Conditional sale of shares in Secure Trust Bank

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES, CANADA, AUSTRALIA, JAPAN OR THE REPUBLIC OF SOUTH AFRICA.

FURTHER, THIS ANNOUNCEMENT IS FOR INFORMATION PURPOSES ONLY AND SHALL NOT CONSTITUTE AN OFFER TO SELL OR ISSUE OR THE SOLICITATION OF AN OFFER TO BUY, SUBSCRIBE FOR OR OTHERWISE ACQUIRE ANY ORDINARY SHARES OF SECURE TRUST BANK PLC IN ANY JURISDICTION IN WHICH ANY SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.

This announcement should be read in its entirety.

                                                                                                                                                               27 May 2016

Arbuthnot Banking Group PLC ("Arbuthnot" or the "Company")

Conditional sale of ordinary shares in Secure Trust Bank PLC ("Secure Trust")

Further to its recent announcement, Arbuthnot today announces the conditional sale of 6,000,000 ordinary shares of 40 pence each in Secure Trust (the "Sale Shares"), representing 33.0 per cent. of Secure Trust's existing issued share capital, by way of a secondary placing to institutional investors only (the "Sale"). The Sale was priced at £25 per Sale Share (the "Sale Shares Price") which represents a 10.7 per cent. discount to the closing price of Secure Trust's ordinary shares (the "Ordinary Shares") as of 26 May 2016.

Assuming completion of the Sale, the Company's interest in Secure Trust will reduce from 51.9 per cent. to 18.9 per cent. of Secure Trust's issued share capital and would generate gross proceeds of £150 million for Arbuthnot.

Arbuthnot has also been informed by Secure Trust that the special dividend of 165 pence per Secure Trust ordinary share  relating to the sale of the Everyday Loans Group, which was conditionally announced on 17 March 2016 (the "Special Dividend"), is not expected to be declared until after completion of the Sale. The record date of the Special Dividend is also expected to be after the Sale has completed and accordingly, assuming the Sale completes, the Special Dividend relating to the Sale Shares would be received by the holders of the Sale Shares at the record date for the Special Dividend and not Arbuthnot. The Sale Shares rank pari passu in all respects with the Ordinary Shares.

As the Sale represents a fundamental change of business for Arbuthnot under the AIM Rules for Companies, the Sale is conditional upon a resolution (the "Resolution") being passed by Arbuthnot's shareholders at a general meeting of Arbuthnot (the "General Meeting") and will also be subject to the satisfaction or waiver of certain customary conditions. A circular containing the notice of the General Meeting (the "Circular") is  being posted to Shareholders on or before 28 May 2016 and will be available on the Company's website www.arbuthnotgroup.com.

The Directors consider the Resolution to be in the best interests of the Company and the Shareholders as a whole and therefore the Directors recommend that Shareholders vote in favour of the Resolution to be proposed at the General Meeting, as each member of the Board who holds Ordinary Shares intends to do in respect of his own beneficial holdings of Ordinary Shares amounting in aggregate to 55.53 per cent of the 14,889,048 shares eligible to vote. Sir Henry Angest has signed an irrevocable undertaking to procure that the votes pertaining to his 55.08 per cent. beneficial holding in Arbuthnot are cast in favour of the Resolution.

Arbuthnot has confirmed that, following completion of the Sale, it does not intend to sell any further ordinary shares in Secure Trust for at least 180 days from completion of the Sale, other than with the agreement of Stifel.  

Expected timetable

Enquiries:

Disclaimer

Stifel Nicolaus Europe Limited (trading as Keefe Bruyette & Woods) is acting on the Sale and will not be responsible to anyone other than its client for providing the protections afforded to its clients, nor for providing advice in relation to the Sale, the contents of this announcement, or any transaction or arrangement referred to herein.

