At the time of the appointment of the current Board on 3 October 2012, the Victoria Directors made it clear that they wished to directly link the performance and reward of key personnel to the creation of wealth for shareholders. This link has been encouraged, and is supported, by a significant number of private and institutional shareholders who supported the appointment of the Board. The Directors indicated that they would work with the Company's advisers to design an appropriate value creation structure that is completely transparent and totally aligned to the creation of wealth for all shareholders.
Following discussions with the Company's professional advisers, the Company proposes to enter into a contract for differences (the "Contract") with Mr Geoff Wilding. The Contract is intended to ensure that Mr Wilding is encouraged to generate significant value for all shareholders and is structured so that he will only benefit financially from the Contract after shareholders have received a substantial, near term return from their shareholdings.
Furthermore, to participate in the value creation structure, Mr Wilding is required to pay a non-refundable premium of £20,000 to the Company as a condition of entering into the Contract, which is intended to reflect the market value of the Contract, and he is exposed to the risk of being required to make a further payment to the Company of up to £100,000 under the Contract in certain circumstances if shareholder value (as defined in the Contract) is depleted.
A circular (the "Circular") containing full details of the proposal and the Contract, which is subject to the approval of shareholders, is being posted to shareholders and will be available on the Company's website. The following paragraphs contain some of the details contained in the Circular:
The Board's Strategy
The Board's strategy for the Company has the following key objectives:
Growth- The Board's strategy is to grow the Company - both in the UK and Australia. No strategic opportunity is being ruled in or out. In particular, strong opportunities exist in Australia where Mr Wilding's knowledge and expertise will be especially helpful.
Productivity improvement- Based on comparative analysis, the Board believes there are significant opportunities to improve productivity in some parts of the business.
New opportunities- The board understands where the high growth opportunities are in the markets in which Victoria operates and where Victoria is missing out. The Board plans to reposition Victoria to take advantage of these high growth areas.
Dispose of non-core and underperforming assets- Certain low yield and/or non-core assets will be sold to free up capital to invest into more productive opportunities and improve returns to shareholders.
Working capital management- The Directors consider that Victoria has too much of its resources tied up in working capital. The Directors have already taken action to improve the Company's management of working capital.
The Directors believe that adopting this strategy and achieving the objectives which emerge from it will maximise the creation of value for all Shareholders.
Current Trading
Since their appointment to the Board in October, it has become apparent to the Directors that Victoria is facing some real challenges. The Group is experiencing strong economic headwinds in each of its major markets, has a cost structure that is too high for its current level of business, limited competition advantages, excessive debt levels in the UK, surplus production capability (in a sector with abundant surplus production capacity) and a considerable over supply of stock in the UK.
These issues are reflected in the disappointing results for the 26 weeks ended 29 September 2012 announced in November. However, Victoria is well known for producing superb quality carpets, has an enviable reputation for service, and employs some talented and committed people. Since their appointment, the Directors have begun to build on these foundations to address the key issues facing the business.
The Contract
Following discussions with the Company's professional advisers, the Board believes that the proposed contract is an appropriate way of aligning the interests of Mr Wilding, as the key executive responsible for putting the Company's strategy into effect and achieving the key objectives which emerge from the strategy, with the interest of all shareholders.
A significant number of shareholders have expressed to the Board a desire to see shareholder value and returns generated in the near term. The proposed Contract reflects these wishes and requires substantial returns to be made to shareholders in the next two years before the Contract has any value to Mr Wilding.
At least £3 per Share must be returned to shareholders within the next two years before any value can accrue to Mr Wilding under the Contract. Victoria's share price has exceeded £3 per share for only a short period (between December 2011 and April 2012) over the past five years and for much of that period (January to March 2012) the Company was in a formal sale process.
That process did not result in any offer being made for the Group. If at least £3 per share is returned to shareholders within the next two years, Mr Wilding will begin to accrue value under the Contract and will be entitled to a share of additional shareholder value, the quantum of which is determined by reference to the amount by which total shareholder value exceeds a hurdle, subject to overall caps on the quantum of the payment.
Full details of this formula and how Mr Wilding's value is determined are contained in the Circular. Since Mr Wilding's share of further shareholder value increases as more value is created for shareholders, and given the investment required to be made by him in the Contract and the risk of loss, his interests are directly aligned with shareholders. The Board believes that in creating this direct and transparent link between the value of the Contract and shareholder value, shareholders stand to benefit most from Mr Wilding's relevant experience, commitment and skills.
The Contract will comprise a related party transaction for the purposes of the AIM Rules. Neither Mr Wilding, who is interested in the proposed Contract as a party to it, nor Alexander Anton, who may benefit under the Contract by personal arrangement with Mr Wilding, has participated in the board's consideration of the proposed contract. Mr Andrew Harrison, as the sole independent Director, having consulted with Seymour Pierce Limited, the Company's nominated adviser, considers that the terms of the Contract are fair and reasonable insofar as its shareholders are concerned.
