Statement regarding Global City Holdings N.V. ’s new recommended strategy
Statement regarding Global City Holdings N.V.’s new recommended strategy
We refer to the statement made on your behalf at the pre-meeting (the "Statement") in advance of the general meeting of Global City Holdings N.V. (the "Company") that will take place on 20 March 2015, which conveyed your concerns in respect of the recommended new strategy of the Company. The Statement purports to present arguments for all the minority shareholders. You will appreciate that we will read the Statement as only stating the position of those shareholders who are the signatories to the Statement.
In line with our award winning approach to investor relations, first and foremost it is the intention of the Board of the Company to ensure that there is an open form of communication regarding the new strategy as recommended by the Company’s Board. For this reason, before making a final decision, we decided to call for an informative shareholders’ meeting in Rotterdam to allow for a constructive dialogue with our shareholders. In addition, we organized an informative pre-meeting in Warsaw on 10 March 2015.
We have addressed the alleged concerns below and in that context re-emphasized that the Board's recommendation for the delisting of the Company as soon as reasonably possible together with a public tender offer by the Company at a price per share of approximately 40 PLN (subject to applicable withholding and other taxes, as the case may be) would be in the best interests of the Company and represent a fair price to its shareholders.
The Cineworld Combination
In the Statement you have taken the position that the reasons for the recommended new strategy set out in the circular do not support a decision to delist.
As described in more detail in the Notice, the proposed new strategy directly results from the fundamental and transformational changes to the Company’s business as a consequence of the combination with LSE listed Cineworld Group PLC ('Cineworld') in 2014. It is solely the responsibility of the Board to determine the long term strategy of the Company. As part of its fiduciary duties, the Board continuously reviews the strategic options available to the Company.
On 24 February 2014 the general meeting of shareholders in accordance with Article 2: 107a Dutch Civil Code unanimously approved the transfer of the Company's cinema operations to Cineworld. As a result the Company became a major shareholder in Cineworld (currently holding 29% of the shares). The shareholders approved the Cineworld combination, which resulted in a transformational change of the Company’s core activities. The Cineworld combination resulted in a material change to the Company’s name, profile, business, operations, articles of association, corporate governance structure and composition of the Company’s corporate bodies. These shareholder approved transformational changes require the Board of the Company to assess a new strategy to ensure the long term future of the Company.
Following the Cineworld combination, the Company’s remaining assets, in addition to its 29% holding in Cineworld, primarily consist of its Bulgaria and Israel real estate and cinema related real estate in Central Europe and Israel and its jointly controlled stake in WSE listed Ronson Europe N.V. and Global Parks Holdings (Park of Poland). In December 2014 the Company announced a strategic review in respect of its interest in Ronson Europe N.V.
It is clear that following the Cineworld combination, the Company’s strategy in place prior to the combination is no longer viable. The Company's current operational focus is on project development with the Park of Poland as its first main project. The Aquapark Project (the first stage of the Park of Poland project) is expected to be operational and generate cash flow in more than two years from now.
As set out in the Shareholder Update and Notice of General Meeting dated 6 February 2015 (the "Notice"), in view of the transformational changes, the Board, through the Special Committee, has reviewed the strategic alternatives available to the Company with a view to making a recommendation in the best interests of the Company taking into account the interests of all its stakeholders, including its shareholders.
The Board through the independent Special Committee has, after having taken legal and financial advice, and after discounting the first four of these options, concluded that the interests of the Company and its stakeholders including its shareholders are best served in a private environment.
The Statement in essence articulates three concerns, namely (i) the appropriateness of the new strategy, (ii) the proposed price of the repurchase offer and (iii) the decision making process. These are addressed in turn below.