Canaccord Genuity Limited is the Company's Nominated Adviser. The responsibilities of Canaccord Genuity Limited, as Nominated Adviser under the AIM Rules and the AIM Rules for Nominated Advisers, are owed solely to the London Stock Exchange and are not owed to the Company, any Shareholder or any Director of the Company or to any other person in in relation to the Sale, the contents of this announcement, or any transaction or arrangement referred to herein. Canaccord Genuity Limited is acting exclusively for the Company and for no one else in relation to the Sale and will not be responsible to any person other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Sale.

This announcement is not for publication or distribution, directly or indirectly, in or into the United States of America.  This announcement is not an offer of securities for sale into the United States.  The securities referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States, except pursuant to an applicable exemption from registration.  No public offering of securities is being made in the United States.

This announcement is for information purposes only and does not constitute or form part of an offer or invitation to acquire or dispose of any securities of Secure Trust, or constitute a solicitation of any offer to purchase or subscribe for securities in any jurisdiction, including Canada, Australia, Japan or the Republic of South Africa.    

Secure Trust's shares may not, directly or indirectly, be offered or sold within Canada, Australia Japan or the Republic of South Africa or offered or sold to a resident of Canada, Australia, Japan or the Republic of South Africa. No public offering of securities is being made in the United States or elsewhere.

Neither this announcement nor any copy of it may be taken, or transmitted or distributed, directly or indirectly, in or into or distributed to persons in, the United States of America, its territories or possessions or to any US person (within the meaning of Regulation S under the US Securities Act of 1933, as amended). Neither this announcement nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in or into Australia, Canada, Japan or the Republic of South Africa. Any failure to comply with this restriction may constitute a violation of United States, Australian, Canadian, Japanese or South African securities laws.

The distribution of this announcement in certain other jurisdictions may be restricted by law and persons into whose possession this announcement comes should inform themselves about, and observe, any such restrictions. 

MEMBERS OF THE GENERAL PUBLIC ARE NOT ELIGIBLE TO TAKE PART IN THE SALE. THIS ANNOUNCEMENT AND ANY OFFER OF SECURITIES TO WHICH IT RELATES ARE ONLY ADDRESSED TO AND DIRECTED AT PERSONS (1) IN MEMBER STATES OF THE EUROPEAN ECONOMIC AREA WHO ARE QUALIFIED INVESTORS WITHIN THE MEANING OF ARTICLE 2(1) (E) OF EU DIRECTIVE 2003/71/EC, AS AMENDED, INCLUDING BY THE 2010 PROSPECTUS DIRECTIVE AMENDING DIRECTIVE 2010/73/EC TO THE EXTENT IMPLEMENTED IN THE RELEVANT MEMBER STATE (THE "PROSPECTUS DIRECTIVE") ("QUALIFIED INVESTORS"); AND (2) IN THE UNITED KINGDOM WHO ARE QUALIFIED INVESTORS AND (A) HAVE PROFESSIONAL EXPERIENCE IN MATTERS RELATING TO INVESTMENTS AND FALL WITHIN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005, AS AMENDED, (THE "ORDER") OR (B) FALL WITHIN ARTICLE 49(2)(A) TO (D) ("HIGH NET WORTH COMPANIES, UNINCORPORATED ASSOCIATIONS, ETC.") OF THE ORDER OR (C) ARE PERSONS TO WHOM THIS ANNOUNCEMENT AND ANY OFFER OF SECURITIES TO WHICH IT RELATES MAY OTHERWISE LAWFULLY BE COMMUNICATED OR MADE (ALL SUCH PERSONS REFERRED TO IN (1) AND (2) TOGETHER BEING REFERRED TO AS "RELEVANT PERSONS"). THE INFORMATION REGARDING THE SALE SET OUT IN THIS ANNOUNCEMENT MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS ANNOUNCEMENT RELATES IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS.

No prospectus or offering document has been or will be prepared in connection with the Sale. Any investment decision to buy securities in the Sale must be made solely on the basis of publicly available information. Such information is not the responsibility of and has not been independently verified by the Company or by Stifel Nicolaus Europe Limited (trading as Keefe Bruyette & Woods) or any of their respective affiliates.

