15th July 2008

Hill & Smith Holdings PLC ("Hill & Smith" or the "Company")

Trading update

and

Proposed acquisition of minority interests in Zinkinvent GmbH ("Zinkinvent") and disposal of the Benelux and German businesses of Zinkinvent

Trading Update

HILL & SMITH continues to deliver excellent organic growth across all divisions with revenue, operating profit and order books all ahead of the same period last year.  We look forward to reporting interim results ahead of expectations on 18th August 2008.

Our markets remain strong, being driven by expenditure on infrastructure projects particularly for oil and gas, power generation and, in the UK, flood prevention, water treatment and health and safety. In addition we now have a growing international base to our markets with 40% of the Group's profits being generated from the businesses operating in the Far East, Europe and the USA.

Organic growth is being delivered from the following new products and innovative solutions:

 

• Variable electronic message signs aimed at improving traffic flow on the motorway network;

• TopDeck parking for temporary and permanent parking solutions, typically for airports and railway stations;

• GRP (Glass Reinforced Plastic) railway platforms for platform extension and new railway stations to accommodate increased capacity.

Our strong presence in high growth market segments, allied to our new product development, give us confidence for continued growth in the second half of the year and in 2009.

Proposed Acquisition and Disposal

We are also pleased to announce the proposed Zinkinvent transactions reported below. Completion of these transactions will consolidate Hill & Smith's position as an international group with an established market presence and potential for growth in Europe and the USA. Key features of the transactions are: 

• Acquisition of remaining minority holding in Zinkinvent for €23.7 million (£18.8 million).

• Sale of Benelux/German business for €29.9 million (£23.7 million).

• Both transactions involve a Zinkinvent director and related family trust interests requiring Hill & Smith shareholder consent for related party transactions.

• The net effect will be earnings enhancing and Hill & Smith expects further benefits from 100% ownership of Zinkinvent's key businesses in France and the United States.

Commenting on the Acquisition and the Disposal, Hill & Smith's Chief Executive, Derek Muir, said:

"Zinkinvent's businesses in France and the United States have been performing particularly well and the Board believes that they offer the best prospects for future product development and growth. We are therefore confident that applying the proceeds from the Disposal to acquire the remaining minority interests in these businesses will yield significant long-term benefits to the Hill & Smith Group."

Further information:

Derek Muir, Group Chief Executive

Hill & Smith Holdings PLC

Tel: 0121 704 7430

Chris Hardie

Arden Partners plc

Tel: 020 7398 1639

Edward Carter / Anna McNeil

Freshwater UK

Tel: 0121 633 7775

Details of the Proposed Acquisition and Disposal

Hill & Smith announces that it has, subject to shareholder consent, conditionally agreed to purchase all of the remaining 31.8% minority shareholding, (the "Acquisition Shares"), which the Company does not currently hold in its 68.2% owned subsidiary Zinkinvent. The consideration for the purchase is €23.7 million (approximately £18.8 million), payable in cash on completion. The Acquisition Shares are currently held by Mr Lars Baumgürtel ("Mr Baumgürtel"), by a trust of which Mr Baumgürtel is a beneficiary and by Galvafin GmbH & Co. KG, a company in which Mr Baumgürtel is a substantial shareholder. Following completion of the purchase of this minority interest, Zinkinvent will become a wholly owned subsidiary of Hill & Smith.  

In addition, Hill & Smith has agreed to sell the entire issued share capitals of Galva Holding Company NV (together with its subsidiaries), Galva Belgium NV, CS Galva NV and ICA Hagen GmbH together with 31.8% of the issued share capital of Galva Belgium 2 NV (collectively, the "Disposal Businesses") to Fontaine Holdings NV ("Fontaine"), a company controlled by Mr Baumgürtel, for a total consideration of €29.9 million (approximately £23.7 million).  Net cash balances within the Disposal Businesses, which are expected to amount to approximately €2.1 million (approximately £1.7 million) at completion, will be retained by Fontaine. The Disposal Businesses comprise all of Zinkinvent's trading operations in Benelux and Germany. The Hill & Smith Group will retain a 68.2% shareholding in Galva Belgium 2 NV, whose principal asset is a minority equity investment in a Dutch galvanizing group. 