Appropriateness of the new strategy
The reasons for the Special Committee to recommend a public to private strategy include:
1.The transformational changes in the Company’s activities: since the Cineworld combination the Company no longer operates cinemas. Instead the Company’s remaining operational activities concern project development investments with the Park of Poland as its main project. Park of Poland, is intended to be the first large scale entertainment park in the CEE. The Company owns a large plot of land to develop the full scale entertainment park. These projects are of an entirely different nature with an entirely different risk profile than operating cinemas and as such require a very different management approach and financing structure. It is believed that the Aqua Park investment, and aspirations for like-minded projects as part of the Park of Poland project in the longer term horizon, are best developed in a private environment until these reach long term positive cash flows, stability and maturity. In addition to the unattractive risk profile for a listing, the WSE listing places the Company's activities in a more stringent business environment and with a more complex decision making protocols, limiting its ability to quickly adopt and pursue opportunities to generate long term value with project development.
2.The Company has not raised new equity since the 2006 IPO and the Company does not intend to further access the public equity capital markets to fund its activities. The Company intends to fund these activities with external private debt financing. As a holding vehicle, debt financing is managed / reviewed at the subsidiaries level (on a non-recourse basis).
3.The shares in the Company have delivered significant value to shareholders. Despite a significant percentage float (approximately 40%) and the ‘all time high’ share price, there has not been a true market for the Company’s shares, due to the extremely low and declining trading volumes in the past 7 years.
4.The reform of Polish pension funds (OFE’s) is likely to further reduce the appetite for OFE’s investing in the shares listed on the Warsaw Stock Exchange and reduce liquidity even further.
5.The WSE listing played an important role in building the ‘Cinema City’ brand and Polish business activity, placing Cinema City as the #1 player in its industry in the country. Following the Cineworld combination, the Company does not have any direct operating activity in Poland and does not carry the Cinema City brand name. Serving primarily as a holding company of shares in listed holding companies with no direct active operating activity in Poland, there is very limited scope for the listing to support the Company’s business activity.
6.It is estimated that a termination of the Company's WSE listing will generate a cost saving of approximately EUR 1 million per annum, which include annual fees payable to the WSE, nominated adviser fees and related professional costs. We are pleased to provide you with an overview of these costs.
7.The Board believes that the delisting will be conducive to the long term value of the shares in the delisted entity.
These reasons make clear that the WSE listing does not serve the long term interests of the Company.
The Dutch Private Company
The Board recognises that in a private environment the interests of the minority shareholders must continue to be appropriately protected. If the Board decides to proceed with the new strategy, the listed entity will convert into a BV. This is the Dutch law equivalent of a private limited liability company, which can provide the appropriate flexibility as regards the transferability of shares and can obligate the Board to provide an appropriate level of information to the shareholders. In addition, the Company will apply a governance regime that will be geared to consider the interests of its stakeholders including its shareholders. We are happy to further discuss the features of private company to provide the comfort that the long term viability of the Company has been addressed with due consideration for its shareholders.
It is clear that the points raised in the Statement do not establish a valid or credible basis for challenging the appropriateness of the new strategy. The Company plainly has the right to consider delisting (as is accepted in the Statement and must always have been appreciated) and, while the existence of investment restrictions as a matter of Polish law was not in any event known to the Company at the point of listing, any such restrictions can have no more bearing on the operation of the Company, a Dutch entity, than any other entity with an international investor base and operation. The concerns regarding the delisting by reference to investment restrictions, access to information and value have been adequately addressed given the associated repurchase offer that provides all shareholders with an exit option in a fair and efficient manner in view of the very low and declining trading volumes; to provide an example, it would take the current minority shareholders over 5 years to dispose of their shares if the Company remains listed. This repurchase has been recommended by the Company even though not required under Dutch law, and if the offer is not accepted, where possible will be accommodated by the private entity. In other words, if the proposed terms of the repurchase comply with the applicable requirements from the perspective of the minority shareholders in the Company, then no question of prejudice associated with the delisting arises.
We do not understand why you challenge the Board's conclusion to the effect that being listed entails a significant degree of attention from the Company's management together with associated expense. It is quite clear that the Company, a Dutch public limited liability company, is listed on the WSE, its shareholdings in Cineworld is listed on the London Stock Exchange and Ronson Europe NV is listed on the WSE. Such a structure results in significant management time and expense being directed towards compliance with the legion of applicable regulatory and disclosure requirements in circumstances in which the Company has transformed from an operational company into a holding company. Simplifying such matters would plainly serve to further the Company's best interests both economically and competitively in conjunction with those of its stakeholders as well.
