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Carpet Choice & Carpet Court Merger Proposal. What do we want to achieve today? Allow you to gain an understanding of why we are considering a merger.

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Presentation on theme: "Carpet Choice & Carpet Court Merger Proposal. What do we want to achieve today? Allow you to gain an understanding of why we are considering a merger."— Presentation transcript:

1 Carpet Choice & Carpet Court Merger Proposal

2 What do we want to achieve today? Allow you to gain an understanding of why we are considering a merger Identify what matters, if any, remain to be resolved Vote on whether we should continue with the merger negotiations

3 NEWFURN FLOOR COVERINGS LTD ABN Manningham Road West, Bulleen, Victoria 3105 NON-BINDING BALLOT PAPER ON PROPOSED MERGER WITH CARPET COURT Please tick the appropriate box  Yes - Unconditional approval of the proposal   Yes, subject to - conditional approval of the proposal Conditions: ________________________________________   No – Reject the proposal 

4 How did we arrive at where we are today? Newfurn was established in 1959 Carpet Choice was formed in 1993 with just 17 stores We split from furniture in 1995 We considered the takeover of Solomons in 1996 We expanded nationally and trebled our turnover We attempted an outcome with Carpet One

5 Where do we stand today? We have grown to become market leader

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8 Where do we stand today? We have grown to become market leader Growth has slowed, and membership numbers are static, but still 30 to 40 below our needs We are the recognised leaders in our industry, both at store and office level We are strong and financially sound Many members are nearing retirement age

9 What challenges do we face in the future? Supplier dominance Ageing membership base Harvey Norman, Bunnings, Carpet Call New entrants (LCP)

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11 What challenges do we face in the future? Supplier dominance Ageing membership base Harvey Norman, Bunnings, Carpet Call New entrants (LCP) New retail formats Imports Shortage of sales staff and installers What is the ideal model?

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13 What questions have members raised? Making my competition better Losing my point of difference (branding and marketing) Impact on product profiles Cost to members Distraction of Central Office Membership Agreements Dual membership A worse deal from our suppliers Is there a financial risk? Losing control of our destiny Who has the final say about the merger?

14 What are the views of Phil Ruthven? Phil Ruthven, Chairman of IBISworld, has been a long and respected commentator on business success, retailing and cooperatives DVD

15 How did this dialogue with Court begin? Occasional discussion at Management and Board level for some years Last year, a joint committee was formed to more seriously explore the possibilities Confidentiality Agreements were signed by all Directors and Management of both groups We jointly appointed a business and strategic advisor which has provided the foundation for this presentation

16 Why would we want to do this? Two main reasons… 1.To strengthen our members’ position in both the short and long term at the expense of the rest of the competition 2.To position the group to deal with future strategic opportunities and threats, to ensure our longevity

17 What Strategic Opportunities exist? They fall into two categories… 1.Flooring related – grow and improve network, dominant market share, critical mass (inc marketing), possible new tiers, consider new formats, importing, logistical support structures 2.Non Flooring related – absorb other groups, property development, enter new business or retail markets - diversification

18 What’s in it for Members? Better buying prices Better product profiles Better margins and profitability Better goodwill when you sell your business Better service from a better resourced central office Better lifestyle and a greater sense of success from being part of the biggest and best

19 What’s in it for the Group? Around 25% market share giving us strength in numbers Lower central office costs per member Improve the Balance Sheet Easy entry into warehousing, if it is a benefit Savings and efficiencies in media buying Enhance services across all areas Meet competitive challenges and metro expansion More funds to expand and dominate in our market Funds to pursue strategic objectives Attract the best

20 What would it cost me as a Member? This will depend on what we agree to in respect to capital structures. All costs of undertaking the merger will be absorbed into group operating costs

21 What would it cost the Group? So far it has cost Choice approximately $60,000 Costs are being split 50/50 Estimated costs if we proceed are another $200,000 approximately for us, a little more for Carpet Court

22 How do the two Groups compare? Choice has a Business Development Team, offering training and retail support, whereas Court doesn’t Court has warehouses and staff to support and man them, Choice doesn’t Court imports, Choice doesn’t Choice is very disciplined on store presentation, Court isn't Staff structures are different and reflect above

23 How do the two Groups compare? AspectChoiceCourt Central OfficeOne in Melbourne – no warehouse National office and warehouse in Melbourne Office and IPL in Sydney Warehouse in Perth Directors7 elected from membership, one independent OfficesLeasedOwned (Melbourne) Leased (Sydney) CO Staff23 inc part timers26+ inc part timers

