Arc Capital : Update on Fortress Group Limited sale and NAV as at 30 June 2014

22 August 2014

On 24 July 2014, ARC Capital Holdings Limited ("ARCH") (AIM: ARCH) announced that the ARCH Board had requested a suspension of trading in ARCH shares pursuant to AIM Rule 40 until such time as the Valuation Committee is satisfied that it is able to formulate and attribute a fair value to ARCH's equity stake in Fortress Group Limited ("FGL") and to issue a NAV. ARCH was unable to publish a NAV as at 30 June 2014 because its Valuation Committee was unable to attribute a fair value to ARCH's equity interest in FGL as at 30
June 2014.
As detailed in ARCH's announcement dated 30 July 2014, the ARCH Board had been notified that FGL had entered into an agreement for the sale of its 100% equity interest in Funtalk China Holdings Limited ("Funtalk") to the Purchaser ("FGL Sale").
Capitalised terms used but not defined in this announcement bear the same meanings as set out in ARCH's announcements dated 4 July 2014, 23 July 2014, 24 July 2014, 30 July 2014 and 1 August 2014.

On 22 August 2014, Mr Borrelli in his capacity as ARCH's representative on the FGL Board, presented ARCH's Valuation Committee with his recommendation regarding the fair value of ARCH's equity interest in FGL as at 30 June 2014. Mr Borrelli recommended that the fair value of this interest be written down to zero.
Mr Borrelli's recommendation was based on the information available to him, including executed FGL Sale transaction documents provided to him in his capacity as an FGL Board member and his knowledge of the affairs of FGL. Mr Borrelli was, however, limited in what he could disclose to the ARCH Valuation Committee regarding the FGL Sale due to the confidentiality obligations imposed on him by FGL and Sanpower.
FGL and Sanpower have purported to impose confidentiality obligations with respect to some of the information Mr Borrelli has learned regarding FGL, in particular information relating to Funtalk's financial position and the terms of the FGL Sale. Mr Borrelli does not agree with FGL's decision to seek to impose these confidentiality obligations and does not consider that these purported obligations were imposed with a view to advancing FGL's best interests. Further, the confidentiality terms do not contain the usual carve outs or exemptions for regulatory requirements. This is highly unusual and the remedies available to Mr Borrelli and ARCH in this regard are being pursued.
Mr Borrelli's reasons for his recommendation are summarised as follows:
 there is a high degree of uncertainty regarding what, if any, return ARCH Digital will receive from FGL through any distribution of the proceeds of the FGL Sale;

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 this uncertainty stems primarily from the structure of the FGL Sale and the uncertainty surrounding the realisable value of tranche payments due under the FGL Sale. This uncertainty also recognises the liabilities of FGL to PAG which likely enjoy a priority to the returns to any shareholders of ARCH; and
 this uncertainty regarding any return to ARCH Digital as a shareholder of FGL is further compounded by the manner in which the FGL Sale has taken place, including the complete lack of information about what led to the PAG Closing not occurring, the complete lack of information about what led to the FGL Sale being executed in place of the PAG Sale and the ARCH Digital Sale, and the conduct of Funtalk, PAG and FGL, both during and after the documentation and closing of the FGL Sale.
It should be noted that Mr Borelli did not in his capacity as a Board member of FGL approve the FGL Sale.
The Valuation Committee of ARCH has carefully considered Mr Borrelli's recommendation.
Further, the Valuation Committee considered it relevant that:
 the Valuation Committee does not have available to it much of the limited information available to Mr Borrelli, such as information regarding the structure and components of the payment terms under the FGL Sale;
 FGL has refused to provide to ARCH and ARCH Digital information necessary to make an informed assessment of the value of the consideration to be paid under the FGL Sale; and
 ARCH is unlikely to sell its interest in FGL in an orderly transaction to a market participant because it would be unable to:
a. provide to the market participant any relevant information regarding the distribution of the proceeds of the FGL Sale, and hence, regarding the expected return the market participant could expect to receive from acquiring ARCH's interest in FGL; and
b. answer any, if not all of the questions that a reasonable and enquiring buyer is likely to ask in respect of the financial position of Funtalk and in respect of the FGL Sale.
The Valuation Committee considers that, in light of Mr Borrelli's recommendation, and for the further reasons set out above, it is appropriate to value its interest in FGL as at 30 June
2014 at zero.
For the avoidance of any doubt, the Board of ARCH has instructed legal advisors to consider all its options in respect of the Funtalk investment, the FGL Sale and associated matters.

On the basis of the above, ARCH announces that as at the close of business on 30 June 2014, its unaudited net asset value ("NAV") per share was US$0.3676, which represents a decrease

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of 59.9% compared to the NAV per share at the close of business on 31 March 2014.

The suspension in trading in the ARCH shares pursuant to AIM Rule 40 was requested until such time that the Valuation Committee of ARCH was satisfied that it was able to formulate and attribute a fair value to FGL and to issue a NAV. On the basis that the NAV per share as at the close of business on 30 June 2014 has been issued, the suspension in the trading of the ARCH shares will be lifted and trading in the ARCH shares will resume at 3.15p.m. today.

Further to the announcement made on 10 February 2014 indicating that that ARC Capital Partners Limited (the investment manager to ARCH and a subsidiary of PAG) had provided written notice to ARCH to resign as investment manager, ARC Capital Partners Limited has served its six months' notice under the Investment Management Agreement and ceased to act in its capacity as investment manager on 7 August 2014.
For more information please contact: ARC CAPITAL HOLDINGS LIMITED:
Steve Feniger, Chairman of the Board
E: steve.feniger@gmail.com
Cosimo Borrelli
Managing Director, Borrelli Walsh Limited
Consultant to the Board
T: (852) 3761 3800
E: cb@borrelliwalsh.com
NOMINATED ADVISER:
Philip Secrett, Grant Thornton UK LLP T: (44) 20 7383 5100
E: philip.j.secrett@uk.gt.com
BROKER:
David Benda / Hugh Jonathan, Numis Securities Limited
T: (44) 20 7260 1000
E: d.benda@numiscorp.com

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