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Subject no. CS10

Chartered Secretaries Qualifying Scheme – Level Two

Chartered Secretaries Case Study

Pre-seen material June 2013

This case study will be reproduced in the examination paper so that you can refer to it during the examination. You will not be allowed to take your own copy of the case study into the examination.

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Introduction Studeley plc (‘Studeley’) is a UK food manufacturer whose main factory and head office are located in the West Midlands. Studeley was established in the early 1900s by a baker who made and sold a range of bread, cakes and pies locally. The company expanded steadily by organic growth, and has continued to grow ever since. Over the past 30 years, organic growth has gradually reduced, and the company’s growth has been supplemented by the acquisition of new branded products. Studeley now manufactures and markets food products including baked goods (such as bread, cakes and pies), cooking ingredients (such as sauces and flavourings), and other products for sale mainly to supermarkets (such as spreads, pickles, soups, canned vegetables and desserts). A breakdown of sales between products is given in Appendix 1. Almost all of Studeley’s output is branded. In this respect, Studeley is different from Bakery and Associated Products plc (‘BAP’), its largest competitor, which sells a large proportion of its output to large retailers for sale under the retailers’ own names. Studeley’s main customers are the leading UK supermarket chains, and it also supplies grocery retailers and wholesalers. The company’s main production and administration centre has not moved since the company was first founded. Its location in the West Midlands was originally selected so that the company could be near to sources of raw materials. Now materials are sourced from many parts of the UK and abroad, and Studeley’s location, rather than being an advantage in terms of access to raw materials, is no longer ideal. In terms of receiving supplies, the ideal location would be in the east of England, where there is a lot of arable farming and where there would be easy access to ports for delivery of imported materials. However, Studeley’s current location in the central part of England is suitable for supplies of meat, production of which is more widely spread across the UK. It is also well placed for distribution of its finished goods, most of which are delivered to retail chains’ central warehouses. Road transport links have improved gradually over the years, and Studeley’s main production site is now five miles from a motorway. Consequently, transport costs, while still important, play a less important part in the company’s cost profile than they used to, and any transport cost disadvantages due to location are smaller than they were even a few years ago. Over the years, Studeley has acquired several well-established brands which have brought some important benefits in terms of economies in selling and distribution. The wider range of established brands has helped Studeley to counter, to some extent, the purchasing power of large retail groups. Acquisitions have brought only modest benefits in terms of production. The company has long prided itself on its production efficiency, and any production synergies arising from its acquisitions have been modest. Some production processes shared by existing and new products have allowed synergies in production costs, while scale increases have led to some increases in purchasing power. But these benefits have been less important than those related to sales and distribution. Studeley’s products have an excellent reputation with consumers, who are intensely loyal to many of the company’s brands. George Sykes, the Operations Director, is proud of the skills of his workforce and the care that they take to ensure the quality of their products, and displays a protective loyalty to his staff. In their turn, the production staff, many of whom have worked for Studeley all their working lives, have great respect for George. Perhaps as a result of this, the workforce is very stable, and its average age has been rising for some time. 56% of Studeley employees are aged 45 or over, as compared with 37% for the whole UK food and drink manufacturing and processing sector in 2011. Two years ago, the number of employees over 45 years of age was even higher. Over the past two years, Studeley has been renewing its production facilities, with a programme of investment in new production equipment, as a result of which it has been able to achieve substantial savings in staff numbers. George and Peter Drew, the Personnel Director, are proud of the fact that it has been possible to achieve these savings through a voluntary severance scheme, including early retirement, and without the need for any compulsory redundancies.

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The people who buy Studeley’s products are also getting older. Many of them have consumed and enjoyed these products all their lives. Even with its acquisitions, Studeley has attracted relatively fewer younger consumers. Biographical details of directors and the Company Secretary are given in Appendix 2, and board membership is shown in Appendix 3. Financial performance Studeley’s shares are quoted on the Main Market of the London Stock Exchange, and the share price is a constituent of the FTSE 250 share index. Along with many other companies, Studeley’s financial performance faltered in the financial crisis at the end of 2008, and the company raised new equity capital with a rights issue in 2009. The issue was more of a precautionary measure than one forced on it by the liquidity problems that some companies faced. While it was not large in relation to the company’s total capital (it raised £470 million), it allowed Studeley to replace variable rate bank borrowing, which had become expensive as banks raised their margins in the face of increased uncertainty about the financial outlook. The financial markets recognised that Studeley was taking prompt and prudent action and, as a result, Studeley was able to raise new equity capital on reasonably favourable terms. It did so at a time when its P/E ratio, while somewhat lower than that of the food processing sector as a whole, was not particularly depressed. The general view of the financial community was that the Finance Director and his advisors handled the issue well. Over the past two years, the performance of the share price has been less impressive, and poor in comparison with other food manufacturers. Studeley’s income statement and statement of financial position are shown in Appendix 4, and its share price history is shown, together with the share prices of BAP and Alpha Foods, its closest competitor in terms of product range and size, in Appendix 5. A note on major holdings of Studeley shares is attached as Appendix 6. Market positioning The company’s brands are almost all well established, and most are household names in the UK. For this reason, Studeley has never seen much need for innovation in what it offers to the market, and expenditure on product development and marketing has been modest. Studeley’s previous Sales Director always argued that, since its brands were well known and respected, they needed only limited marketing as long as there was continued attention to product quality and good standards of customer service (this director retired in 2011 and was replaced after an interval by Mac Demond as Sales and Marketing Director). Most of the directors have always believed that the company’s competitive strategy should be based on efficient production and traditional product quality. This is similar to the strategy of BAP, the leader in Studeley’s sector of the grocery market. BAP adopts this strategy because a large proportion of its output is of supermarket chains’ own brands, so it does not need to spend as much on advertising and promotion as companies whose production is all branded. BAP’s retailer brand business does depend on the reliable delivery of products of a suitable quality in conformance with agreed specifications at competitive prices. The most important area in which Studeley has been slow to recognise a problem, and slower to acknowledge its significance, is the growing public consciousness concerning the importance of healthy eating to a healthy lifestyle. The staff and directors of Studeley are aware of trends in consumer interests and the activities of consumerist groups, and of government initiatives related to diet, exercise, health-related illnesses and obesity. Studeley labels its products to indicate their calories, fat, saturates, salt and sugar content, but has not

