Acquisition of Wyevale Garden Centres and Trading Update
DATED: 25TH JULY 2018
TRADING STATEMENT FOR THE YEAR ENDED
31 DECEMBER 2017
Dear Shareholder,
At the AGM on 14th June 2018 I promised to write to you all if and when we agreed to acquire any of the Wyevale garden centres that they have put up for sale.
I am pleased to announce that on 23rd July we exchanged contracts to buy eight Wyevale garden centres for a price of £34.25m plus stock. Including the estimated value of stock, stamp duty land tax and other acquisition costs, the total outlay will be approximately £44m. In 2017 these sites produced a turnover of £35m and EBITDA of just under £4m. The deal is expected to complete on 13th August.
This agreement is the culmination of a dialogue that has been taking place with Wyevale and Terra Firma, its private equity owner, for several months - well before they put all 145 Wyevale garden centres up for sale in May. This is the reason we have been able to conclude this purchase in advance of the wider sale process.
The eight sites we are purchasing are the following:
Melbicks. This is a freehold site to the west of Birmingham that will be converted into a leasehold upon acquisition. There is currently indoor retail space of 75,000 square feet.
Sanders. This is a freehold site located north of Taunton with indoor retail space of 39,000 square feet.
Percy Throwers. This is a freehold site near Shrewsbury that will be converted into a leasehold upon acquisition. It is a modern garden centre that was re-built in 2015 and has 58,000 square feet of indoor retail space.
Bicester. This is large and busy leasehold site located to the north of Oxford and near Bicester Village. There is 130,000 square feet of retail space split between a mall with individual retail units and the garden centre.
Endsleigh. This is a large, purpose-built garden centre to the east of Plymouth with 86,000 square feet of indoor retail space.
Weybridge. This leasehold site is located between Brooklands and Chertsey close to the M25 with 32,000 square feet of indoor retail space.
Cadbury. This is a large leasehold site located to the south-west of Bristol with 127,000 square feet of indoor retail space.
Cardiff. This is a leasehold site located between Cardiff and Newport that was built in 2015 and has 58,000 square feet of indoor retail space.
We have chosen these sites because they all meet the following criteria:
- All the buildings are modern and fit for purpose, with good internal infrastructure and no need for major reconfiguring in order to install the Blue Diamond offer. Two of the sites were built within the last three years, and all within the last twenty years.
- All sites are in good locations that are very accessible and are within reach of a significant number of our core AB customers.
- All of the garden centres are destination centres that can be refurbished to meet the standards and scale of Redfields and Bridgford.
- There will be little if any cannibalisation of our existing garden centres.
- All sites have a history of good trading, with some doing much higher sales in the period prior to Wyevale's ownership.
- There is much potential to increase average spend and footfall, and to introduce our own offer to replace the concessions at these centres.
We anticipate that the acquisition will, over time, improve the profitability of the Group well beyond the current profit being made by the centres being bought. This will come from introducing the Blue Diamond product range, focusing on our core AB customer, raising the merchandising to our standards, investing in the refurbishment of the stores and removing concessions whose product we can offer ourselves. In addition, we expect that the significant increase in our scale will bring benefits for margins across the whole Group.
We are financing this transaction through a combination of £21m additional borrowing from NatWest and the sale and leaseback to BlackRock Investment Management of one of our existing garden centres, Brambridge, and two of the properties we are acquiring, namely Melbicks and Percy Throwers, which will yield £26m before expenses and taxes. This financing plan covers the cost of acquisition, and subsequent capex and working capital needs.
The Board continues to adopt a cautious approach to borrowing and has approved the acquisition on the basis that the ratio of net debt to EBITDA will remain under three times. We are planning to maximise free cash flow in the near term so as to reduce our debt levels as quickly as possible. We have budgeted for the capital expenditure necessary to deliver our plans for the acquired sites, and this will be deployed over a three year period.
There is also a robust operational plan in place to manage the integration of these sites that includes the temporary suspension of our existing development plans, the redeployment of existing Group employees and the recruitment of additional resource in key areas. Our main focus initially will be the assessment of the centres and their teams before moving on to make changes from 2019.