1.    Introduction

Arbuthnot has today announced the conditional sale (the "Sale") of 6,000,000 ordinary shares in Secure Trust (the "Sale Shares"), representing 33.0 per cent. of Secure Trust's existing Issued Share Capital to institutional investors at a price of 2500 pence per Sale Share (the "Sale Share Price").

The Sale will reduce the Company's interest in Secure Trust to 18.9 per cent. of Secure Trust's Issued Share Capital and will generate gross cash proceeds of £150.0 million for Arbuthnot (£148.0 million net of expenses). The Company intends to use this capital to accelerate the growth of Arbuthnot and its subsidiaries (the "Group" or "Arbuthnot Group"), including the private and commercial banking business within Arbuthnot Latham & Co., Limited, as well as to invest in and develop over time other businesses in accordance with the Company's strategy. As the Sale is treated under Rule 15 of the AIM Rules as a fundamental change to the business of the Company, the Sale is conditional upon approval of the Resolution by Shareholders at the General Meeting convened for 11:00a.m. on 14 June 2016, the notice of which will be set out in Part III of the Circular. In addition the Sale will be subject to the satisfaction or waiver of certain customary conditions under the Block Trade Agreement.

2.    Background to and reasons for the Sale

The Company

The Arbuthnot Group is engaged in providing banking and financial services. The Company, along with its subsidiaries, operates in two segments: retail banking and private banking. The retail banking segment comprises the Company's interest in Secure Trust. The private banking segment comprises the Company's wholly owned subsidiary, Arbuthnot Latham & Co., Limited.

Secure Trust

Secure Trust is a longstanding established UK bank, having been incorporated in 1954. Its core business is to provide banking services, including a range of lending solutions and savings products. Secure Trust's diversified lending portfolio currently focuses on consumer finance (including unsecured personal loans, motor and retail finance) and business finance (including asset finance, commercial finance and real estate finance). Its lending is almost entirely funded by customer deposits, with substantially no exposure to wholesale funding.

In 2011 Secure Trust was admitted to trading on the AIM market of the London Stock Exchange, as a result of which the Company's interest in Secure Trust was reduced to 75.5 per cent. of its issued share capital.

In 2012 Secure Trust issued £20 million of new ordinary shares of which the Company subscribed to approximately £5 million and which resulted in the Company's shareholding in Secure Trust being reduced to 70.7 per cent.

In 2012 and 2013 Secure Trust acquired the Everyday Loans Group Limited ("ELG"), the V12 Group and the business of Debt Managers.

In December 2013 the Company sold 580,000 Secure Trust shares, following which the Company's interest in Secure Trust was reduced to 67 per cent.

In July 2014 Secure Trust issued c.£50 million of new ordinary shares and the Company sold c.£25 million Secure Trust shares as part of the same placing, following which the Company's interest in Secure Trust was reduced to 53.3 per cent.

In November 2014, Secure Trust's management exercised share options, following which the Company's interest in Secure Trust was reduced to 51.9 per cent.

In December 2015, Secure Trust agreed to the conditional sale of its branch based non-standard consumer lending business, ELG for a total consideration and debt repayment of £235 million resulting in an expected post tax profit on sale of c.£115 million. The sale of ELG completed on 13 April 2016.

At 31 December 2015 Secure Trust's consolidated total assets were £1,247.3 million. Secure Trust generated a profit before tax of £25.2 million in 2015 (not including profit for the period from discontinued operations of £9.4 million relating to ELG). The profit on sale of ELG will be recognised in 2016.

Secure Trust has announced its intention, conditional on completion of the Sale, to commence a process to seek the admission of its ordinary shares to the premium listing segment of the Official List and to trading on the main market for listed securities of the London Stock Exchange.  As part of the intended move to the main market Secure Trust will address its Corporate Governance structure and Sir Henry Angest, non-executive Chairman of Secure Trust and Chairman and Chief Executive Officer of Arbuthnot has signalled his intention to commence a search for a new independent non-executive Chairman of Secure Trust.  