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done much more to respond to growing interest in, and changing attitudes to, the healthiness of food. Brands and external perceptions of the company It is June 2013. Tom Coysh, the Chairman, is concerned that Studeley’s low profile means that it is undervalued by investors and that, unless it changes investors’ perceptions, it will be vulnerable to a bid by a rival that takes a more aggressive approach to marketing its products to consumers and communicating the investment potential of its shares to investors. Since he joined Studeley, Tom has been of the view that the company is not making the most of its brands. He considers that while Studeley spares no effort in the care and attention with which it produces its food products, it is not setting prices at levels that reflect this quality. He feels that the company has not been marketing its products in such a way as to maximise the return from the benefits that they offer to consumers. He has observed that some companies in the sector market their brands in ways that allow them to charge premium prices but Studeley, which has brands with similar potential, does not. On the other hand, all of Studeley’s products are branded, and are sold for prices considerably higher than those charged by some other companies, particularly smaller companies in the same sector. Tom is aware that smaller companies tend to have less powerful brands, and even fewer resources to support them than Studeley has. They are therefore even less well-placed to than Studeley to charge prices similar to those of major brands. Indeed, smaller companies often sell to retailers for sale under the retailers' own brand names, and these products tend to command substantially lower prices for manufacturers than successful branded products sold under their own brand names. This applies to retailers' own brands manufactured by the sector leaders as well as those manufactured by smaller companies. As a result of Tom's concerns about the possibility of a bid for the company, Matthew Granger, the Managing Director, has retained a respected firm of corporate communications consultants to advise on investor relations and financial communications. These advisors consider that a bid for the company is a definite possibility, and the company’s brokers share this view. An extract from the financial pages of the ‘Sunday Reporter’ appears as Appendix 7. Fergus Dalgleish, the Finance Director, has expressed unease about Matthew’s action in retaining corporate communications consultants. Before any action was taken, Matthew discussed the matter with Tom and consulted Fergus. Fergus, showing little enthusiasm for the idea, felt that any appointment should be made by him, since he regarded the company's relations with the City (the City of London’s financial centre) as his province. Matthew made clear his view that the issue was central to the strategy of the whole company, and that delay was not wise, a view shared by Tom. A recent letter from the corporate communications consultants to Matthew is attached as Appendix 8. Matthew showed this letter to Tom and to Fergus, who described it as “a lot of nonsense”. Tom suspects that reinvigorating the portfolio of Studeley’s products could help in more than one way to improve investors’ views of the company and its shares. Part of the brief of Mac Demond, the recently appointed Sales and Marketing Director, is to maximise the potential of Studeley’s brands, and to make proposals to this end, involving increased marketing expenditure if necessary. Tom has already heard suggestions from Matthew and from Stephen Norbury, the Senior Independent Director, that the acquisition of a suitable company with good marketing skills might be one way of strengthening Studeley's marketing capabilities. However, for the time being, Tom wants to see what Mac can make of his brief.