24 How do the two Groups compare? AspectChoiceCourt Retail Sales$270 million Net Assets approx. Paid Up Capital $2.5 million $484,000 $8.0 million $6.2 million Number of stores Choice Court Homeflair/unidentified Number of Members121180

25 How do the two Groups compare? Balance Sheet ItemChoiceCourt Current Assets$16,200,000$21,000,000 Non Current Assets$900,000$2,900,000 Total Assets$17,100,000$23,900,000 Current Liabilities$14,000,000$15,800,000 Non Current Liabilities$600,000$100,000 Less Total Liabilities$14,600,000$15,900,000 = Equity Issued Capital Retained Profits and Reserves $2,500,000 $500,000 $2,000,000 $8,000,000 $6,200,000 $1,800,000

26 How would the merger be achieved? Most likely, a Scheme of Arrangement (SoA) will be used A SoA is a friendly means of merging two companies Most likely a new company would be set up, which will then absorb both businesses A Scheme Booklet would be sent to all members detailing elements of merger ASIC and the Federal Court must approve the SoA Members are then asked to vote (75% must approve) Federal Court then grants final approval

27 Current Structure

28 Proposed Structure

29 Would there be equal shareholdings? Pre-merger there are different shareholdings Does this matter? Should the new group have Ordinary Shares and Preference Shares, to equalise Ordinary Shares? One member – one vote?

30 How would a new Group be governed? Members will control (one member, one vote)… –Election of Directors –Increases in Capital –Major Acquisitions –Changes to the Constitution (75% required) Directors will control… –Governance of the group via management –Strategies –Borrowings, profit distributions

31 Who would make up the Board of Directors? In the transition phase (around two years)… –4 Directors representing Carpet Choice –4 Directors representing Carpet Court –Three independent, non executive Directors, one of which would be Chairman In the longer term, it is recommended that the Board be reduced in numbers, but there be no less Independent Directors

32 Who would manage the Group? Choice has one GM, whereas Court has two, but they have specialist responsibilities We don’t have similar structures The Steering Committee will make the necessary decisions on the staff structure prior to the final member vote The central (head) office will be Melbourne based, and most likely a new site Some positions are obvious, others less so We envisage our senior managers will be part of the new group

33 Would both brands continue? The simple answer is YES, and both should be grown to their optimal store network Marketing and merchandising will remain as different as it is today We expect both brands will remain culturally apart, and mostly likely stay separate for meetings and trips

34 How would suppliers feel about this? Who gives a damn! It is our job to look after the end consumer and keep them happy It is the suppliers’ job to look after us and keep us happy – to supply the product we need, on time, at a fair price Suppliers should only expect support for support Suppliers will respect a dominant group – they could not afford to lose us It is in their interests for us to elevate the standards of the industry

35 What would happen to the product profile? The big advantage is that we should have more shared exclusives that are only available to the new group Some obvious product rationalisation should result in lower prices and higher margin The bigger the volume a group offers, the better placed it is to negotiate prices We will be better placed to consider exclusive imports We may be better placed to secure exclusive brands

36 Would existing trading terms continue? Definitely YES, and maybe better If both groups have strengths and weaknesses in their rebate structures from suppliers, we should be able to have the best of both worlds Trading terms and fees are not consistent, and don’t need to be. The main variation may be in advertising levies A review will take place to identify to what extent they can be improved

37 Would I lose any independence? The simple answer is NO You retain your rights as a member You will still have the final say in running your business, the products you choose, the prices you sell them for and so on

38 What are the timelines? Event 04/0805/0806/0807/0808/0809/08 Steering Committee MeetingsXXXX Finalise StructureXXX Due DiligenceXX Meet with MembersXXX Issue necessary documentsX Federal Court HearingX Member votes, then second hearingX CompletionX

39 What matters are still to be resolved? Merger Process Capital Structure Organisational Structure Central Office Location Warehousing and Importing (will be reviewed in time) Strategic Objectives (after merger)

40 Is there a Plan B? Do we really need to merge? Acts as a catalyst for change If this does not proceed, what will Carpet Court do? If this does not proceed, we must not stand still Store network will become first priority, but we will need to consider all the future options

41 What do I need to do? Give us your feedback and complete the non-binding vote today Carry on with business as usual Continue to trade as Carpet Choice, but look forward to new opportunities Be prepared to give your final vote in around three months

42 Do you have any questions about the Carpet Choice & Carpet Court Merger Proposal?

43 Should we continue with the negotiations? We now need to take a Non – Binding VOTE

44 Thank you for your attendance and input


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