IAS 10 paras 21, 22(b) (e), post balance sheet administration of major subsidiary, restructuring, pro-forma

Mothercare plc – Half year report – 12 October 2019

Industry: retail
15 Post balance sheet events
Administration of Mothercare UK Limited and Mothercare Business Services Limited
On 4 November 2019, Mothercare plc announced a Notice of Intent to appoint Administrators to Mothercare UK Limited, the main trading subsidiary of the Mothercare plc Group.
On 5 November 2019, PricewaterhouseCoopers LLP (“PwC”) were appointed as administrators of Mothercare UK Limited, and Mothercare Business Services Limited – the shared services operation for the Mothercare plc Group.

Transfer to Mothercare Global Brand Limited
On 4 October 2019, Mothercare Global Brand Limited, a fully-owned subsidiary of Mothercare plc, was incorporated in the United Kingdom.
On 5 November 2019, after Mothercare PLC had appointed PwC as administrators of the two above subsidiaries, an agreement was entered into such that Mothercare Global Brand Limited, purchased the ‘Mothercare’ brand, contracts Mothercare UK Limited held with its incumbent franchise partners, and certain assets from PwC in exchange for certain liabilities including, but not limited to, two s75 defined benefit pension scheme liabilities.

As a condition of this transfer there are terms contained in the transfer agreement which stipulate that cash generated through the administration process will be used to repay the Group’s Revolving Credit Facility; this was therefore subsequently de-recognised. The Group has a commitment to pay additional consideration to PwC in the event that there is any shortfall otherwise preventing PwC from repaying the secured creditors in full.

The assets acquired by Mothercare Global Brand Limited were limited to certain items of property, plant and equipment, and trade debtors. All inventories held at the reporting date, as well as all UK store leases, were not included in the transfer to Mothercare Global Brand Limited, with control of these assets being lost through the administration.

Post balance sheet, operations included in the reportable segments of ‘UK’ and ‘Business Services’ were discontinued.

Issue of share capital and convertible unsecured lending
An equity placing was made on 5 November 2019, consisting of 32,359,450 ordinary 1p shares at 10p each, and raising gross proceeds of £3.2 million.

The Group’s broker Numis has underwritten an amount of up to £20.0 million for an optional equity raise in January 2020.

On 14 November 2019, four shareholders signed agreements with Mothercare plc to provide unsecured lending in the form of a loan, containing the option for equity conversion at the election of the lenders, thereby raising total finance of £5.5 million. Simultaneously, the pre-existing shareholder loan agreements, which had been signed on 17 May 2018, were impacted such that the conversion price, previously 19 pence, was amended to 10 pence – this resulted in an increase in the value of the embedded derivative.

Proforma view of the continuing business
The following proforma shows what the estimated theoretical impact of the above post balance sheet events would have been, if they had occurred on 12 October 2019.

The approach used for the proforma assumes that the transfer of trade, assets and liabilities to Mothercare Global Brand Limited was a common control transaction and therefore scoped out of IFRS 3. As IFRS 3 does not provide specific accounting guidance, the Group have looked to the merger accounting principles as prescribed by FRS 102.

Information contained in this proforma is intended to be illustrative, and is provided due to the significant post balance sheet changes in the Group composition. All numbers are provisional and will be reviewed as the accounting for the transaction is completed in full.