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Planning information and market intelligence The Company Planning Manager has a standing brief to keep an eye on developments in Studeley's markets and, in particular, on Studeley’s competitors. All the directors (and others) might normally be expected to do this, but Matthew Granger, the Managing Director, has found that busy people may not always remember to do so, and has made it a specific requirement for the Planning Manager to do this in a methodical way. The Planning Manager uses a variety of means to watch developments. When he first joined the company 12 years ago, he used a press monitoring service. He now finds that he can find a lot of what he needs on the internet. But he also reads the trade press, as well as the business columns of the national press, and talks to trade contacts. He finds that he collects a surprising amount of information from colleagues inside the company that his colleagues have not shared with everybody who might find it useful. An example of the kind of information that the Planning Manager collects and circulates is given in Appendix 9. Mac also collects information on Studeley’s markets and competitors. He is particularly interested in anything that has a bearing on Studeley’s competitive position, and on how it should be responding to market trends. He is keenly aware of developing consumer trends. One article that he has seen recently, which is indicative of growing public interest in such topics, was published in the ‘Healthy Living’ section of the Saturday 27 April edition of a major national newspaper. Extracts from this article are shown in Appendix 10. Communication between directors At the beginning of April 2013, Tom was having an informal chat with Matthew. They both shared the view that the company needed to change; indeed, Matthew was appointed as Managing Director with a view to conceiving and carrying through major changes. They had both been closely involved in the appointment of Mac Demond as Sales and Marketing Director, also with an explicit brief to bring in changes in his own area of expertise. But Tom was concerned that, in identifying and dealing with problems, the company should maintain its strengths in the areas where it had a justifiable reputation for excellence. He had already shared this concern with Matthew, who understood and agreed with his views. They had discussed a few months earlier what might be done to ensure that other directors were aware of this need, and to explore how far the executive board was aware of and shared this agenda. To this end, Tom had asked Matthew to arrange a small number of informal discussions among the executive directors on business issues that might give rise to problems, or where problems were already apparent. The first of these meetings had already been held at the end of March. Mac was invited to explain his perceptions of the company’s marketing and the problems that he believed needed to be addressed. This meeting did not go very well. Mac, who had only joined the company a few weeks earlier, was critical about the company’s marketing expertise and the reputation of its brands. His fellow executive directors felt and said that he did not recognise the company’s strengths, both in terms of people and the company’s products. Mac, on his part, was strengthened in his view that many of his colleagues were excessively conservative and unwilling to change, and lacked a vision of what the company could be. The upshot of this meeting was that Mac, in effect, was told by his fellow directors to go away and ‘do his homework’. Tom wished to press on with the process of sharing views, but wanted to do this in a way that would help to develop a consensus on what problems needed to be addressed rather than encouraging disagreement. Matthew suggested that one way to do this was to discuss a topic where there was, on the whole, agreement that the company was doing a good job. He suggested that a discussion on production might be suitable, embracing facilities, supplies and personnel. Tom agreed, and this time Matthew decided to establish common ground

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before the meeting by eliciting some views by email. Extracts from the email discussion appear as Appendix 11. Board composition and performance Studeley has, for some years, carried out performance reviews for the executive directors, and Tom has informally reviewed the performance of the non-executive directors (NEDs). In recent years, this review has become more formal, and Charles Sexton, the Company Secretary, has organised the issue and analysis of survey questionnaires, completed by all directors, on the operation of the board and its committees. Last year, in accordance with the provisions of the UK Corporate Governance Code, and at Tom’s request, Charles arranged for a professor of corporate finance from a leading UK business school to present a paper to the board on recent developments in the evaluation of board performance, and to provide advice to the company as it carried out a rather more detailed formal evaluation. In mid-May, Matthew Granger, the Managing Director, had a meeting with Charles. He asked Charles to check the reactions of directors to a solution that he thought he had found to the problem of how to replace Stephen Norbury, the Senior Independent Director, as chairman of the audit committee when he retires at the end of 2013. Matthew proposed that Giles Bazalgette, the CEO of his old firm, EMC, should be appointed as a NED, with a view to his taking over the chairmanship of the audit committee when Stephen retires.

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Appendices Appendix 1 Breakdown of Studeley’s sales by product groups

Appendix 2 Biographical details

Appendix 3 Board membership

Appendix 4 Financial statements – Income Statement and Statement of Financial Position summaries

Appendix 5 Share prices for Studeley, Alpha Foods and BAP

Appendix 6 Major holdings of Studeley shares

Appendix 7 Extract from financial pages of ‘Sunday Reporter’

Appendix 8 Letter from Studeley’s corporate communications consultants

Appendix 9 Planning information on competitors

Appendix 10 Extract from report on healthy eating in Saturday edition of national newspaper

Appendix 11 Extracts from Directors’ email discussion dealing with transport, company location and workforce

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Appendix 1: Breakdown of Studeley’s sales by product groups (year to 31 March 2013)

£ million

Baked products (including bread, cakes and pies) 388 Processed cooking ingredients (including sauces and flavourings) 362 Savoury spreads, pickles and relishes 132 Jam and marmalade 73 Soups 153 Cooked vegetables 64 Desserts 132 Total 1,304

