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Real Good Food raises £15.5m for expansion plans

Published 30 June 2017

Real Good Food has raised a total of £15.5m of expansion capital from a new investor and two existing shareholders in the form of both debt finance and new equity.

This new injection of capital will be raised by way of the issue of a secured loan note instrument of up to £8.75 million (the "Loan Notes") from funds managed and controlled by Downing LLP ("Downing"). The Loan Notes are redeemable in full after three years.

In addition to subscribing for the Loan Notes, funds managed and controlled by Downing have committed to subscribe for shares in Real Good Food of 10% of the issued share capital at a price of 35p per share raising a further £2.75 million (together, the "Expansion Capital").

The Company has also secured two £2.0 million secured one year term loan facilities from existing shareholders of the Company, Napier Brown Holdings Limited and Omnicane Limited (the "Shareholder Loans") in order to maintain an appropriate level of working capital in the business.

Expansion Plan

In order to achieve its 2018 budget, and also to take advantage of further growth opportunities, the Company has decided to embark upon an expansion plan at two of its subsidiary companies, Renshaw and Haydens (the "Expansion Plan").

The two main areas of investment are at Renshaw's Crown Street site in Liverpool and Haydens in Devizes. Both these businesses are seeing significant increases in forward demand; this has been driven by international expansion and the launch of a mainstream retail brand at Renshaw and the acquisition of two major new retail customers at Haydens.

At Renshaw, the Company will invest approximately £7 million in expanding capacity by over 50% as well as the installation of new soft icings and discs production lines which support the strategy to broaden the offering to mainstream users.

At Haydens, the acquisition of two new major customers has put short term pressure on operational capacity and the Company will therefore invest approximately £8 million in order to reconfigure site operations, including blast freezing capability and the installation of a new, automated Yum Yum line.  This is expected to take site capacity from its existing level of up to approximately £30 million revenues to over £50 million of revenues.

Both of these investments, as well as increasing capacity, bring significant benefits in efficiency, upskilling the workforce and mitigating the impact of the forthcoming Living Wage increases.

The majority of the Expansion Plan is expected to be completed by the end of September 2017 and is budgeted to cost approximately £15 million in aggregate, with the additional capacity provided by the Expansion Plan expected to commence delivering significant financial returns from the financial year commencing 1 April 2018.

Funding the Expansion Plan

The Company investigated various options for raising investment capital via its existing lenders in order to fund the Expansion Plan, but the Board has concluded that in order to meet its current desired investment strategy and timelines it needed to accelerate the deployment of capital and so deemed it necessary to seek alternative third party funding. The Company's existing debt arrangements comprising Invoice Discounting ("ID") and asset facilities with Lloyds Bank and ABN Amro remain unaffected. The growth of export operations, which are not included in Lloyds' ID facility, with the consequent requirements for stock has increased short term working capital requirements.

The Expansion Plan will therefore be funded by a combination of the Expansion Capital and existing cash resources of the Company.  In addition to the funding required for the Expansion Plan, the Directors consider it appropriate to raise the Shareholder Loans in order to provide additional working capital headroom for the Company.

The New Investment

The Board concluded that in order to meet its current and longer-term investment strategy and to enable it to create further shareholder value, it required additional investment capital to fund growth.  After exploring a number of options, the Board is delighted to have found a long term strategic partner in Downing, who are committed to the longer term future of the business, and who can provide capital to meet the needs of the business in a flexible, bespoke way through a combined debt and equity solution.

The Company is therefore pleased to announce that Downing is providing the Loan Notes.  The Loan Notes are available for drawdown in two tranches; with initial drawdown of with £7.25 million and the balance capable of drawdown following the issue all the shares which Downing has committed to subscribe for as detailed below.  The Loan Notes have an interest rate of 6.5%, payable quarterly and are secured against the Company's assets, subject to an intercreditor agreement between each of Downing, Lloyds Bank plc, Lloyds Bank Commercial Finance Limited, Napier Brown Holdings Limited and Omnicane Limited.  There is also a 3% annual non utilisation fee to the extent that the Loan Notes are not fully drawn.

Additionally, Downing have been granted the right to appoint a new Non-Executive Director to the Board and hence the Directors are also delighted to appoint Judith Mackenzie to join them on the Board of the Company with immediate effect.

Additionally Downing has agreed to subscribe for 7,844,924 new ordinary shares of 2 pence each in the Company (the "New Shares") at 35 pence each (the "Placing Price") to raise gross proceeds of approximately £2.75 million (the "Placing"). The Placing Price represents a 4.1% discount to the  closing mid-market price of a Real Good Food share on 28 June 2017, being the last practicable day prior to this announcement and the New Shares will, when issued, represent 10% of the Company's overall issued share capital.