Mr Baumgürtel is a director of Zinkinvent and its principal subsidiaries. In view of his involvement in the Acquisition and the Disposal, they both constitute related party transactions for the purposes of the Listing Rules. Completion of the Transactions is therefore conditional on approval by the Shareholders of Hill & Smith. A circular is being despatched to Shareholders shortly convening a General Meeting of the Company, at which ordinary resolutions will be proposed to approve the Acquisition and the Disposal. 

Background to and reasons for the Acquisition and the Disposal

The Acquisition

In May 2005, Hill & Smith acquired 33.3% of the issued share capital of Zinkinvent for €25.0 million. In March 2007, Hill & Smith announced that it had agreed to acquire, conditional on shareholder approval, a further 34.9% of Zinkinvent for €26.1 million. Following shareholder approval of this further purchase, Zinkinvent became a 68.2% subsidiary of the Company in July 2007.  

The Directors of Hill & Smith have been reviewing the options for increasing further the Group's 68.2% shareholding in Zinkinvent. Completion of the Acquisition will result in the Group obtaining 100% ownership of its businesses in France and the United States of America. The Board believes that having full ownership of these businesses will be advantageous for the Group because this will enable it to:

• obtain the full benefit of Zinkinvent's established profitable activities in France and the United States of America, where the Directors consider there are the best opportunities for growth; 

• implement and extract maximum benefit from the product development potential within the fabricating operations of Zinkinvent in France and the United States of America; and

• achieve a more tax-efficient Group structure.  

The Disposal

In the announcement and publication of the Report and Financial Statements for the year ended 31 December 2007 the Board of Hill & Smith stated that it had decided it did not wish to retain the Benelux and the German trading operations of Zinkinvent, and was therefore seeking a purchaser for these businesses.  

The Directors believe that the Disposal Businesses do not fit with the Group's strategy of expanding in growing markets, primarily through product development. The absence of established fabrication activities within the Disposal Businesses, and the significant market share which the Benelux galvanizing operation already has, limit the growth potential available to the Group in these countries.

In addition, the anticipated returns on capital employed of the Disposal Businesses are lower than those that are expected to be achieved in the rest of the Zinkinvent Group, being influenced in particular by the higher levels of expected future expenditure needed to comply with environmental legislation and in funding the unprofitable German operation. The Directors therefore consider that it is in the best interests of Shareholders to dispose of these businesses and to re-invest the majority of the proceeds in acquiring full ownership and 100% of the benefits of Zinkinvent's businesses in France and the United States of America where higher returns can be achieved.  

Information on Zinkinvent and the Acquisition Agreement

Zinkinvent is a German holding company with no trading operations, and its principal asset is the entire issued share capital of Vista NV ("Vista"). Vista is an established Belgian based industrial group with operations in Benelux, France, the United States of America and Germany. It operates under the trading names of Galva Power in Belgium, France Galva in France, Voigt & Schweitzer in the United States of America and ICA in Germany.  Vista's principal activity is the provision of hot dip galvanizing services to a wide range of industrial, agricultural and commercial users. It also has fabricating operations in France and the United States of America serving respectively the lighting column and power supply markets.  

In its unaudited accounts for the year ended 31 December 2007, the Zinkinvent Group reported revenues of €266.2 million (£183.0 million) and profit before tax of €38.0 million (£26.1 million). The gross assets of the Zinkinvent Group at 31 December 2007 were €319.7 million (£235.6 million). The financial performance of the Zinkinvent Group in 2007 benefited substantially from the movement in the price of zinc, the main consumable material.  

The Acquisition Shares are currently held by Mr Baumgürtel, through a trust of which Mr Baumgürtel is a beneficiary and by Galvafin GmbH & Co. KG, a company in which Mr Baumgürtel is a substantial shareholder.  

The consideration for the purchase is €23.7 million (approximately £18.8 million), payable in cash on completion. This represents an equivalent price to that paid to acquire Hill & Smith's additional 34.9% holding in 2007, and values the entire issued share capital of Zinkinvent at approximately €74.8 million.

Following completion of the Acquisition, Mr Baumgürtel will resign, without compensation for loss of office, from the boards of Zinkinvent, Vista, France Galva, and Voigt & Schweitzer and will have no continuing managerial responsibilities for companies within the Hill & Smith Group.

Information on the Disposal Businesses and the Disposal Agreement

The Disposal Businesses comprise seven galvanizing plants and one powder coating plant in Benelux and one galvanizing plant in Germany.

