KCOM Group PLC – Annual report – 31 March 2019
03 Critical accounting judgements and key sources of estimation uncertainty
The table below shows the judgements which have the most significant effect on amounts that are recognised in the accounts, and the assumptions and estimates at the end of the current reporting year that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
35 Subsequent events (extract)
Acquisition of KCOM Group PLC
On 24 April 2019, Humber Bidco Limited, a wholly-owned indirect subsidiary of Universities Superannuation Scheme Limited, announced a recommended cash offer for the entire issued and to be issued ordinary share capital of KCOM for 97.0 pence per share. On 3 June 2019, MEIF 6 Fibre Limited, a wholly-owned indirect subsidiary of Macquarie European Infrastructure Fund 6 SCSp (an investment fund managed by Macquarie Infrastructure and Real Assets (Europe) Limited), announced a recommended cash offer for the entire issued and to be issued ordinary share capital of KCOM for 108.0 pence per share. Both offers were to be effected by way of a Scheme of Arrangement.
As a result of there being a competitive situation, and in order to provide an orderly framework, the Takeover Panel ruled that the auction procedure set out in Appendix 8 of the Takeover Code would apply. The auction process ended on 12 July 2019 after which the KCOM board recommended unanimously the revised MEIF 6 Fibre offer of 120.3 pence per share.
The reconvened Court Meeting and General Meeting relating to the MEIF 6 Fibre offer took place on 26 July 2019 at which 99.48% and 99.52% respectively of shares voted were in favour of the Scheme. The Company obtained Court approval for the Scheme on 30 July 2019, which will see the Scheme become effective and the shares will be de-listed in early August 2019. An announcement will be made following the conclusion of this process.
Significant agreements – change of control
The following significant agreements contain provisions entitling the counterparties to exercise termination or other rights in the event of a change of control of the Company:
• Under our £180.0 million multi-currency revolving facility agreement dated 30 September 2016, the Company must notify Lloyds Bank PLC, the Agent of the agreement, within seven days of becoming aware of a change of control of the Company. Any bank or financial institution named within the facility agreement may then notify the Agent within seven days that they wish to cancel their commitments. The Agent must then give at least 21 days’ notice to the Company of this and all outstanding amounts due to that bank or financial institution will become immediately due and payable. For these purposes, a “change of control” occurs if any person or group of persons acting in concert gains control of the Company. At 31 March 2019, the Group had borrowings or £115.0 million.
• The Company’s share schemes, details of which are contained in the Remuneration report on pages 54 to 64, contain provisions which take effect in the event of a change of control, as a result of which options and awards may vest and become exercisable. The provisions do not entitle participants to a greater interest in the shares of the Company than that created by the initial grant or award under the relevant scheme. At 31 March 2019, the Group had 4,787,062 share options outstanding.
Strategic report – Managing risk in our business (page 26) (extract)
Viability Statement 2019
As in previous years, the Directors have assessed the prospects of the Group for a period of three years. Although certain aspects of the Group’s planning cycles take into account longer timeframes than this, the Directors have determined that, given the predictability of cashflows and the banking facilities currently in place, three years is the most appropriate period for this assessment.
The Group’s prospects are primarily assessed through the annual financial planning process which is led by the Executive Leadership Team with input from all relevant functions. In addition, the Board considers the Group’s strategy and long-term prospects more broadly than just this annual process, particularly in relation to the assets and the investment profile of the operations in our Hull & East Yorkshire segment.
When specifically assessing the viability of the Group, various scenarios and stress tests are performed. These consider severe but plausible scenarios which are aligned to the principal risks as identified in the Group risk register. Whilst it is impossible to foresee all risks (or take into account risks which are immaterial but could turn out to be significant) mitigation activities could be performed in these scenarios, for example reducing capital expenditure and discretionary spend or making changes to dividend payments.
The Directors have also considered the acquisition of KCOM by MEIF 6 Fibre (Note 35) as a potential viability scenario. Under this scenario it is the present intention that, under the current change of control agreement, MEIF 6 Fibre will facilitate the repayment by the Group of its existing debt facilities once the acquisition of KCOM is complete. In due course, after the acquisition of KCOM has completed, it is also the present intention that MEIF 6 Fibre will consider putting in place an appropriate capital structure for the business, which is likely to include new third party debt. This is likely to result in a short-term intervening period between the settling of existing facilities and the availability of new ones. The Group is cash generative and is able to manage its cash flows to meet its liabilities as they fall due. However, access to a modest working capital facility would likely be required to manage short-term volatility and seasonality in cash flows. The Directors have discussed this with MEIF 6 Fibre who have confirmed, subject to completion of the acquisition of KCOM, their present intention to replace the existing facilities and to support any short term working capital volatility and/or seasonality with the availability of required funds prior to new debt facilities being in place, with such support lasting for a period no shorter than 12 months from the date these annual report and accounts were approved.