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This announcement contains the text of a letter from the Chairman of Touchstone Innovations plc that is being despatched to all shareholders of Touchstone Innovations plc and persons with information rights with respect to Touchstone Innovations plc.
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own financial advice immediately from your stockbroker, bank manager, solicitor, accountant, fund manager or other appropriate independent financial adviser authorised under the Financial Services and Markets Act 2000, as amended ("FSMA") if you are resident in the United Kingdom or, if not, from another appropriately authorised independent financial adviser.
28 June 2017
Touchstone Innovations plc
Chairman's letter to shareholders
I wrote to you on 1st June 2017 to explain the chronology of events and the reasons which resulted in our rejection of IP Group plc's ("IP Group") approach to the Board of Touchstone Innovations plc ("Touchstone") regarding a possible combination of the two businesses (the "Possible Offer").
On 20th June 2017, IP Group announced a firm intention to make an offer for the entire issued and to be issued share capital of Touchstone (the "Offer") (the "Firm Intention Announcement").
IP Group has received support for the Offer from three of our largest shareholders (Invesco Asset Management ("Invesco"), Woodford Investment Management LLP ("Woodford") and Lansdowne Developed Markets Master Fund LLP ("Lansdowne") (together the "Large Shareholders") in respect of 74.3% of Touchstone's shares. These three Large Shareholders also own approximately 50% of IP Group.
As I noted in my letter 1st June 2017, I first received a letter from IP Group setting out the indicative non-binding terms for a recommended all-share merger of Touchstone and IP Group on 4th April 2017. Since that time a possible transaction has been described by IP Group variously as a "merger", a "takeover" and a "combination". Notwithstanding these differing descriptions, the Offer represents an unwelcome hostile takeover offer.
During the discussions that the Board of Touchstone ("your Board") has had with IP Group since April, we have raised a number of topics that we believe would need to be addressed in order for a combination to be capable of being recommended by your Board. These included the need for agreement on valuation, people, strategy and business model, and portfolio balance.
Having considered the Firm Intention Announcement carefully, your Board notes that the Offer does not address the concerns that your Board had surrounding the Possible Offer and that consequently the Offer is also not capable of recommendation by your Board.
I address each of these topics below.
1. Valuation (and terms)
The financial terms of the Offer remain unchanged from those of the Possible Offer, and your Board continues to believe that these fundamentally undervalue Touchstone on a standalone basis and do not fully reflect:
- the value in Touchstone which has been built up over 10 years;
- the breadth and diversity of its portfolio (some 90% of the value of which lies in unquoted companies);
- the potential of its therapeutics assets, which are attracting interest from leading pharmaceutical companies (as illustrated by PsiOxus and Crescendo which have recently signed significant partnering deals with BMS and Takeda respectively);
- its unique access to opportunities arising from Imperial College London and UCL, as well as its close relationships across the 'Golden Triangle';
- its close relationships with major pharmaceutical companies, as evidenced by the Apollo Therapeutics joint venture alongside GSK, AstraZeneca, and Johnson & Johnson; and
- its relationships with co-investors and numerous other industry partners.
Based on the closing price of 134 pence per IP Group share on 19 June 2017 (being the last business day prior to the date of the Firm Intention Announcement), the Offer is stated to value each Touchstone share at 289 pence.
Your Board also notes that no premium is being offered for control.
The only consideration being offered to holders of Touchstone shares pursuant to the Offer is new IP Group shares. Whilst the Large Shareholders have all indicated their support for the Offer, they are already shareholders in IP Group. Consequently, the other Touchstone shareholders (the "Remaining Shareholders") are not all in the same position as the Large Shareholders.
Your Board notes that no cash alternative is being offered.
The Remaining Shareholders are left in a difficult position by the Offer. IP Group has indicated that if it receives acceptances under the Offer in respect of, and/or otherwise acquires, 90 per cent. or more of the Touchstone shares, it intends to exercise its rights pursuant to the Companies Act to squeeze out the remaining Touchstone shares in respect of which the Offer is not accepted. Furthermore, IP Group has indicated that if it acquires Touchstone shares carrying 75 per cent. of the voting rights of Touchstone it intends to procure the making of an application by Touchstone for the cancellation of admission of the Touchstone shares to trading on AIM.
