Under the disposal agreement, the purchaser agreed to acquire MFI retail for the nominal consideration of £1, conditional only on the approval of MFI’s shareholders (which was required because the disposal was a Class 1 transaction for the purposes of the UK Listing Authority’s Listing Rules).

MFI has agreed to make a payment on completion of £8.7 million and, subject to certain conditions being met, two deferred payments of up to £65.1 million in aggregate, to the purchaser’s group. Merchant Equity is investing up to £61.2 million in the purchaser’s group, and has undertaken to arrange committed bank facilities of at least £40 million.

“The market’s reaction to the deal has been enthusiastic,” notes Claire Wills, the partner at Freshfields Bruckhaus Deringer who advised MFI. Shares in MFI rose almost 11% on announcement.

The reaction is unsurprising. MFI retail has struggled in recent years due to rising costs and difficult market conditions. Despite a significant reorganisation in July 2006, analysts at Seymour Pierce had predicted that MFI would have to pay any purchaser around £130 million in cash (almost double the reverse premium agreed) to take MFI retail off its hands.

Sales for nominal consideration are not uncommon. Sportingbet plc announced on 13 October 2006 that it was disposing of its US operations for $1, and other companies that have sold operations for nominal consideration include Laura Ashley, the Joseph Campbell Company (which was liquidated into the Campbell Soup Company for $1), Barings and Dan-Air.

Reverse premia are relatively common in the context of property transactions, where landlords make inducement payments to anchor tenants (that is, prime tenants in a shopping centre or building who attract or generate traffic). However, they are not unknown in the context of business disposals. They can be structured in various ways, depending on the tax and commercial objectives of the parties. In May 2000, BMW sold Rover for £10 but paid the purchaser nearly £100 billion in the form of interest-free loans, cash and assets.

The cheap cash currently floating around the market means that we are likely to see more deals like this. “There is a greater appetite for risk and investors chasing good returns are now more willing to consider buying turn-around operations,” says Wills. Merchant Equity was established specifically to seek out turn-around opportunities.

MFI will make an initial deferred payment of £53.1 million to the purchaser’s group on 3 September 2007 (or earlier if there is a change of control of MFI or certain other credit events, such as an event of default under its banking facilities, occur), provided that both of the following conditions are satisfied:

MFI will make a further payment of up to £12 million to the purchaser’s group on 2 April 2008, provided that both of the following conditions are satisfied:

MFI can elect to satisfy these payments by subscribing for subordinated shares in the purchaser’s holding company (see “Novel clawback arrangements” below).

The rest of the financial package includes:

Pensions. MFI is retaining MFI retail’s existing pension liabilities. MFI agreed with the trustees of its pension schemes, which have an aggregate deficit of £296 million, that the disposal does not adversely affect its employer covenant, and obtained clearance from the Pensions Regulator for the disposal and associated funding.

Transfer of customer deposits. MFI agreed to pay the purchaser’s group an amount in respect of customer deposits that were held at the MFI group level (estimated to be around £51.9 million) on completion.

Cash adjustment. To reflect the fact that Merchant Equity agreed to acquire economic control (that is, take over the economic risks and rewards) of MFI retail from 5 August 2006, MFI agreed to pay the purchaser’s group £8.7 million on completion.

On completion, MFI is entitled to subscribe for a subordinated share in the purchaser’s holding company. MFI can also elect to satisfy future amounts to be paid by way of a further subscription.

The subordinated shares carry very limited rights but give MFI the right to receive a payment, if certain conditions are satisfied, on the purchaser’s exit from the MFI retail business before the fifth anniversary of completion.

The rights are set out in the articles of the purchaser’s holding company. Broadly, they provide that, if MFI retail is sold within five years of completion, MFI is entitled to a minimum of 5% of any gross sale proceeds in excess of £300 million. MFI’s percentage participation rises in steps to 25% of the excess where gross sale proceeds exceed £482 million.

In substance, an IPO within five years of completion is treated like any other sale, with MFI being entitled to subscribe for new equity on equivalent value terms to those on a sale.

“These types of clawback arrangements have become increasingly common in the market, particularly in a private equity context. This is because there have been well-publicised examples of corporates selling businesses to private equity buyers who have subsequently (and often quickly) on-sold the businesses at a significantly higher price. A clawback arrangement is intended to provide the original seller with some of the upside on the on-sale and, therefore, a degree of protection against any adverse market comment,” says Wills.

Shareholder approval was required for both the disposal and the change of MFI’s name to Galiform plc. Rather than seek approval at a single EGM, MFI and Merchant Equity agreed that two separate EGMs would be held (see box, “Timetable”).

This was agreed because the disposal required just an ordinary resolution, so only 14 clear days’ notice was needed for the meeting to approve it; however, approval of the change of name required a special resolution, so at least 21 clear days’ notice was needed for that meeting (sections 369(1) and 378(2), Companies Act 1985).

In practice, what this meant was that completion of the disposal could take place more quickly and did not have to be delayed to await the outcome of the second EGM on 23 October 2006.