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Appendix 2: Biographical details Tom Coysh (59) Chairman Tom gained a first class degree in Philosophy, Politics and Economics at Oxford, where he was also the lead singer in a modestly successful rock band. He joined the army on a short service commission when he graduated, then joined a multinational consumer goods company as a management trainee. He became the executive chairman of one of the company’s operating companies at an early age, then left to become chief executive of a company that was being sold off by another multinational consumer goods company in a management buy-in. He took the company public three years later, and three years after that saw the company, in which he had a major shareholding, join the FTSE 250 share index. Having secured his family’s financial future, he chose to retire from full-time work at the age of 50, but almost immediately took on jobs as chairman of two unquoted companies. He joined Studeley as a NED in 2010, and became chairman in 2011. Tom is gregarious as well as shrewd, and has a wide circle of contacts in industry and the City as well as in his social life. Fergus Dalgleish (62) Finance Director Fergus studied mathematics at Oxford, then qualified as an accountant with a big four accounting firm. He was a prize winner in his final examinations. After six years in his firm, he joined the corporate finance division of a Swiss bank in the City. After a further six years he married and started a family. He regretted not doing so earlier, and two years later decided that he wanted to devote more time to his family and to spend his working hours in a less stressful environment. A friend working in an executive search company suggested Studeley, which he joined in 1986 as Finance Director. On first acquaintance, colleagues and other business contacts tend to be overawed by his undoubted intellectual powers, but the Chairman and Managing Director frequently consult him informally, and feel that he gives sound advice. Like the Chairman, Fergus has been assiduous in maintaining his network of business contacts. Mac Demond (43) Sales and Marketing Director Mac ran his own marketing company for five years before joining Studeley in the spring of 2013. His marketing company, which was quoted on AIM, ran into cash flow problems in 2011, but avoided disaster by a timely sale to an international consultancy, which had sufficient resources, even in the financial crisis, to ensure that the business was adequately capitalised. Mac received nothing like as much as he might have received in a sale a year earlier, but nevertheless emerged with a substantial personal fortune. The brief to the recruitment consultants who shortlisted him included the words ‘go-getting’, ‘innovative’, ‘mover and shaker’ and ‘achiever’. Mac is extremely ambitious, and believes that Studeley offers a classic example of an unexploited resource. His colleagues’ views on him are split. Some are exhilarated by his dynamism and consider him to be a breath of fresh air, one of the best hopes for the future of the company. Others consider him untried and overambitious, and are sceptical about the appropriateness of appointing a person such as Mac to a traditional company such as Studeley. Peter Drew (52) Personnel Director Peter started work in the brewing industry, where at a fairly early age he became personnel director of a subsidiary of a major brewing company that made products derived from brewers’ yeast. From there he moved to BAP, Studeley’s largest competitor, to become human resources director of one of its main divisions. He moved to Studeley as Personnel Director in 2002. He has noted with some interest the contrast between the background, age and attitudes to business of Tom Coysh, Stephen Norbury, Fergus Dalgleish, George Sykes and Charles Sexton on one hand (all of whom are likely to be retiring in the next few years) and (in rather different ways) Matthew Granger and Mac Demond on the other.

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Matthew Granger (48) Managing Director Matthew is a Fellow of the Chartered Institute of Management Accountants (CIMA). He has worked as a general manager in several companies, most, but not all, of which produce food and other consumer products, and in the last three companies as Chief Executive. Matthew sees himself as a professional manager, with skills that are transferable between industries and sectors, and has steadily increased the size of business that he has run. Before joining Studeley in 2010, he was the Chief Executive of EMC, a large but unquoted manufacturing company (EMC stands for ‘Extruded and Moulded Components’ which EMC makes predominantly for the motor industry). Despite his versatility, Matthew recognises the value of trade knowledge and is glad of the fact that he spent a total of eight years in the food industry in previous jobs. Matthew believes that Studeley is ripe for reform (partly because he tends to take a radical approach to business problems, and also because the Chairman has explained why he believes that change is needed). But Matthew also believes that change is more likely to be successful at Studeley if it is carried through with a degree of consensus. However, he believes that while consensus is desirable, change is essential. Stephen Norbury (63) Senior Independent Director Stephen is chairman of the audit committee and is also chairman of the nominations committee and a member of the remuneration committee. He was known to the Chairman before he joined the company because they were at university together. Stephen was doing his PhD in biotechnology, while the future chairman of Studeley was an undergraduate. After completing his PhD, Stephen joined a UK-based confectionery company that is a subsidiary of a very large multinational food company, where he worked in the company’s research division. He subsequently transferred to the company’s financial function, and qualified as a fellow of CIMA while working full time. He subsequently became the financial controller of the UK subsidiary, and was promoted to Group Finance Director in 2002. When he retired in 2009, he became a Non-Executive Director of three companies, including Studeley and one FTSE 100 company. Stephen is due to retire at the end of 2013, and the company has already retained consultants to help in finding a successor. Charles Sexton (62) Company Secretary Charles retired from his job as company secretary of a FTSE 100 company in 2011. He returned to full-time work for a three-year period as Company Secretary of Studeley because he wanted to earn some more money to give his two children a helping hand in buying their own homes. Charles is seen by his colleagues as a safe pair of hands. Like the Finance Director, he is frequently consulted on general business problems by both the Chairman and the Managing Director. George Sykes (63) Operations Director George has worked at Studeley since 1983, and became a director in 1997. He works hard, and expects his staff to do the same. Most of them follow his lead willingly, though their spouses sometimes complain about their long working hours. George takes an old fashioned, paternalistic attitude to his staff. While he sets high standards and demands commitment from his colleagues, he is unfailingly courteous and supportive. George takes a keen interest in his production engineering professional institute, to which he devotes a large amount of time outside working hours, particularly on activities that provide development opportunities for younger professional colleagues. He and his wife have been married for 31 years, and have no children. His wife has now retired from her full-time job as a health visitor, and spends a lot of time on charitable work. She is tolerant of the amount of time her husband spends on his job and professional body activities.

