple,
Brookdale Global Opportunity Fund and Brookdale International Partners L.P.
(who are part of the Concert Parties) the following undertakings:
(i) that they will respect the rights of the ZDP Shareholders as set out in the
Company's Articles of Association from time to time;
(ii) that they will vote the Ordinary Shares which they own or control with a
view to procuring that a majority of the Board will not be directors,
employees, partners or other officers of Red Apple and/or Weiss Asset
Management, LLC and/or Weiss Capital, LLC;
(iii) that they will encourage the Board (the composition of which will change
if the Offer is successful) in its efforts to appoint a single suitable
representative of the ZDP Shares and, in the event that such appointment has
not been made and ratified by Ordinary Shareholders by the conclusion of the
Company's next Annual General Meeting or in the event that following such
appointment and ratification there is no such representative on the Board (for
example by virtue of such person's resignation) for a period of 30 days, they
will exercise their voting rights to change the Articles of Association so as
to effectively permit the ZDP Shareholders to elect a single representative to
the Board; in this regard no change to the Articles of Association to allow the
ZDP Shareholders to elect a Director shall be made without the terms of such
change being approved in advance by Red Apple (such approval not to be
unreasonably withheld or delayed); and
(iv) that they will not take any steps to delist the ZDP Shares provided that
this obligation shall not require the listing to be maintained in the event
that the appropriate resolution and other authorities have been obtained to
wind up the Company or otherwise repay and/or cancel all the ZDP Shares.
In addition, ZDP Shareholders are afforded certain protections by the Company's
Articles of Association which provide, as noted above, that their prior consent
at a separate class meeting is required in respect of certain specified matters
which are potentially prejudicial to them as a class. These include matters
such as: any proposal for the winding-up of the Company prior to 1 October
2007; the extension of the Company's life; and where the Company ceases to
comply with its investment objective (which is to provide long-term capital
growth, together with a high level of income, from investment in continental
European equities and also in an income portfolio of high yielding equity
securities and European bonds) in a manner which is, and at the time of such
non-compliance appeared likely to be, materially prejudicial to the interests
of ZDP Shareholders.
The Board can give no firm assurances concerning the position of ZDP
Shareholders. The Board would however draw the attention of the ZDP
Shareholders to the fact that:
(a) Red Apple has expressed the view that the Company may pay dividends to
Ordinary Shareholders even while the then current capital entitlements of ZDP
Shareholders remain uncovered;
(b) Red Apple has only undertaken not to take any steps to delist the ZDP
Shares but not to take any positive steps to ensure that the listings will be
maintained;
(c) Red Apple's undertaking as to the composition of the Board as described in
paragraph (ii) above is not sufficient to ensure that any future Board will
comply with the requirement in the UK Listing Rules that the Company be able to
act independently of its controlling shareholder and any associate thereof. Any
breach of the Listing Rules may result in the ZDP Shares being compulsorily
delisted from the London Stock Exchange; and
(d) Red Apple has declined to undertake not to change materially the investment
policy of the Company without the consent of the ZDP Shareholders.
Intention of the Directors
None of the Company's Directors intends to accept the Offer in respect of their
holdings which total 50,000 Ordinary Shares.
Other than an undertaking that they will vote their Shares with a view to
procuring that a majority of the Board will not be directors, employees,
partners or other officers of Red Apple and/or the Concert Parties, there has
been no indication from Red Apple as to its possible intentions regarding the
future composition of the Board of Directors. If the Offer is successful,
unless they are removed by Red Apple and/or the Concert Parties, Peter Harwood
and John Hallam intend to remain on the Board at least for the time being.
Christian de Labriffe and Patrick Stauffenberg have both indicated that if the
Offer becomes unconditional they will resign from the Board.
Conclusion
The Directors who have been so advised by Dresdner Kleinwort Wasserstein, are
not giving any recommendation or advice as to whether or not Ordinary
Shareholders should accept the Offer. Shareholders should seek their own
independent advice. However the Board considers that:
(a) if Ordinary Shareholders consider the risk of a fall in the European and UK
equity markets to be relatively low, and that the income (including the
existing Revenue Reserve) that the Company earns and distributes between now
and 1 October 2007 is likely to be significant, then they should consider not
accepting the Offer and consider retaining their shareholding on the basis that
they may, particularly if equity markets continue to recover, receive
substantially more in the period to 1 October 2007 than the Offer Price; but
(b) if Ordinary Shareholders consider the risk of a fall in the European and UK
equity markets to be likely and have concerns with the fact that the Company
has a portfolio which is 35.3 per cent. invested in shares of split capital
investment companies (many of which themselves embody a geared exposure to
falls in the European and UK equity markets), which together could lead to the
capital value of the Company falling substantially, and take the view that in
such circumstances the Board might decide that in order fairly to balance the
interests of the Ordinary and ZDP Shareholders (particularly if, as a result of
the factors stated above, the Company defaults on its Bank Loan thereby
incurring significant loan and swap breakage costs which are substantially
borne by ZDP Shareholders) all or substantially all the Revenue Reserve should
not be paid out as dividends during the life of the Company, then they should
consider accepting the Offer.
In providing its advice, Dresdner Kleinwort Wasserstein has taken into account
the Directors' commercial assessments.
Responsibility
The Directors of the Company accept responsibility for the information
contained in this announcement, save for the section headed `Red Apple's Views'
above. To the best of the knowledge and belief of the Directors of the Company
(who have taken all reasonable care to ensure that such is the case), the
information contained in this announcement (save for the section headed `Red
Apple's Views' above) is in accordance with the facts and does not omit
anything likely to affect the import of such information.
The Manager of Red Apple Investments, LLC accepts responsibility for the
information contained in the section headed `Red Apple's Views' above. To the
best of the knowledge and belief of the Manager of Red Apple, (who has taken
all reasonable care to ensure that such is the case), the information contained
in that section is in accordance with the facts and does not omit anything
likely to affect the import of such information.
Definitions
Capitalised terms used in this announcement bear the meanings ascribed to them
in the Offer Document dated 30 October 2003.
Enquiries
For the Company:
Andrew Zychowski
David Yovichic
Dresdner Kleinwort Wasserstein 020 7623 8000
For Red Apple:
Andrew Weiss/Eitan Milgram 001 617 778 7780
Dresdner Kleinwort Wasserstein, which is authorised and regulated by the
Financial Services Authority, is acting for Investec European Growth and Income
Limited and for no-one else in connection with the Offer and will not be
responsible to anyone other than Investec European Growth and Income Limited
for providing the protections afforded to customers of Dresdner Kleinwort
Wasserstein, or for affording advice in relation to the Offer.
Copies of the Offer Document will be available for inspection at the offices of
Stephenson Harwood, One St Paul's Churchyard, London EC4M 8SH during usual
business hours on any weekday (public holidays excepted) whilst the Offer
remains open for acceptance.
END