The Directors have authority to allot 3,500,000 of the New Shares based on existing authorities but the allotment of the balance (4,344,924) of the New Shares is conditional, inter alia, upon the Company obtaining approval of the Shareholders at a General Meeting to grant the Directors the authority to allot such Placing Shares, to be held on 21st July at 30 Portland Place, London W1B 1LZ (the "General Meeting").  A circular will be posted to shareholders shortly giving further detail on the reasons for the Placing and the use of proceeds in support of the resolution to be proposed at the General Meeting.  The Company has received irrevocable undertakings to vote in favour of the resolution to grant the Directors to allot the balance of the New Shares from certain shareholders in respect of their entire beneficial and direct holdings of existing ordinary shares of 2 pence each in the Company ("Ordinary Shares") totalling, 46,204,920 Ordinary Shares, and representing approximately 65 per cent of the existing ordinary share capital of the Company.

Accordingly, application will shortly be made for 3,500,000 New Shares to be admitted to trading on AIM ("Admission").  Admission is expected to be effective at 8.00am on Wednesday 5 July 2017.

Following Admission, the Company's issued share capital is 74,104,317 Ordinary Shares. The above figure of 74,104,317 may be used by shareholders as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in the Company under the FCA's Disclosure and Transparency Rules.

Shareholder Loans and Related Party Transaction

Pursuant to the terms of the Shareholder Loans, each of Napier Brown Holdings Limited and Omnicane Limited, both substantial shareholders of the Company, is providing a secured £2.0 million loan facility with identical terms and conditions, which is available immediately on a drawdown basis and supplements the Company's existing cash resources and banking facilities to provide additional working capital headroom.  The Company investigated various options for raising additional capital to provide further headroom but was unable to do so within the requisite timeframe or on terms that were agreeable to the Board.  The Shareholder Loans will incur a coupon at a rate equal to 6.5% per annum and, as each of Napier Brown Holdings Limited and Omnicane Limited are substantial shareholders of the Company and have Board representation, each of the Shareholder Loans is deemed to be a related party transaction pursuant to the AIM Rules for Companies.  The Company, Napier Brown Holdings Limited, Omnicane Limited and Downing, have agreed that, in the event of a repayment of the Shareholder Loans, 50% of the amounts repayable to the shareholders shall also be paid to Downing as a partial redemption of its Loan Notes.

Pieter Totté, David Newman, Christopher Thomas and Peter Salter, the Independent Directors of the Company, consider that, having consulted with the Company's Nominated Adviser, finnCap Ltd, the terms of the Shareholder Loans to be fair and reasonable insofar as the Company's shareholders are concerned.

Update on Trading

The Company intends to announce Final Results for the Year Ending 31 March 2017 in July and expects to report revenues of approximately £109 million and EBITDA of between £5.0 and £5.4 million, following the previously announced impact on its Food Ingredients Division of the volatile commodity markets and currency fluctuations as a result of the Brexit vote. Net Debt at the period end was £16.2 million. This figure was higher than previous expectations in part due to pre-payments on capital equipment for the Expansion Plan.

In the first nine weeks of the new financial period, the Company has experienced strong growth in revenues across all three of its operating divisions.

In the nine weeks to the 4th June 2017, sales were 15% up on the previous year in Cake Decoration, 9% up in Premium Bakery and 87% up in Food Ingredients following the Brighter Foods acquisition (like-for-like sales in Food Ingredients increased by 17%). EBITDA for the same period was 56% ahead of the previous year.

While the first half of the year is traditionally the Company's quietest period, trading to date is consistent with meeting the Board's expectations for revenue and EBITDA for the year ending 31st March 2018.

Pieter Totté, Executive Chairman of Real Good Food, commented:

"As we have already advised shareholders, we believe that there is a significant opportunity to invest in our operating subsidiaries to drive more efficiencies, customer growth and improve operating margins, which ultimately will accelerate the Company's organic growth.  We have already embarked upon this within our Cake Decorating division and are seeing positive results in order intake at Renshaw and Rainbow Dust.  The Board has taken the decision to raise the Expansion Capital on order to enable us to accelerate our investment programme into other divisions, including a major increase in capacity at our Haydens site within the Premium Bakery.

"We believe this is the first significant step in funding a major medium term investment programme which will secure our competitive position for the longer term and ultimately will drive future returns for shareholders."



Source: Company Press Release