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Appendix 3: Board membership

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Appendix 4: Financial statements – Income Statement and Statement of Financial Position summaries

Studeley Summary Income Statement for year to 31 March

2013 2012 £m £m Turnover 1,303.9 1,249.7 Cost of sales (912.9) (873.4) Gross profit 391.0 376.3 Selling, marketing and distribution costs (174.4) (168.5) Administrative costs (124.1) (130.0) Operating profit 92.5 77.8 Interest payable and other financial charges (88.1) (89.3) Profit/(loss) before taxation 4.4 (11.5) Taxation (charge)/credit (0.4) 9.9 Profit/(loss) after taxation 4.0 (1.6)

(continued)

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Studeley Statement of Financial Position Summary as at 31 March

2013 2012 £m £m Assets Non-current assets Property, plant and equipment 311.2 306.7 Goodwill 641.9 658.2 Other intangible assets 543.1 556.6 Total non-current assets 1,496.2 1,521.5 Current assets Inventories 104.9 114.6 Trade and other receivables 170.0 161.8 Cash and cash equivalents 9.5 19.5 Total current assets 284.4 295.9 Total assets 1,780.6 1,817.4 Liabilities Current liabilities Trade and other payables (237.6) (259.1) Short-term borrowings (74.9) (83.9) Accrued interest payable (6.7) (10.9) Provisions (7.8) (11.3) Current income tax liabilities (0.3) (4.1) Total current liabilities (327.3) (369.3) Non-current liabilities Long-term borrowings (780.4) (783.6) Retirement benefit obligations (150.6) (84.1) Deferred tax liabilities (31.7) (92.7) Total non-current liabilities (962.7) (960.4) Total liabilities (1,290.0) (1,329.7) Net assets 490.6 487.7 Equity Capital and reserves Share capital 4.1 4.1 Share premium 365.1 365.1 Reserves 121.4 118.5 Shareholders’ funds 490.6 487.7

Note: the accounts for the year to 31 March 2013 will be published in July 2013. The figures above include the information that is required by law and financial reporting standards. The published accounts will show separately non-recurrent operating costs of £65.1 million in the year to 31 March 2012 and £63.7 million in the year to 31 March 2013, which are included in the figures above. These amounts will be shown in the published accounts as exceptional items attributed to the re-equipment and reorganisation of production facilities.

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Appendix 5: Share prices for Studeley, Alpha Foods and BAP

Studeley Alpha Foods BAP

pence pence pence

July 2011 31.5 58.8 101.5

August 2011 30 56.6 98.7

September 2011 34.25 60.5 100.2

October 2011 36 67.4 110.1

November 2011 37.5 68.9 112

December 2011 36.75 69.1 119.3

January 2012 38.75 71.9 116.6

February 2012 44.14 79.9 126.4

March 2012 43.9 81.7 131.7

April 2012 39.1 78.8 138.4

May 2012 37.4 78.7 144.5

June 2012 42.4 84.2 149.2

July 2012 40 82.6 150.8

August 2012 45 86.8 154.1

September 2012 42.9 88.4 155.5

October 2012 37 84.2 149.8

November 2012 33.5 79.5 150.5

December 2012 29.6 75.9 149.9

January 2013 30.6 78.7 150.6

February 2013 26.9 77.4 160.1

March 2013 28.5 80.6 159

April 2013 32.2 85.3 166.1

(continued)

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Series 1 Studeley Series 2 Alpha Foods Series 3 BAP

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Appendix 6: Major holdings of Studeley shares The corporate governance report in the draft of Studeley’s report and accounts for the year to 31 March 2013 includes the following: “At 10 May 2013, the following interests in the issued ordinary share capital of the company have been disclosed in accordance with the requirements of the UK Listing Authority’s Disclosure and Transparency rules:

Entity % of total issued shares

Amalgamated Insurance plc 7.3

William Formby Trust 4.3

Banque du Centre SA 3.6

These holdings may have changed since the date of disclosure, and no requirement to notify the company of an increase or decrease in any of the above holdings would have arisen unless the holding had moved up or down through a whole number percentage level.” Notes: (i) Studeley subscribes to a stock surveillance service which keeps an eye on

shareholdings that are large or active, with the purpose of identifying, at an early stage, any activity by a potential bidder for the company. The most recent routine report by the stock surveillance service comments that Amalgamated Insurance plc (‘Amalgamated’), which is a general insurer based in the UK, has had a large shareholding in Studeley for several years. The size of this holding has not changed for several years, apart from changes arising from Amalgamated subscribing to rights issues. The William Formby Trust is a family trust set up by one of the founders of the company. It has held shares in the company since it was set up by a provision in the will of William Formby in 1938. Banque du Centre SA is a French bank based in Paris. It acquired its holding at the beginning of 2010 and, apart from subscribing to the rights issue in 2009, has not increased its investment.

(ii) The stock surveillance service also mentions in its most recent report that a holding of

2.97% of the shares of Studeley has recently been acquired by Schweigen AG Zurich (‘Schweigen’). Schweigen is a nominee holding company. The stock surveillance company has asked Schweigen for information about the beneficial ownership of Schweigen's holding, but has not yet received a response.

