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.
Chairman’s letter to shareholders
On 23rd May 2017, IP Group plc (“IP Group”) announced that it had made an approach to the Board of Touchstone Innovations plc (“Touchstone”) regarding a possible combination of the two businesses (the “Possible Offer”) and that the Board of Touchstone had rejected the proposal. The announcements made on 23rd May 2017 by both IP Group and Touchstone have been circulated to you.
I am writing to explain the chronology of events leading to the rejection and the Directors’ reasons for it.
Chronology of events
On 4th April 2017, I received a letter from IP Group setting out the indicative non-binding terms, which implied an at-market combination with no premium to prior day close, on which IP Group would be willing to work towards a recommended all-share merger of Touchstone and IP Group.
Your Board considered the contents of the letter and, on 7th April 2017, unanimously decided to reject the merger proposal and stated that it could not see any basis for further discussions.
However, in the days that followed, it was made clear to the Board that three of our largest shareholders (Invesco Asset Management Limited (“Invesco”), Woodford Investment Management LLP (“Woodford”) and Lansdowne Developed Markets Master Fund Ltd (“Lansdowne”) (together the “Large Shareholders”)) wanted Touchstone to engage with IP Group to see if a merger could be agreed. For this reason, and because the proposal had certain merits, the Board agreed to engage.
Meetings were held, but no real progress was made on two very important issues: first, on the valuation of Touchstone, and second, on the need to retain and build on the best of both companies and to establish a clear understanding of joint strategy, corporate governance and management.
As a consequence, I had a telephone call on 19th May 2017 with Mike Humphrey, Chairman of IP Group. Amongst other things he told me the term ‘merger’ had been used, but that this was in fact a ‘takeover’.
He indicated he had no mandate from his Board or the Large Shareholders to negotiate on either the ratio of the resulting ownership of IP Group between IP Group shareholders and Touchstone shareholders following the Possible Offer (approximately 62% IP Group, 38% Touchstone) or on people (management and directors).
There have been no further discussions between the two companies since this call.
Reasons for the rejection of the IP Group Possible Offer
As part of the discussions with IP Group we raised a number of topics, which we believed would need to be addressed in order for the combination to be capable of being recommended by the Board. These included seeking agreement on strategy, business model and portfolio balance. However, in this letter I will focus on the two that are the most important, in my view, being valuation and people.
First, the Board believed that the terms of the Possible Offer fundamentally undervalued Touchstone on a stand-alone basis.
The Board believed that the terms did 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);
· its therapeutics assets, which are attracting interest from leading pharmaceutical companies;
· its unique access to opportunities arising from Imperial College London and UCL, as well as close relationships across the ‘Golden Triangle’;
· its close relationships with major pharmaceutical companies, as evidenced by the Apollo Therapeutics joint venture; and
· its relationships with co-investors and numerous other industry partners.
The Board has full confidence in Touchstone’s future as a stand-alone business. We believe that Touchstone has the platform and portfolio to drive overall returns and generate cash over the next five years to deliver self-sustainability.
We strongly believe that the opportunities available to Touchstone shareholders are highly compelling in the stand-alone vehicle, and that dilution of your position on the terms of the Possible Offer would not be in your best interests.
Second, IP Group’s Possible Offer was silent as to proposals to retain and build on the best of both companies. Their announcement on 23rd May 2017 states that the combination would create a combined business with substantial capabilities that would be greater than the sum of the two parts. However, these are people-based businesses, not just assets, and in the absence of a plan to retain and build on the best of both companies, the Board believes there is a significant risk of value erosion on both sides.
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.
An important test for us was whether the combined organisation was one where our staff, particularly our ventures investment team, would have been attracted to stay. Our belief was that the Possible Offer, which ignores the importance of retention and incentives, risked seeing this team dissipate and, along with it, the associated network of partners, co-investors and entrepreneurs.
Prior to my appointment to the Board of Touchstone as Chairman on 1st August 2016, I carried out my own due diligence, speaking to professional advisers and to Touchstone’s largest shareholders, Invesco, Woodford, Imperial College London and Lansdowne.
All were extremely complimentary about Touchstone. The shareholders explained that they rated Touchstone and the team very highly, saying that it was a good organisation with strong governance, and that they considered the investment process to be excellent. Indeed, this is evidenced by the fact that some of these shareholders have invested directly in certain portfolio companies, alongside Touchstone.
Everything I have found in my 10 months as Chairman supports those views.
The concerns surrounding the Possible Offer which I outline above have not been addressed to the satisfaction of the Board and, for these reasons, the Board of Touchstone rejected the Possible Offer.
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.
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