This announcement contains inside information 

31 October 2022

TP Group plc

("TP Group", "Group" or "Company")

  Business Update

Following the investment by Science Group plc and the subsequent Board changes, the strategy for TP Group was set out on 1 November 2021. The Board has regularly updated shareholders on the execution of that strategy, including the restructuring of the Group and the substantial challenges associated with the legacy contracts in the Maritime Division which have been  well documented in the TP Group 2021 Annual Report and the 2022 Interim Results together with other announcements made over the past year. The Board now provides a further update to shareholders.

Maritime Division Contracts

The TPG Maritime division provides products and services associated with air handling systems for submarines. This is a specialist defence industry business with a small but international client base. In 2021, the TPG Maritime Division ("TPGM") had seven major customers, defined as revenue in excess of £0.5m in the year. Of those major clients, five contracts required priority renegotiation or termination. A summary of the current status of these contracts is as follows :

Contract A (UK Customer) : The overspend on this large, fixed price contract only became apparent early in 2022, resulting in material provisions and prior year adjustments as previously reported. Continuing with this very onerous contract in its original form was not financially viable for TPGM, placing the business at serious risk of insolvency. As a result of a protracted negotiation, agreement has now been reached with the customer such that the contract has been restructured as a Qualifying Sub-Contract, mitigating future exposure. While the margin associated with this contract will be significantly lower than had been originally anticipated and the terms remain sub-optimal, the Board concluded that it is in the best interests of all stakeholders to accept this compromise in relation to the current supply obligations but that any future product supply would require alternative contract arrangements.

Contract B (European Customer) :  An agreement has been reached to settle the legacy liabilities and the customer wishes TPGM to complete the supply programme on the revised terms. The settlement includes a potential payment by TPGM of up to £0.4 million which may be reduced subject to future performance.

Contract C (European Customer) and Contract D (Asian Customer) : Progress has been made with these clients, resulting in a reasonable probability, but no certainty, of a satisfactory compromise. Negotiations are continuing.

Contract E (Hydrogen-powered train project) : TPGM had been acting as the reseller intermediary between a US supplier and a UK client in relation to this diversification. TPGM has agreed terms in principle with the other parties to exit this arrangement.

Of the remaining customers, it should be noted that a large UK consumables support contract is subject to re-tender in the next year. This contract accounted for approximately one third of TPGM revenue in 2021 and a greater proportion in the first half of 2022, although the gross margin is low. TPGM anticipates bidding to renew this contract but there can be no certainty as to the outcome.

As part of the contract renegotiations, the Board has removed or terminated parent company guarantees previously provided by TP Group plc to TPGM. Such guarantees potentially undermine the principle of limited liability of the subsidiary, exposing the Group to the TPGM liabilities and potentially inhibiting the Board's options.

TPG Services Division

The Services division has continued to perform satisfactorily with a continued focus on improving contract margins. The integration of Osprey, initiated over the summer, is progressing well with increasing alignment of strategic, operational and financial objectives.

Opportunities for collaboration between TPG Services and the Science Group R&D Division have been identified and are being developed by the respective operating management teams. Such cooperation should enable these businesses to offer new service capabilities into defence industry clients.

Westek

Following the disposal of Northstar (April 2022) and Sapienza (July 2022), negotiations regarding the potential disposal of Westek are continuing with a preferred buyer. The valuation is modest and there is no certainty that a transaction will be completed. An alternative strategy to retain Westek within the Group will be implemented if a transaction is not concluded.

Group Financing

The current aggregate facilities (HSBC and Science Group) total £11 million of which approximately £7.0 million is currently drawn, including the bank facility which remains fully drawn at approximately £6 million. In recent months, the Group has partially drawn on the Science Group standby facility in order to fund working capital requirements. Current cash flow forecasts indicate that the Science Group facility may continue to be required in the coming months. 

The current bank facility and the Science Group standby facility expire in September 2023. The Board does not anticipate either facility will be renewed and therefore alternative funding arrangements will need to be in place by the end of the year in order for the Group to satisfy the requirements in relation to financial reporting as a going concern.  While the Board has initiated discussions to explore potential alternative financing sources, it is apparent that a pre-condition to any refinancing is that the legacy TPGM contracts are satisfactorily resolved. Furthermore, in the current UK economic environment, there is no certainty that new debt facilities will be available on terms which are acceptable or can be agreed in a timely manner.

The Board has not ruled out the possibility of an equity fund raise, but it recognises that at the current share price such a refinancing would likely result in a significant dilution of existing shareholders who did not or were unable to participate.

Summary

The onerous nature of the legacy TPGM contracts became apparent in late 2021 and early 2022. The materiality and seriousness of the situation progressively escalated during the subsequent months. Ultimately, these contracts placed the future of the Maritime subsidiary, and potentially the entire Group, in jeopardy. The new management team installed at TPGM, led by a senior manager seconded from Science Group, has brought a new rigour and discipline to the division enabling the contracts to be renegotiated, a serious financial solvency crisis to be averted and implementation of necessary operational and commercial improvements.

To remain as an independent company, the capital structure of the Group needs to be addressed.  It is not certain that any refinancing can be completed on terms which would be acceptable to the Board or TP Group shareholders.

Recommended Offer by Science Group plc

While the TPGM contract negotiations are ongoing, sufficient progress has been made which, together with the disposals of the non-core operations, has enabled the Independent Directors and Science Group plc to agree terms for a recommended offer for TP Group plc ("Offer") at a significant premium to the current share price. The Independent Directors of TP Group strongly recommend that shareholders accept the Offer, which is anticipated to be implemented by a Scheme of Arrangement. Details of the Offer are set out in a separate announcement released today.

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