Arbuthnot Latham & Co., Limited

Arbuthnot Latham & Co., Limited ("Arbuthnot Latham & Co.") conducts a private banking business, which comprises current accounts, deposit accounts, loans, overdrafts and foreign exchange and wealth management, which comprises discretionary wealth management and financial planning.  On 14 April 2016, Arbuthnot Latham & Co. appointed Ian Henderson as its Chief Executive Officer.

In the latter part of 2015, Arbuthnot Latham & Co. commenced an initiative to build a wider commercial banking business, initially driven by client demand to provide banking services for the corporate structures of entrepreneurial clients in the media sector. Arbuthnot Latham & Co. intends to broaden the initial focus and develop its services for clients in the commercial real estate and also the professional services sectors. The business has also invested in improving its infrastructure, moving into new offices in 2015 and is in the process of implementing a new banking system.

Rationale for the Sale

At the time of Secure Trust's admission to trading on AIM in November 2011, the Company indicated that over time it would be willing to see its interest in Secure Trust further diluted to allow Secure Trust to grow as the opportunities arose, in an appropriate way, to enhance value for all Shareholders. The growth of Secure Trust in the last four and half years has been substantial, and the Company believes that now is the appropriate time to reduce its holding in Secure Trust to a non-controlling position, in order to broaden the range of strategic options available to Secure Trust.  In addition, the Board believes there are opportunities available to Arbuthnot to use the proceeds of the Sale as set out below.

Secure Trust's special dividend

Arbuthnot has also been informed by Secure Trust that the special dividend of 165 pence per Secure Trust ordinary share relating to the sale of ELG, which was conditionally announced on 17 March 2016 (the "Special Dividend"), is not expected to be declared until after completion of the Sale. The record date of the Special Dividend is also expected to be after the Sale has completed and accordingly, assuming the Sale completes, the Special Dividend relating to the Sale Shares would be received by the holders of the Sale Shares at the record date for the Special Dividend and not Arbuthnot. The Sale Shares rank pari passu in all respects with the Secure Trust ordinary shares.

3.    Use of proceeds from the Sale

The Company intends to use the proceeds and capital generated from the Sale to support the growth of its Group, including the private and commercial banking business within Arbuthnot Latham & Co., Limited, as well as to invest in and develop over time other businesses in accordance with the Company's strategy.

4.    Financial effect of the Sale 

Following the reduction of Arbuthnot's holding in Secure Trust to 18.9 per cent of Secure Trust's Issued Share Capital, Secure Trust will no longer be a fully consolidated subsidiary in the financial statements of the Arbuthnot Group, but will instead be treated as an associated undertaking. This will require Arbuthnot to record within its comprehensive income statement, its proportionate share of Secure Trust's profit after tax. The Company will continue to receive dividends from Secure Trust in respect of its retained shareholding in Secure Trust and will continue to benefit from the attractive growth potential of Secure Trust through that shareholding.

Following the completion of the Sale of Arbuthnot's investment in Secure Trust it is expected that Secure Trust will be presented in the Group's balance sheet as an investment in associated undertakings, initially recognised at fair value and then going forward adjusted to include the proportionate share of Secure Trust's profit after tax.

As a result of the deconsolidation of Secure Trust, Arbuthnot will be required to recognise in its comprehensive income statement any gains it makes from the sale of its holding in Secure Trust. The impact of the Sale is expected to generate a profit before tax of £141.2 million for the Group Holding Company, before expenses relating to the Sale. However, when this transaction is consolidated into the full year financial results of the Arbuthnot Group for the year ending 31 December 2016 it will result in a profit before tax of £110.3 million. The gain is expected to be free from tax but further guidance on this matter will be sought from HMRC in the normal course of dealing with the tax affairs of the Arbuthnot Group.