In the year ended 31 December 2007, the Disposal Businesses reported unaudited revenues of €87.2 million (£59.9 million) and unaudited profit before tax of €6.6 million (£4.5 million). The unaudited gross assets of the Disposal Businesses at 31 December 2007 were €67.9 million (£50.0 million).  The financial performance of the Disposal Businesses in 2007 continued to benefit from the movement in the price of zinc, the main consumable material.  

The consideration payable by Fontaine for the Disposal Businesses is €29.9 million (approximately £23.7 million). At completion net cash balances within the Disposal Businesses, which are expected to amount to approximately €2.1 million (approximately £1.7 million), will be retained by Fontaine and are dependent on the trading results of these businesses up to the date of completion. All of the consideration is payable in cash on completion, except for €1.3m (approximately £1.0m) which will be left outstanding and which will be payable on the third anniversary of the completion date.  

The net proceeds of the Disposal will be used principally to satisfy the cash consideration of €23.7 million (approximately £18.8 million) payable for the Acquisition, with the balance being used to reduce the Group's borrowings.

Financial effects of the Acquisition and the Disposal

Following the acquisition of the additional 34.9% shareholding in Zinkinvent on 2 July 2007, the financial results of Zinkinvent from this date were fully consolidated within the Group's financial statements for the year ended 31 December 2007. Prior to 2 July 2007, the financial results of Zinkinvent were equity accounted as an associate.

The full consolidation of Zinkinvent as though it were a wholly owned subsidiary reflects the IFRS accounting treatment of a "put option" contained in the Articles of Association of Zinkinvent. This put option, which is a standard provision in German GmbH company articles of association, gives all Zinkinvent shareholders the right to require Zinkinvent to repurchase their shares for market value. In 2007, the Group was required to account for Zinkinvent as if the put option had been exercised, and to provide within the Group's consolidated balance sheet for the anticipated cost of acquiring the remaining 31.8% of Zinkinvent still held outside the Group. A notional related financing charge was also required to be included in the consolidated income statement, and this continues to be charged so long as the put option remains unexercised.

As the Group had decided that it did not wish to retain the Benelux and German trading operations of Zinkinvent, revenues, costs and taxation expenses relating to these businesses were excluded in deriving profit for the year of £22.0 million from continuing operations as stated in the Group's Annual Report and Accounts for the year ended 31 December 2007. Revenues, costs and taxation expenses for these operations were shown separately in one line as discontinued operations. Assets and liabilities relating to these discontinued operations were separately classified within the Group`s consolidated balance sheet as at 31 December 2007 under the heading "assets held for sale" and "liabilities held for sale" all of which were recorded at fair value.

  

Following completion of the Acquisition and Disposal, the net financial effect on the continuing operations of the Group will be earnings enhancing. This will be achieved through the Acquisition eliminating the notional interest charge relating to the "put option", the Group's net debt being reduced, leading to lower interest costs, and synergies arising from the Group's 100% ownership of Zinkinvent. This earnings enhancement statement should not be interpreted to mean that the earnings of the Group for the current year or future years will necessarily be greater than those of the Group for any preceding financial period.

The Disposal is expected to realise a profit to the Group. Such profit can only be definitively computed on completion when the net cash within the Disposal Businesses and the trading results up to completion are known. A small minority interest will also result from the Group disposal of its 31.8% shareholding in Galva Belgium 2 NV, whose principal asset is a minority equity investment in a Dutch galvanizing group. This minority interest is recorded as "available for sale financial assets" in the Group's consolidated balance sheet.  The consideration proceeds for the disposal will replace the assets and liabilities held for sale. 

The Acquisition will eliminate from the Group's consolidated balance sheet the anticipated cost of acquiring the remaining 31.8% of Zinkinvent (resulting from the "put option") and replace it with the actual consideration paid, with any difference being adjusted through goodwill.

With the exception of the adjustments noted above, the consolidated net assets of the Group will remain unchanged following completion of the Acquisition and Disposal. 

The Acquisition payment of €23.7 million and Disposal receipt of €28.6 million is expected to generate a net cash benefit to the Group of €2.2 million after deduction of €0.6 million of transaction costs and the estimated transfer of €2.1 million of net cash balances within the Disposal Businesses.

Note:

Capitalised terms used, but not defined, in this announcement have the same meanings as given to them in the circular to be posted to Shareholders.