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Appendix 7: Extract from financial pages of ‘Sunday Reporter’ of 12 May 2013 The following extract is from a regular column in the financial pages of the ‘Sunday Reporter’, a large-circulation national weekly paper, in which the paper’s widely respected financial editor reports investment-related business news items and offers tips on share investments:

“Studeley could be described as a sleeping giant. It is one of the UK's largest food manufacturers, with a portfolio of famous brands that have been known and loved by generations of Britons. And it certainly seems to be sleeping. Recognised by its industry peers as a byword for quality, Studeley is sitting on brand assets that would make many conglomerates’ mouths water. Yet the Studeley share price is in the doldrums. The shares have risen by only 66% since December 2008 – over a period when most other companies’ shares have made a much sharper recovery from the very real prospect of a financial melt-down following the world financial crisis. Of course, food processors tend to be almost recession proof, so their fall at the end of 2008 was less severe than for most other sectors, and consequently we would expect their recovery since the crisis to be less steep. But Studeley has done less well than its competitors. The share price of Alpha Foods, Studeley’s closest competitor, has risen by 141% since December 2008, and the shares of BAP, the sector leader, are up by 131%. There don’t seem to be any particular problems with Studeley’s financial management. Studeley raised £470 million in a rights issue in 2009, and this allowed it to repay its variable rate debt and reduce long term borrowing from £1,250 million to below £800 million. The general view in the City is that Studeley handled the rights issue well. It got the timing right and, by acting promptly, it avoided any cash flow problems and was able to raise new capital on favourable terms. Studeley has been forecasting a return to profit this year, but nothing more. That means an operating margin of 0.7% against the figure of 0.6% last year, when the operating profit was £77.8 million, giving an earnings figure of minus £1.6 million. Last year’s accounts show that the non-recurrent cost of re-equipping Studeley’s production facilities last year was £65 million, and the Finance Director estimates that, without that extra cost, earnings last year would have been about £50 million. He expects similar one-off costs this year. Next year, with these exceptional costs out of the way, and benefits showing from the re-equipment programme, the company is forecasting earnings of £69 million. But the financial caution that was apparent, and looked just the right thing three years ago, is starting to look like lack of ambition. In fact, even before the re-equipment programme, Studeley’s production capabilities looked good. Industry specialists have always been impressed by Studeley’s production quality, and reckon that Studeley’s production processes are the most cost effective in the industry. But something else at Studeley doesn’t look right. The problems seem to be to do with marketing, rather than finance or production. The company seems to be going nowhere in terms of marketing its products. Brands that used to be a guarantee of premium prices are starting to look tired and out-of-date. Consumer groups’ reports point up Studeley’s products as high in fat, sugar and salt – out-of-step with modern trends and the expectations of health-conscious consumers. Mac Demond, the new Marketing Director, has been brought in to shake things up. Whether he will be able to do so before a predator identifies the recovery potential remains to be seen. Some of the problems may be problems of perception, but more fundamental changes may be needed. A larger group could have the resources in areas like food technology to make these changes. The shares could be a good speculative purchase.”

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Appendix 8: Letter from Studeley’s corporate communications consultants 1 May 2013 Dear Matthew, We are delighted and honoured to have been appointed six months ago to act as Studeley’s corporate communications consultants, with an immediate brief to prepare for what may happen if the company receives an unwanted takeover bid. What we have learned about the company since then has helped us to advise you on preparing for such a possibility. What we have learned has also prompted us to put a further proposition to you, linked to but extending our current brief. Studeley is a well established and respected firm. It is perceived as a good corporate citizen, and both its staff and the final consumers are loyal to the company and its products –

sometimes even fiercely so. Studeley’s commercial relationships with its corporate customers, who are predominantly major UK retailers, are also good. Major UK retailers are not given to sentimentality in their commercial dealings, but we have researched how Studeley is seen by these customers, and found that they value Studeley’s commitment to product quality, its reliability as a supplier and the business standards of the company and its directors. Given all this, it is disappointing that the investment community does not have an equally high regard for Studeley, or for its shares as an investment. The prospective P/E ratio of Studeley shares yesterday (on the basis of consensus forecasts for next year) was 12.3, compared with 15.7 for BAP and an average of 15.1 for the UK food processing sector as a whole. We have also carried out research in the City, and our research shows that the reason for the poor perception on the part of investors is because Studeley is seen as an ageing company, with ageing brands, that is not adjusting to the realities of the modern world. This appears to be due in particular to what the company says – or does not say – about its products in relation to current developments in consumers’ attitudes to healthy eating. Not all of Studeley’s products are out-of-step with trends in healthy eating, but many are. You will have seen the comments on some of Studeley's products in the press. We believe that there is a fundamental problem. Our current objective is to help to achieve an immediate improvement in communication about the virtues of the company and its products, so that Studeley can position itself effectively in advance of any bid. It should also provide short-term support for sales and prices. We believe that progress is being made on both of these fronts. But what we are doing at the moment amounts to little more than a stop-gap solution. Even if the company survives what I believe to be an imminent threat to its survival as an independent entity, there is a longer-term threat that needs to be addressed. My reason for writing to you now is that it is clear that the company needs to make its communication strategy an integral part of its corporate strategy for the longer term. An improvement in how the company is seen, both in terms of what it does now and how it is seen as taking effective action for the future – based on real changes to make those actions reality – will mean an improvement in investor perceptions. That can generate a sustained improvement in the share price, and a reduction in the company’s cost of capital. We can create a virtuous circle of increasing profitability and improved investor perceptions. The alternative could be a long-term decline, in which sales and profitability fall and respected and valued brands are starved of the resources needed to develop and support them. The result could be the erosion of goodwill and the demise of a once great company.