It is anticipated that, in due course, the regulatory returns of Arbuthnot will also require Secure Trust to be de-consolidated and instead the remaining investment in Secure Trust will be considered a significant investment in a financial sector entity and will be subject to the appropriate capital deductions. As a result of the Sale the Group's surplus regulatory capital is expected to increase by approximately £94.5 million.

5.    Current Trading of Arbuthnot

The Company announced its full year results for the financial year ended 31 December 2015 on 17 March 2016, reflecting a record Group profit before tax of £34.2 million, including the results of ELG, a 52 per cent. increase on the prior year. As at 31 December 2015, Arbuthnot Latham & Co's total assets were £1,004.5 million (2014: £699.5 million) with customer loan balances of £619 million (2014: £537 million) having originated £250 million of new loans during the period, an increase of 45 per cent. on the previous year and a new record. Arbuthnot Latham & Co reported profits before tax of £6.0 million for 2015, an increase of 65 per cent. year on year.

On 5 May 2016, the Company announced the following trading update, in relation to the Group (including Secure Trust):

"The Group has had a good start to the year with overall lending volumes higher than last year and at the end of the first quarter, customer loan balances have increased by more than 30 per cent. compared to the prior year. The completion of the sale of ELG on 13 April 2016 has generated a substantial profit which has further strengthened the Group's capital and liquidity resources. The Group will continue to invest these resources in its on-going businesses and we remain confident of making good progress during the remainder of the year."

6.    Relationship Agreement and Services Agreement

The Company entered into the Relationship Agreement with Secure Trust at the time of Secure Trust's admission to trading on AIM, which governs certain aspects of the relationship between the Company and Secure Trust. The terms of the Relationship Agreement cease, inter alia, should Arbuthnot hold less than 50 per cent. of the voting rights attached to the ordinary shares in Secure Trust. Following completion of the Sale, the Company will hold less than 50 per cent. of the voting rights attached to the ordinary shares in Secure Trust and therefore the Relationship Agreement will be terminated automatically.

As long as the Company holds ten per cent. or more of the issued share capital of Secure Trust and is therefore required to be an approved controller under the applicable regulatory regime, the Company would expect two directors of Secure Trust to be nominees of the Company.

The Company also has the Services Agreement with Secure Trust which does not change as a result of the Sale but will remain in place until such time as the Company and Secure Trust agree that it should be terminated or amended.

7.    Summary of the Sale

The Company has agreed, subject to Shareholder approval and the satisfaction or waiver of certain customary conditions in the Block Trade Agreement, to dispose of 6,000,000 Sale Shares, representing 33.0 per cent. of Secure Trust's Issued Share Capital, to institutional investors, to generate proceeds, net of estimated expenses, of £148.0 million at the Sale Share Price. The Sale Share Price represents a discount of 10.7 per cent. to the closing market price of 2800 pence per Ordinary Share on 26 May 2016.

The Sale is not being underwritten.

8.    General Meeting

At the General Meeting, a Resolution will be proposed to approve the Sale. The Notice of General Meeting, which is to take place at 11:00 a.m. on 14 June 2016, will be contained in the Circular.

The Resolution is to be proposed as an ordinary resolution and will be passed if more than 50 per cent. of the votes cast are in favour, as is expected to be the case having regard to the irrevocable undertaking from Sir Henry Angest to procure that the votes pertaining to his 55.08 per cent. beneficial holding in Arbuthnot are cast in favour of the Resolution. 

9.    Recommendation

The Directors consider the Sale to be in the best interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend that Shareholders vote in favour of the Resolution to be proposed at the General Meeting, as they intend (and which Sir Henry Angest has irrevocably undertaken to procure) to do in respect of their own beneficial holdings of Ordinary Shares, totalling 8,267,600 Ordinary Shares, representing approximately 55.53 per cent. of the 14,889,048 shares eligible to vote.