Esken: Notification of Class 2 transaction - Sale of Stobart Air and Carlisle Lake District Airport

Esken, the aviation and energy infrastructure group, announces that it has signed an agreement for the sale of its entire shareholdings in Stobart Air Unlimited Company ('SA') (which operates regional flights under a franchise agreement for Aer Lingus) and Stobart Air (UK) Limited, the owner of Carlisle Lake District Airport ('CLDA') to Ettyl Limited (Ettyl). The sale is subject to certain change of control and bank facility consents and is expected to complete by early May 2021.

Background to the transaction

Esken took the decision in April 2020 to buy back its shareholding in SA and the aircraft leasing company Propius from the Administrator of Connect Airways Limited ('Connect') to take control of various legacy guarantees and obligations which the Company had and which predated the sale of those operations to Connect in January 2019. The buy-back was a necessary action at the time in order to mitigate the potential impact of these guarantees being called and to allow the Company to conclude a refinancing of the business in order to mitigate the impact of the COVID-19 pandemic on Esken and its subsidiaries. It was Esken's stated intention to seek a new owner of these businesses by 28 February 2021 following an anticipated extension of the Aer Lingus Franchise when it expires in December 2022. A combination of the impact of the extended lockdowns halting most flight operations for the period since acquisition and the decision by Aer Lingus in November 2020 to award preferred bidder status for the franchise extension to another party has led to a protracted process to achieve the stated objective.

Structure of the transaction

Ettyl, an Isle of Man based company backed by private investors, has agreed to acquire Esken's economic interests  in Everdeal 2021 Limited and Everdeal Employees 2019 Limited, both holders of shares in Stobart Air Unlimited Company (collectively referred to as 'SA'), for £2 plus the value of any cash on the balance sheet payable at completion together with a contingent consideration of £7.5 million payable upon and to the extent of the occurrence of certain trigger events at any point up to 1 July 2024. Any contingent consideration will become payable in three equal instalments over 18 months from the date of any trigger event. The sale of the businesses is expected to complete by early May 2021.

Esken will make a payment on completion of up to £9.4m and will be responsible for the settlement of pre-completion liabilities totaling £25.8million of which £19.1 million are the subject of pre-existing parent company guarantees. These sums represent unpaid creditors of £12.4 million, which will be paid as they fall due in the months ahead and maintenance reserves of £13.4 million, which will be paid towards maintenance obligations as they arise over the remaining term of the aircraft leases. Ettyl will take responsibility for operational cash outflows from 1 April 2021 and these will be set-off against sums due by Esken under the SA sale agreement.

Prior to the completion of the sale of SA, Esken will take back 100% ownership of Propius, an aircraft leasing company, for £1. Esken will retain responsibility for the continuing lease obligations of Propius under the existing lease arrangements until April 2023 ('Lease End Date'). Propius' liabilities under its existing aircraft lease agreements will be mitigated and subsidised by SA as Propius will enter into a sub-lease of the aircraft with SA for a period from the date of completion to the Lease End Date for which it will receive total lease payments of approximately £14 million. Under the sub-leases, SA will become liable for the ongoing maintenance of the aircraft from the completion date including return conditions at the Lease End Date. Propius will therefore be responsible for total lease payments of approximately £9 million after receipt of the sub-lease payments and in addition will pay a sum of £15.5 million in April 2023, being the break fee under the existing leases. Ancillary costs associated with the break fee such as hedging and related costs may also be payable at that time.

The obligations of Propius under the leases will continue to be supported by a parent company guarantee from Esken until April 2023. Subsequent to that date, any continuing use of the aircraft will be a matter between Ettyl and the lessor directly and it is anticipated that Propius will then become a dormant company.

Ettyl will also acquire Esken's entire shareholding in Stobart Air (UK) Limited, the owner of CLDA, for a cash consideration of £15 million plus the value of any cash on the balance sheet. The sale of SA and CLDA are inter-conditional and so the net effect of the two transactions is that the consideration of £15 million in respect of the sale of CLDA will be offset against the obligations in relation to the pre-completion liabilities and completion payments due to Ettyl from Esken in respect of the sale of SA at completion. Satisfaction of the completion conditions is required such that the sale of both SA and CLDA complete on the same date.

Should either CLDA or SA be sold subsequently resulting in a gain to the buyer's equity in those assets, Esken will be entitled to an additional consideration of up to £30 million in the first 12 months and up to £20 million in the second 12 months following completion.

Conditions to completion

The completion of the sale of both SA and CLDA is subject to a number of conditions including consent from various key stakeholders and commercial counterparties to Esken, SA and CLDA including consent from the lenders under Esken's bank facility.

Financial Impact of the transaction

The resulting effect of the SA transaction for the period up to completion will be shown as discontinued operations in the results for the year to 28 February 2022. The transaction to dispose of SA is expected to result in a loss on disposal of approximately £8m after professional fees. The disposal of Stobart Air (UK) Limited, which owns Carlisle Lake District Airport, for proceeds of £15m, is expected to generate a profit on disposal in excess of £10m. Both results are subject to any year end February 2021 audit adjustments.

The cash impact of the transactions in the following three financial years will be as follows

Esken has pre-existing parent company guarantees under the aircraft leasing arrangements which at the completion date will be approximately £69 million in gross terms, with these reducing by c.£2 million per month until April 2023. On the basis that SA and Ettyl fulfils their respective obligations under the transaction agreements and sub leases through to April 2023, the maximum potential liability of Propius will be up to £49 million. The settlement of these obligations is contained within the cash flows set out above.  In the event of a failure of SA prior to that date Esken would seek to agree alternative arrangements for the continued use of the aircraft with another party which would mitigate any residual exposure.

David Shearer, Executive Chairman, Esken said

"I am pleased to be able to announce these transactions today which are in line with our stated strategy at the time of the successful capital raise in June 2020. This has been a difficult and protracted process to conclude given the impact of the pandemic on air travel. Stobart Air remains a critical part of connectivity between Ireland and the United Kingdom and I am pleased that we have managed to secure the future of that business and its 480 staff under a new owner with ambitions to grow its network of routes. The sale of the airline presents a significantly better financial outcome than that resulting from a closure.

Our operations at CLDA were peripheral to the main focus of our Aviation business at London Southend Airport and we have taken this opportunity to tidy up our portfolio of businesses at a fair value in current markets allowing us to minimise future cash burn and avoid management distraction. I wish the new owners of both these businesses every success in the future.

The completion of these transactions will allow management to focus on the core operations of Stobart Energy and London Southend Airport, along with the aviation services business. I will report further on our strategic objectives for these businesses when we release our results for the year to 28 February 2021."

The Disposal described above constitutes a Class 2 transaction for Esken for the purposes of the Financial Conduct Authority's Listing Rules. Due to Stobart Air being acquired on 27 April 2020, it did not contribute to the Group's full year results for the year ended 29 February 2020. Stobart Air's reported gross assets were £28.6m at 31 August 2020. For the full year ended 29 February 2020, Stobart Air (UK) Limited contributed a loss before tax of £24.3m and gross assets as at 31 August 2020 were £9.1m. Any proceeds arising will be used to meet the cost of the legacy obligations retained under the transactions and thereafter to reduce the Group's net debt position.

All figures are shown in GBP and have been converted where applicable at USD1.37 and €1.15.