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We hope that you will agree that the time is ripe for action to improve Studeley’s communications with the investment community. We believe that action is not just desirable, but urgently needed. If you share this view, and share our belief that we can achieve this together, we very much hope that you will be willing to discuss our ideas in more detail. Yours sincerely, Reg Matlin Chief Executive Matlin Communications

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Appendix 9: Planning information on competitors (a) Information circulated on a routine basis to directors and senior managers on 1 May

2013 by Studeley’s Planning Manager:

(i) Recent press items on industrial relations at Alpha Foods (‘AF’):

Item in Merseyside local paper: Workers at the AF plant in Speke (near Liverpool) voted last week to strike over payments for holiday working. Union officials called the strike ballot after the company imposed changes in weekend working hours that it said were covered by the agreement signed with the union last year. The union claimed that the changes were not covered by the terms of the existing agreement, and needed to be negotiated separately. Item from Merseyside local paper: A court in Liverpool yesterday refused to grant an injunction to AF declaring the planned strike at AF's Speke plant to be illegal because of alleged irregularities in the strike vote. In its judgment, the court described any irregularities as ‘immaterial’, effectively allowing the strike action to go ahead as planned. Item from food industry trade paper: The AF plant in Speke reopened this week following a three-month strike over payments for weekend working. A company spokesman said that a consensus had been reached on the application of last year’s agreement in the light of increased demand for the company’s products. He regretted the interruption of production, but described the outcome as a victory for common sense, and expressed the hope that the clarification of the agreement would pave the way for a harmonious long-term solution. A union spokesman claimed that the result was a victory for union steadfastness. He stated that the union would continue to abide by negotiated agreements.

(ii) Trade paper report on launch of Alpha Foods’ new ‘Healthy Eating’ dessert

range:

Item in ‘Grocery News’: “Details were announced yesterday of the new Alpha Foods ‘Healthy Eating’ dessert range, targetted at ABC women. The range has been market tested in the Midlands, and is now being rolled out nationally. The range is stocked by all major grocery retailers and all major wholesalers. The national launch is supported by a heavyweight television, press and web advertising campaign, which starts on 25 May. The press campaign uses magazines, national dailies and selected freesheets. The theme of the campaign is ‘With your body in mind’ and the campaign is based on the health properties of the range, with emphasis on the low sugar and fat content of the products. It features celebrities in situations which illustrate health and fitness as well as glamour.”

(b) Studeley’s current information about competitors’ products, markets and financial

performance:

Studeley keeps a database of information on competitors, using as sources: their financial statements, other information provided in their reports and accounts, intelligence from third party sources such as market research omnibus surveys and sales force reports. This is updated from time to time as new information becomes available. This information includes the following details about the product ranges and profitability of Alpha Foods and BAP:

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Alpha Foods product range % of sales (year to 31 December 2012)

Bakery products (including cakes and pies) 30.9 Sauces and flavourings 24.0 Soups and cooked vegetables 14.8 Spreads and relishes 19.9 Desserts 10.4 Total 100.0

Alpha Foods does not manufacture products for sale under retailers’ own names. All of its products are sold under their own brand names. Alpha Foods’ most recent published accounts show that the operating profit (before interest) on the products listed above averages 20.1% of sales. Using Studeley’s current profit margins during the past year on similar branded products, adjusted for reorganisation costs, the Planning Manager has estimated that Studeley might expect to make an average sales margin of 8% on Alpha Foods’ product mix. Reasons for the difference in margins could be related to production efficiency or to pricing. Since Studeley’s production efficiency is reckoned to match that of any of its competitors, and since the scale of Alpha Foods’ branded sales is not very different from that of Studeley’s, an important factor contributing to the difference could be higher selling prices for Alpha Foods. BAP product range BAP has not recently published any product breakdown similar to that shown above for Alpha Foods. However, the Planning Manager has made the following estimates, using information provided by the market research company that Studeley uses to monitor the retail distribution of its own products:

BAP product range % of sales (year to 31 March 2013)

Bakery products 31 Cooking ingredients 19 Spreads, pickles and relishes 10 Desserts 13 Soft drinks 9 Chilled dairy products 18 Total 100

The overall operating margin on all BAP’s sales is 11.9%. The Planning Manager’s estimate of the operating profit that Studeley would make on BAP’s product range is 6% to 7% (calculated in a similar way to that used for the comparison with Alpha Foods, allowing for differences between product ranges and the different proportions of BAP’s sales represented by branded and non-branded products, and incorporating some estimates for product categories that Studeley does not make). The Planning Manager has used the information on product ranges and operating margins to prepare the following summary, for Studeley, Alpha Foods and BAP, of the sales, operating profits and profit margins for branded and non-branded sales:

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Studeley Alpha Foods BAP

Year to 31 March 2013 (unpublished)

Year to 31 December 2012

Year to 31 March 2013

Turnover (£m) Branded sales 1,053 647 2,003 Non branded sales 251 nil 1,127 Total turnover 1,304 647 3,130 Operating profit (£m) and % sales margins Branded 80.0 (7.6%) 130.0 (20.1%) 322.5 (16.1%) Non branded 12.3 (4.9%) nil 49.6 (4.4%) Total 92.3 (7.1%) 130.0 (20.1%) 372.1 (11.9%)