Bearing in mind that IP Group has received support from the Large Shareholders in respect of 74.3 per cent. of the Touchstone shares, the Remaining Shareholders are being offered a choice between accepting IP Group shares or retaining Touchstone shares that will not be publicly traded, if the Offer becomes wholly unconditional.
Whilst the Large Shareholders have all indicated their support for the Offer, your Board's view is that the terms of the Offer are not a fair deal for the Touchstone shareholders as a whole. The Remaining Shareholders (who constitute the vast majority by number of shareholders on the Touchstone share register) include Imperial College London, the founder of Touchstone.
An important test for us throughout the discussions was whether the proposed combined organisation was one where our staff, particularly our ventures investment team but also our technology transfer office, would have been attracted to stay.
Your Board notes the commitments by IP Group in the Firm Intention Announcement in relation to people and is pleased that IP Group recognises the importance of the retention of Touchstone's employees, the key individuals amongst whom we strongly believe are important to the future success of any combined group. In particular, your Board notes the intention to maintain stable headcount in both companies' investment divisions for a minimum of 12 months.
Over the last 10 years, Touchstone has been able to attract talented employees into its venture investment team, based around the clarity and focus of its positioning. The members of this team are in turn creating a high-quality network of partners, co-investors and entrepreneurs from which Touchstone and its portfolio companies derive significant benefit. It is the collective skills, knowledge and experience that resides in these people that we believe is crucial to future success.
In the Firm Intention Announcement, IP Group stated that:
"IP Group attaches great importance to the skills, knowledge, and expertise of the existing management and employees of Touchstone and expects that they will contribute to the future success of the Combined Group. Accordingly, following completion of the Offer, IP Group will ensure that existing contractual and statutory employment rights of the employees of Touchstone are fully safeguarded and that Touchstone continues to comply with its pension obligations."
Whilst your Board welcomes IP Group's recognition of the importance of the existing Touchstone team, it notes that these statements do no more than comply with minimum legal obligations.
Our people are highly sought after - indeed some have been already been approached for roles in other organisations - but our concern was not just about retaining people across our ventures investment team and our technology transfer office. We are also concerned to ensure that any combined entity remains able to attract and retain talented employees.
The Firm Intention Announcement states that:
"We had a number of constructive conversations with the management of Touchstone, in particular around building on the Combined Group. Unfortunately, we could not come to an agreement with the Touchstone Board."
We have stressed to IP Group from the outset the importance of agreeing the structure of the organisation that would retain and build on the best of both companies, if a merger were to be capable of being recommended. We have engaged with IP Group, but have not been able to reach a conclusion to this objective.
It would not be difficult to infer from the quote above that the Touchstone management were in favour of the IP Group proposals, but that IP Group had been unable to persuade the Touchstone non-executive directors. However, this inference would not be correct. The three executive directors of Touchstone are Board members, and at every meeting where the overall structure of the organisation has been discussed the view of your Board has been unanimous.
3. Strategy and business model
In the Firm Intention Announcement IP Group states that "we believe that the combination of IP Group and Touchstone Innovations creates an international leader in IP commercialisation and a business that is greater than the sum of the parts."
Your Board considers there to be significant differences between the two companies, which in part derive from their very different origins, with Touchstone being born out of Imperial College London's Technology Transfer Office ("TTO") and IP Group being born out of Beeson Gregory, a stockbroking firm.
Touchstone's focus has been on building companies funded by venture capital and corporate venture syndicates in the unquoted domain. IP Group has used the public markets more frequently than Touchstone to encourage investment in its assets.
Furthermore, Touchstone's focus on nurturing the intellectual property from Imperial College London, and the academic communities of Cambridge University, Oxford University and UCL (the "Golden Triangle"), differs from IP Group's stated broader international approach.
Given these and other differences, your Board believes that, without an agreed and clear approach to strategy, the benefits of both approaches may be lost or diluted rather than maintained or enhanced. Your Board is confident in Touchstone's stand-alone strategy.
4. Portfolio balance
The Offer document states that:
"The Offer will allow Touchstone's shareholders to continue to benefit from exposure to Touchstone's investments and, through IP Group, gain access to its portfolio."
As noted above, Touchstone shareholders will only be able to receive IP Group shares as consideration and, since the Offer is a hostile offer, Touchstone has been unable to carry out any due diligence on the IP Group portfolio. This has made forming any view on the value of the IP Group portfolio difficult.
