TIDMCSI
RNS Number : 6381K
Castle Street Investments PLC
04 January 2016
THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS
RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN
WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE
UNITED STATES OF AMERICA, CANADA, JAPAN, THE REPUBLIC OF SOUTH
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REGULATIONS.
Castle Street Investments plc
("Castle Street" or "the Company")
Acquisition of Selection Services Investments Limited, Placing
and Re-Admission to AIM
Castle Street Investments plc (AIM: CSI), is pleased to announce
it has agreed to acquire Selection Services Investments Limited
("Selection"), a UK focused provider of IT solutions and Cloud
services, for an enterprise value of GBP34.8 million. The Company
has also conditionally raised GBP30 million by way of an
oversubscribed placing of new Ordinary Shares.
Highlights:
-- Platform acquisition to start buy and build in the IT
solutions and Cloud services sector supported by organic growth
-- Seeking to build an integrated IT solutions and Cloud services business
-- Potential to expand capabilities and service offering whilst
improving margins by focusing on higher value services
-- MXC Capital originated the opportunity and is acting as
cornerstone investor, subscribing for GBP12.9 million of equity and
will own 24.9% of issued share capital post Admission
-- Placing more than 2x oversubscribed, supported by high quality institutional shareholders
-- Experienced management team recruited with track record of
delivering growth and shareholder value, to be led by Andy Ross,
partner in MXC Capital, as CEO
-- Selection is an established business with GBP35 million of
revenues, 65% of which are recurring
-- Selection has over 500 active customers who typically have between 250-3,000 seats
-- The Company will have available cash resources of GBP16.5 million at Admission
-- In addition, terms agreed for a GBP7 million revolving credit
facility and a GBP2 million overdraft (with up to a further GBP10
million available under an accordion)
The Acquisition will be funded by a combination of the Company's
existing cash resources and the placing of 100,000,000 new Ordinary
Shares raising GBP30 million (approximately GBP28.4 million net of
costs). The additional proceeds of the Placing will be used to
strengthen the Company's balance sheet in line with its future
strategy of making targeted acquisitions within the IT services
sector.
The Acquisition and the Placing are subject, inter alia, to
Shareholder approval at the General Meeting to be held at 10.00
a.m. on 20 January 2016 at the offices of DAC Beachcroft, 100
Fetter Lane, London EC4A 1BN.
Bill Dobbie, Non-Executive Chairman of Castle Street, said:
"It has been our stated investment strategy to seek investment
into a profitable and cash generative business with an experienced
management team, good revenue visibility and growth opportunities.
We believe that in Selection we have identified a business that
meets these criteria and look forward to an exciting future."
Andy Ross, incoming CEO of Castle Street said:
"The smaller end of the IT services sector is highly fragmented
providing an exceptional opportunity for a buy-and-build platform
focusing on IT solutions and Cloud services. The combination of a
strong balance sheet, the new management team we are building and
MXC's proven track record in the sector is a powerful one that will
set us apart and presents a great opportunity to deliver value for
shareholders."
The Acquisition constitutes a reverse takeover under Rule 14 of
the AIM Rules for Companies and is therefore conditional, inter
alia, on approval by Shareholders which will be sought at a general
meeting of the Company, notice of which is set out at the end of
the Admission Document, extracts from which can be found below. The
Admission Document will be posted to Shareholders today and is
available on the Company's website:
www.castlestreetinvestments.com.
Further to the announcement of 24 December 2015, trading in the
Company's shares will remain suspended pending Shareholder approval
at the General Meeting.
Castle Street Investments Tel: +44 (0)
plc 7788 923053
Bill Dobbie, Chairman
Niall Stirling, CFO
N+1 Singer (Nominated Tel: +44 (0)20
Adviser and Broker) 7496 3000
Sandy Fraser
Jen Boorer
MXC Capital Markets Tel: +44 (0)20
LLP (Financial Adviser) 7965 8149
Marc Young
Charlotte Stranner
The following text has been extracted from the Admission
Document which has been published today.
