¢ Doce u24 ‘The Mayflower decision 10 Rupert Hambro, Chairman of Mayflower, introduced the next item on the doard’s agenda, “Let’s get to the important business of today — our next acquisition. You will remember at our last meeting that we decided the time was right to start looking for our next target.” The story s0 far... 11 The principal activities of the Mayflower group are the design, engineering and manufacture of car bodies and commercial vehicle cabs, vehicle conversions and the production of synthetic webbing. Group tumover for the year ended 31 December 1995 totalled £202.3 million, 31% of which came from the group's existing operations in the US. The group’s business has grown rapidly since 1991 with operating profits having increased from £1.3 million to £15.5 million. 12 Mayflower’s strategy is to “develop a global automotive engineering business through the establishment of a group of high quality and profitable specialist ‘manufacturing operations”. This strategy has been developed against a background of the changing requirements of the sutomotive industry worldwide, Increasingly, Original Equipment Manufacturers (OEM's) are requiring global capacity from their suppliers and an ability to commit to long-term development initiatives. An example of this for Mayflower has been a close relationship with Rover, leading to a long-term contract for the production of the body shell for the MGF sports car. 13. This strategy has resulted in four major purchases since 1991 * Motor Panels Coventry - an automotive pressings and fabrication company with strong customers within the Rover group. Following what was considered a cheap purchase (£14m), major changes were made by a dedicated “hit-squad” to improve productivity, culture etc The business was then handled to a new line management. + Shayside (US) - brought from the reciever in 1993 to add a US stamping facility to that of Motor Panels. + IAD (Automotive Engineering Consultants) - also bought from the receiver in 1993. It had an excellent reputation, but fell into trouble during the 1992/93 recession when most of the major vehicle manufacturers took much of their business in-house. Now in much reduced, but also more focused, form afier the purchase eg Mayflower/IAD has added substantially to the stature of the engineering capability, of Motor Panels. This has enabled Mayflower/IAD to contribute to customer developments, and gain better contacts e.g. MGF, Rolls Royce. It has also allowed the US business to go much more aggressively after new work with Ford and Mack.* Walter Alexander ~ purchased for £24 million in 1995, a transaction which took Mayflower back into net debt for the first time in some years, Walter Alexander provided a means to produce @ finished product (buses) rather than just components, but it was lacking in some of the body panel skills that Motor Panel could provide. After a visit from the Mayflower “hit-squad”, the company has won some significant new orders and is benefiting from the clout which comes from being part of a larger group. Back to the Board, 14 “John”, continued Rupert Hambro, “et me hand it over to you”, All eyes were now on John Simpson, Deputy Chairman and Chief Executive. Everyone around the table knew that he, David Donnelly, Mayflower’s Group Finance Director, and John Fleming, Acquisitions and Operating Review Director, all had quite different ideas about what the next move should be. 15 John Simpson had also asked Mike Bryant, the Managing Director of IAD to think through Mayflower’s options and present his recommendations to the Board. Mike’s perspective on the automotive business was a little different ftom the usual nuts and bolts, engineering-orientated approach which tends to dominate most boardrooms in the industry. John was sure Mike’s case would force the board to think alittle more broadly than it had previously. 16 John began: “I’ve asked Mike Byrant to give us his thoughts on a possible target. As you know, Mike was responsible for lifting sales of IAD by nearly 50% during 1995 and his close working relationships with both Opel in Germany and Nissan in the UK and Spain have given him real insight into the future of our industry. But before I bring Mike into the meeting, | know that my fellow directors, David and John would like to put forward some ideas. David, would you like to lead off? Cash is king... 17 David Donnelly was a concemed man. Mayflower was only now making considerable progress in reducing its debt, Nearly half the Walter Alexander acquisition was financed by debt, and the new MGF project has required substantial investment (neatly £30 million). And it won't stop there. 18 Walter Alexander, in particular, is going to need a major injection of cash over the next few years. To begin with, an immediate, reorganisation will require about £Gmillion. Then there will be a programme of major capital investment. The company had to survive a substantial downtum in the bus building industry in the UK. during 1989 — 1992, as deregulation and privatisation of bus services meant a substantial hiatus in new ordering, Walter Alexander largely relied on its export business in the Far East. Then, as new private bus operators began to emerge in 1992 in the UK, domestic investment picked up again, making this a strongly growing business sector. The company was, however, financially weak, and has not been able to make a full investment in capital equipment or product design etc. to take full advantage of the situation.19 David addressed the meeting: “Thanks John. As you will recall, 1 have been keeping you all informed in some detail about our cash flow over the past 12 months. Our rapid growth, recent investments and previous acquisitions have all put strains on our position. The situation is now looking better and I guess that, and the market's expectations, is why we are looking for another acquisition. However, we owe it to our shareholders to continue to be mindful of our financial state.” 20 “Therefore, I believe that any acquisition target we consider should satisfy (a) It should not require any substantial investment post-acquisition — in terms of restructuring or equipment. (6) We should not have to take on any financial debt, (©) It should be strongly cash generative.” “The last point in particular is important if we are going to continue to be able to fund projects like MGF and our ambitious plans for Walter Alexander.” Candidate number 1: The Pullman Company 21 “Thave found a company that not only meets these criteria, but will make us market leader in a highly attractive, high margin business. My recommendation is ‘The Pullman Company, based in the US. 1 assume you have already read through the fact sheet attached to the board papers (see Appendix A), but let me just highlight a few key points: + Pullman, through its operating division Clevite, is a leading supplier of vibration control components for passenger vehicles in the States © Despite the recent sluggish state of light vehicle building in North America, its trading record is impressive — last financial year saw sales of £144 million, operating profits of £17.3 million - that’s margins of 12%! This business benefits from proprietary skills which have allowed it to move into high value-added car products, and it has recently been able to move some of its production to lower cost Mexico both of which will protect margins for some time to come. . It has successfully been run as a generator of cash and is in a strong market position to continue to be cash generative with minimal investment. . We would not have to take on any financial debt, so the main debt impact would be the net cash cost of the acquisition less any new money raised in a rights issue.”