However, there is a concentration risk arising from the relative size of Oxford Nanopore Technologies ("ONT") as against the balance of IP Group portfolio. A number of commentators have noted that one of the benefits for IP Group in proceeding with the Offer is that it will reduce IP Group's reliance on its investment in ONT. For Touchstone shareholders, the reverse is true.
This situation has now been live for nearly three months and your Board believes that it has had a detrimental effect on new business and on our relationships with co-investors. Morale is being undermined, recruitment plans are on hold and our employees are uncertain about their future.
Your Board has reviewed the Offer carefully and, after taking all the reasons set out above into account and receiving the advice of our advisers, continues to be of the view that it cannot recommend the Offer on its current terms.
Your Board notes that IP Group has said in the Firm Intention Announcement that it remains open to engagement at any point regarding the Offer. If IP Group were to seek to improve the terms of the Offer, then your Board would similarly be open to engagement to discuss any improved terms.
Your Board advises the Company's shareholders to take no action in relation to the Offer. Further announcements will be made in due course as appropriate and your Board will provide its formal views on the Offer to shareholders no later than 14 days after publication of IP Group's offer document.
Chairman, Touchstone Innovations
Touchstone Innovations plc
Tel: +44 20 3727 2030
J.P. Morgan Cazenove
(Financial Adviser and Joint Corporate Broker to Touchstone
Tel: +44 20 7742 4000
RBC Capital Markets
(Joint Corporate Broker to Touchstone Innovations plc)
Tel: +44 20 7653 4000
Adrian Duffield /Melanie Toyne-Sewell/Chantal Woolcock
Tel: +44 20 7457 2020
J.P. Morgan Limited, which conducts its UK investment banking business as J.P. Morgan Cazenove ("J.P. Morgan Cazenove"), is authorised and regulated in the United Kingdom by the Financial Conduct Authority. J.P. Morgan Cazenove is acting as financial adviser exclusively for Touchstone and no one else in connection with the matters set out in this announcement and will not regard any other person as its client in relation to the matters in this announcement and will not be responsible to anyone other than Touchstone for providing the protections afforded to clients of J.P. Morgan Cazenove or its affiliates, or for providing advice in relation to any matter referred to herein.
RBC Capital Markets is the business name used by RBC Europe Limited, which is authorised in the United Kingdom by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority ("FCA") and the PRA and is a subsidiary of the Royal Bank of Canada. RBC is acting as Corporate Broker to the Company.
This announcement (including information incorporated by reference) may contain statements which are, or may be deemed to be, "forward-looking statements".
All statements, other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of the management of Touchstone about future events, and are therefore subject to risks and uncertainties which could cause actual results, performance or events to differ materially from those expressed or implied by the forward-looking statements. The forward-looking statements contained in this announcement include statements relating to the expected effects of the transaction and other statements other than historical facts. Often, but not always, forward-looking statements can be identified by the use of forward looking words such as "plan", "expect", "budget", "target", "aim", "scheduled", "estimate", "forecast", "intend", "anticipate", "assume", "hope", "continue" or "believe", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "should", "would", "might" or "will" be taken, occur or be achieved. By their nature, forward-looking statements involve risks (known and unknown) and uncertainties (and other factors) that could cause actual results to differ materially form those suggested by them. Much of the risk and uncertainty relates to factors that are beyond the relevant companies' or directors' ability to control or estimate precisely, such as future market conditions and behaviours of other market participants or changes in tax rates.
Each forward-looking statement speaks only as of the date of the announcement. No representation, assurance or guarantee is provided that the occurrence of the events expressed or implied in any forward-looking statements in the information will actually occur. All forward-looking statements contained in the information are expressly qualified in their entirety by the cautionary statements contained or referred to in this disclaimer. Readers are cautioned not to place undue reliance on these forward-looking statements. Other than in accordance with their legal or regulatory obligations (including under the Takeover Code), Touchstone, the directors of Touchstone, its subsidiaries and subsidiary undertakings are under no obligation and undertake no obligation, and expressly disclaim any intention or obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The directors of Touchstone accept responsibility for the information contained in this announcement (including expressions of belief) and, to the best of the knowledge and belief of the Touchstone directors (having taken all reasonable care to ensure that such is the case), the information contained in this announcement is in accordance with the facts and does not omit anything likely to affect the import of such information.
In accordance with Rule 26.1 of the Code, a copy of this announcement will be available at www.touchstoneinnovations.com by no later than 12 noon (London time) on the business day following this announcement. The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.
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