The Planning Manager has also put together market capitalisations (using current share prices), together with consensus forecasts for earnings, to give prospective P/E ratios for Studeley, Alpha Foods and BAP:

Studeley Alpha Foods BAP

Market capitalisation £842 m £1,831 m £4,674 m

Earnings £69 m £113 m £305 m

P/E ratio 12.2 16.2 15.3

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Appendix 10: Extract from report on healthy eating in Saturday edition of national newspaper The ‘Healthy Living’ section in the Saturday 27 April edition of a major UK national newspaper includes the following information on the salt, fat and sugar content of Studeley products:

Savoury spreads: two Studeley brands in top 10 (i.e. highest percentage content) for salt content, one in top 10 for sugar, two in top 10 for fat. Jams and marmalades: one Studeley marmalade brand in top 10 for sugar. Cooked puddings: two Studeley brands in top 10 for sugar, three Studeley brands in top 10 for fat. Breakfast food: one Studeley brand in top 10 for sugar, one Studeley brand in top 10 for fat.

The editorial comment includes the following: "...Studeley’s products, well-established household names, several fondly remembered and still eaten by generations of children and adults, do not do well. Studeley is not alone (after all, Studeley is not the only manufacturer in the list). But Studeley is also not the largest manufacturer represented here, and yet it manages to tot up an impressive total of ‘baddies’. Taken together, they suggest that Studeley has yet to wake up to the growing trend towards healthier eating..."

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Appendix 11: Extracts from Directors’ email discussion dealing with transport, company location and workforce Matthew Granger, the Managing Director, initiated a discussion amongst the directors by email, ahead of a face-to-face meeting on transport, company location and the workforce. Extracts from emails are set out below in the order in which they were sent. (a) Extract from initial email sent to the directors from Matthew:

“...I’m wondering whether there might be a case for moving the main production to a location where communications are rather better. After all, the roads round here are narrow and winding, and moving materials in and production out might be more efficient. Besides, we aren’t really centrally placed for our customers. We are too far west.”

(b) Extract from response to Matthew and all directors from George Sykes, Operations

Director:

“We’ve had time to discuss this, and we have concluded that we aren’t too badly placed. We are only five miles from a motorway, and a lot of our transport movements in and out are at night, when there is little congestion. And, as you have just seen, we keep arrangements for transport constantly under review, and the third party carriers who do most of our transport and provide most of our warehousing have to undergo competitive tendering procedures so that we can make sure that we are getting value for money. And, at the same time, we are checking that the overall level of transport and warehousing costs is acceptable, and not such as to put us at a competitive disadvantage. Our total operating costs might be reduced by up to 1% of turnover if all our operations were located in the ideal position, which would be the East Midlands rather than the West Midlands. But then you have to consider what it might cost, in terms of investment and disruption, to move. Remember, we have just spent a lot of time and money making sure that our production equipment and processes are all up to the best standards. And, probably even more important, think what we would lose in terms of a loyal and skilled workforce which, by and large, wouldn’t move with us.”

(c) Extract from follow-up email to all from Matthew:

“...But we will probably have to move sooner or later. Our workforce is ageing, and we may find it difficult to find enough workers from round here.”

(d) Extract from reply to all from Peter Drew, Personnel Director:

“We are going to have to find replacements for something like 20% of our factory employees who are going to be retiring over the next five years.”

(e) Extract from follow-up email to all from Matthew:

“...and while I think that we all accept our production equipment and processes are pretty good (and by the way, George, I think everybody recognises what a splendid job you did with the re-equipment programme, and what you and Peter did putting into effect the staff savings) you must admit that our production facilities aren’t ideal. We operate on four different sites, and our main factory still isn’t up to the best modern standards. Some of the work is done on an upper floor, which is hardly conducive to efficiency.”

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(f) Extract from reply to all from George:

“You have a point there. But, without implying that our factory buildings create serious problems, I believe that our production operations are very efficient in the circumstances we have. Certainly, the ideal might be to have a single modern factory, on one floor, with a single warehouse on the same site. But so far as storage is concerned, our distribution and warehousing is carried out by third party carriers who have their own efficient facilities, so our own storage facilities are not the biggest part of the equation. And so far as production is concerned, I am convinced that having a dedicated and skilled workforce is the most important consideration. I remember some years ago, when a motor components company relocated from old premises in the centre of Birmingham to a green field site outside the city they lost almost all their experienced workers. They had all sorts of problems with the new people they took on, and working relations took years to recover.”

(g) Extract from reply to all from Peter:

“But that was years ago. Things are different now. Managers are free to manage, and workers are more flexible...”

(h) Extract from reply to all from George:

“I don’t know. We’ve got something that works well. Heaven knows I’ve been doing my best over the years to keep production lean and efficient – with some success, I might add. Ask anybody in the industry: I guarantee that they will tell you that our reputation for production efficiency and product quality is second to none. If we try to shave a little bit off operating costs by throwing away what we have built up over all these years, we are leaping into the unknown and taking unnecessary risks. If we want to maximise profits, why don’t we see what young Mac can do to maximise the returns from our legendary brands and product quality by making sure we get the best prices for our products?”

(i) Extract from reply to all from Mac Demond, Sales and Marketing Director:

“Watch my speed!”

The scenarios included here are entirely fictional, except where expressly identified. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.