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Shares buyback

31 August 2007

Shares buyback deal secured for Sheffield Forgemasters

As the strongest possible sign of its substantial recovery from June's destructive floods Sheffield Forgemasters International Limited (SFIL) will meet a two year promise to its employees by giving them the opportunity to own a share of the company.

Management at the 200-year-old company, led by chief executive Graham Honeyman, made the commitment to its 700-strong workforce when it completed a management buy-out (MBO) two years ago.  

The government's Pension Protection Fund (PPF), acting on behalf of the pension scheme trustees, negotiated a financial agreement which saw the company's pension fund deficit reduced at the time of the MBO.

The groundbreaking MBO saw the establishment of a scheme whereby the pension scheme trustees and the administrators PricewaterhouseCoopers (PWC) were given (amongst other things) a 30% equity stake in the company in return for offsetting specific liabilities including its insolvent pension fund. 

Forgemasters has now secured agreement with the pension scheme trustees and PWC by which SFIL will buy back that 30% shareholding. SFIL intends to split that shareholding between its entire workforce.

Under the agreement, employees of the world's largest independently owned forgemaster will be offered the chance to buy shares at half their present value and at preferential lending terms. 

South Yorkshire's leading legal services provider DLA Piper advised Forgemasters in the highly complex agreement.

SFIL chairman Tony Pedder said: "This is a crucial milestone for the company.  One of our commitments to the staff at the time of the MBO was that the company would look after its workforce. This offer of shares to the workforce is a major part of that commitment and we hope it will give our people a sense of ownership as well as an investment in the future of our business. 

"For a very modest investment employees will get a chunk of the business in the form of shares. The more successful the business is, the more the shares will be worth.

"Everyone buying in will get a basic number of shares. However we also intend to offer further shares as a means of recognising any pension deficit felt by certain parts of the workforce. No new shares will go to existing shareholders."  

Neil Thompson, corporate partner in DLA Piper's Sheffield office, said: "Graham Honeyman and the management team have made a massive effort on behalf of their hundreds of highly skilled employees to keep a strategically important business going in South Yorkshire.

"The share issue will also, hopefully, go some way to mitigating the impact of the pension shortfall." 

The deal comes two years after creditors of Forgemasters approved the MBO which secured the jobs of the then 600 workers and avoided the company going into administration. The deal meant all suppliers were paid in full and the pension rights of current and retired employees were substantially protected.

The MBO was the result of another three years of effort by the Forgemasters team, also advised by DLA Piper. The company had been up for sale since its parent group went into administration in 2003. 

A key element of the buy-out package involved the then new PPF, the statutory corporation set up under the Pensions Act to safeguard the pensions of workers if a company becomes insolvent.

The £120m pension fund for the then US-owned Forgemasters had a deficit of approximately £65m, making it insolvent. Under the deal, the PPF, in its role as contingent creditor, pursued its objective of maximising the return to the pension scheme. It agreed to a cash amount that was more than would be available in a liquidation and a 30 per cent equity share in the new business alongside PWC. 

A new stakeholder pension scheme, in which the company matches employee contributions, was established after the buy-out.

SFIL continues to supply an increasing global demand for high quality engineered products to key industries such as defence, nuclear, oil and gas exploration, power generation, marine and construction.