In summary, therefore, this transaction represents an excellent and very rare opportunity for the Group. It will lead to a 38% increase in the number of sites we operate, and an initial 30% increase in turnover. The Wyevale trading model makes wide use of concessions for products that we sell in-house, and so we expect turnover to grow significantly as we migrate the centres to the Blue Diamond format. In addition, the trading history of many of the sites indicates much higher sales potential and we believe that we can get back to these levels, primarily because our offer is more in tune with the catchments of the centres. This kind of re-gearing of newly acquired centres is something Alan and the team have done many times, with great results. Although the size of this acquisition will present some new challenges for us, I am confident that we have the skills and the resources to generate very attractive returns from the investment.
TRADING UPDATE
I am also pleased to be able to provide a positive trading update for the first six months of 2018.
After a very difficult start to the gardening season in March and April when the weather was cold and unsettled, trade in May and June has been exceptionally strong. Total sales for the first half of 2018 were 14% higher than 2017 and 6% higher on a like for like basis, excluding East Bridgford Garden Centre. Total sales increased by 14% in the UK and 5% on a like for like basis. It was also pleasing that sales in the Channel Islands rose by 9%.
The Group's overall sales growth in the garden centres was again higher than the industry in the first half of 2018 according to the latest report from the Garden Centre Association. There were notable outperformances in the Plants, Garden Sundries and Home categories.
At the end of March 2018 we opened East Bridgford Garden Centre near Nottingham after a £4.5m fit-out. The Centre has clearly resonated with customers and by the end of June it had already reached a turnover of nearly £4m. We are optimistic that it will produce a turnover greater than £10m in its first year of trading. We will be spending a further £0.5m on the Play Barn in the second half of 2018.
At the beginning of May, we acquired a 25% shareholding in the company that owns Orchard Park Garden Centre in Gillingham, Dorset for just over £1m, with a put and call option to acquire the remaining 75% of the shares in 2020. This is a centre producing a turnover of £2.5m that we believe can grow significantly within five years with the right investment. It is a leasehold site that we are now managing and operating on a daily basis. There is planning permission to extend the garden centre that we are currently reviewing.
The improvement in profits in the first half is likely to be subdued, as I signalled in the Annual Report, not least because of the introduction of the retail profits tax in Jersey and we therefore remain cautious about the year as a whole. Although we have enjoyed a very welcome rebound from the poor trading conditions earlier in the year, many of the underlying concerns about the UK economy remain. Clearly the Wyevale acquisition will have a material effect in the second half, and we expect it to be the driver of significant profit growth in the medium term.
ISSUE OF SHARES
There are 360,520 authorised but unissued shares available. At the AGM, in response to a suggestion that we put them up for sale, I said that we had no plans to do so, but that this would be kept under review and the Board would remain open to issuing them if there were evidence of significant unfilled demand. Recent offers for the sale of shares have been significantly oversubscribed, the latest one by more than 400%, and we have had strong indications of additional demand for shares from a number of existing shareholders. There are also ten potential new investors on the waiting list to buy shares.
In the Board's view, this is evidence of significant unfilled demand. In the context of the Wyevale acquisition and the desire to reduce debt levels quickly, we now think it would be appropriate to offer these unissued shares for sale. In accordance with our normal practice, we will offer these unissued shares initially to existing shareholders in proportion to their shareholdings. You will have the opportunity to request additional shares should other shareholders not take up their full allocation. Any unsold shares will be offered to the potential new investors on our list. The law requires us to produce a prospectus and we expect to circulate it to shareholders in August.
CONCLUSION
With the dramatic changes in weather, the remarkable opening of East Bridgford, and now the Wyevale acquisition, this has been a very eventful year for Blue Diamond. We are taking some major steps forward this year, which are not without risk, but which have the potential to deliver a quantum increase in the scale and profitability of the business. In addition, the significant development opportunities at existing sites, which are being postponed to allow us to focus on the Wyevale integration, are still there as opportunities to be realised in coming years, along with the longer-term new site developments. We therefore believe that we have a substantial runway for future growth.
The support of shareholders, so warmly expressed at the AGM this year, enables us to pursue these opportunities with confidence. I look forward to bringing you further updates on our progress with our regular cycle of reports.
Yours sincerely
Simon Burke
Chairman