As regards the price per share of the repurchase offer, we do not agree with the Statement which contains a number of errors. Most obvious amongst these are the implicit assumptions that the price per share of the Company should be ascertained directly by reference to the net asset value of the Company; and the net asset value of the Company should, in turn, be ascertained directly by reference to the quoted price of shares of Cineworld.
These "sum of the parts" assumptions are unfortunately simplistic, as they do not reflect the obvious effect of applicable discount factors that one would typically apply to a situation like this, and therefore have the obvious effect of over-estimating the shares' value. As set out in the Notice, the six month average market price represents a significant premium by reference to various historic measures and a fair price.
It should be emphasised that the proposed price for the repurchase is in line with the provisions of Polish law, expressly Article 79 of the Act of 29 July 2005 on Public Offering, the Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies, which mainly refer to the average market price for the last six months.
For completeness, the Statement contains a further error which we wish to correct: the amount spent on the acquisition of additional shares in Cineworld Group PLC was GBP 18.5 million as opposed to GBP 6.65 million. This will also impact the question of valuation.
Decision making process
Finally in your statement – although recognising that the Company has a right to contemplate a delisting – you take the position that a decision to delist is of such an importance that it requires a qualified majority of the votes in a general meeting in line with Polish law should be a four-fifths majority of votes cast. Finally, you state that applying such a qualified majority would also ensure a fair price.
The Company would self-evidently comply with all applicable legal and procedural requirements to which it is properly subject. By virtue of the Company being incorporated in the Netherlands, the Dutch rules in respect of delisting apply. Pursuant to Article 2:107a of the Dutch Civil Code and article 20.4 of the Company’s articles of association, a delisting qualifies as a decision by the Board leading to an important change in the Company’s or its business enterprise’s identity or character which requires the approval of the general meeting of shareholders. It is precisely this approval which the Company is seeking.
The suggestion that the Dutch law reasonableness and fairness principle would increase the threshold for a shareholder vote as ascribed by Article 2:107a of the Dutch Civil Code by 30 percent (minus one vote) to meet the expectations of certain minority shareholders in another jurisdiction has no legal merit. If this suggestion were to be correct, this would in fact have a deleterious effect not only on the Company, but on the market in general as to take such a drastic measure would create corporate/market insecurity and turmoil for the numerous Dutch issuers listed on other markets, not to mention the other non-Polish issuers listed on the WSE. We believe that the signatories to the Statement are professional investors and would have been expected in their customary due diligence to apprise themselves of the applicable corporate statute which governs the Company. Consistent with this position, the WSE clearly prides itself as an exchange that wishes to be attractive to other EU issuers. This in itself requires professional investors to take note of the various corporate consent requirements of the various jurisdictions for material decisions and for the exchange to respect the requirements of such jurisdictions.
The mere fact that the major shareholder would support a decision by the Company based on a recommendation by the Board through the independent Special Committee to go private does not make such proposal or decision unlawful provided the interest of all stakeholders including the interests of (minority) shareholders have been sufficiently weighed in the process leading to such decision. The Board is confident that the inapplicability of Polish listing requirements does not, however, render the delisting "a unilateral decision by the majority shareholders of the Company and the Company itself simply ignoring the minority shareholders" or anything of the sort. To the contrary, the delisting is proposed and recommended by the Board on the basis of their consideration of a range of strategy options in the best interests of the Company taking into account the interests of its stakeholders, including all of its shareholders. The potential effect of your proposal would be to empower the minority shareholders beyond their entitlement and thereby risk subverting the Special Committee's duty to act primarily in the best interests of the Company as a whole in an independent manner.
We trust that your concerns are assuaged by the explanation and confirmation in respect of its intentions given above. As stated in the introduction of this letter, the Company would be very happy to discuss such matters further and take matters into account when contemplating the next steps.
Global City Holdings N.V.