Capitalised terms shall have the same meaning as in the
Admission Document unless the context requires otherwise.
Introduction
The Company today announced that it had conditionally agreed to
purchase the entire issued share capital of Selection. The
enterprise value of the Acquisition is GBP34.8 million payable as
to GBP34.4 million in cash and as to the balance by the issue of
1,353,810 new Ordinary Shares.
In order to part finance the Acquisition, strengthen the balance
sheet in line with its future strategy of making targeted
acquisitions within the IT solutions and Cloud services sector, and
for general working capital purposes, the Company also announced
the conditional placing of the Placing Shares at 30 pence per share
to raise GBP30 million before expenses, including a strategic
investment in the Company by MXC Capital, a technology focused
merchant bank. MXC Capital is subscribing in the Placing for
43,000,000 new Ordinary Shares, representing 24.9 per cent. of the
Enlarged Issued Share Capital, alongside certain new and existing
institutional investors and certain of Proposed Directors.
Upon completion of the Placing and the Acquisition, the New
Ordinary Shares will rank pari passu with the Existing Ordinary
Shares. Application will be made for the admission of the Enlarged
Issued Share Capital to trading on AIM. The Acquisition constitutes
a reverse takeover for the purposes of the AIM Rules for Companies
and, accordingly, requires Shareholder approval, which is being
sought at the General Meeting to be held at the offices of DAC
Beachcroft LLP at 100 Fetter Lane, London EC4A 1BN at 10.00 a.m. on
20 January 2016. The Acquisition and Placing are conditional upon,
amongst other things, the passing of the Resolutions and Admission
which is expected to take place on or around 21 January 2016.
This document contains detailed information about Castle Street
Investments, Selection, the Acquisition and the Placing and
explains why the Directors consider that the Placing and the
Acquisition are in the best interests of the Company and its
Shareholders as a whole and recommend that you vote in favour of
the Resolutions to be proposed at the General Meeting, notice of
which is set out at the end of this document, as they intend to do
in respect of their beneficial holdings of 14,683,641 Ordinary
Shares, representing 20.6 per cent. of the Existing Issued Share
Capital.
Background information on Castle Street Investments
The Company was established in 2005 by two founding partners (of
which one was Bill Dobbie) and was admitted to trading on AIM on 30
June 2010 as Easydate plc, an internet based dating operator. At
this time, through its network of websites, the Company had built a
base of over 13 million registrants and over 9 million members in
29 countries. In January 2011, the Company was renamed and
rebranded as Cupid plc with a focus on international markets, as
well as the UK, and the expansion of its global presence.
In July 2013, the Company completed the disposal of its casual
dating business to focus on developing its core traditional dating
assets. New opportunities were also identified outside dating with
a proposed digital capability adding complementary services.
However, in 2014 changes in the dating market accelerated and new
applications put pressure on traditional online dating business
models. A strategic review of its dating business in the summer of
2014 led to the sale of the traditional dating assets and, with
effect from 24 December 2014, the change of status to an investing
company under the AIM Rules.
Since that time the Directors' focus has been on ensuring a
smooth exit from the legacy business and related liabilities and
turning the Company into a well-capitalised cash shell which could
either exploit new opportunities in line with its published
investing policy or return cash to shareholders. The gross proceeds
of sale of the dating assets amounted to GBP38.6 million and, as
previously announced, the Company's expectation is to close 2015
with a projected cash balance of GBP22 million after taking account
of remaining outstanding liabilities, and excluding the costs
associated with the Selection transaction. The Directors believe
that the acquisition of the Selection business, as described more
fully below, represents an opportunity to redeploy the Company's
cash reserves, in combination with an injection of additional
capital, within a market sector which is ripe for further
consolidation and which offers the prospect of significant returns
for existing and new shareholders.
Background information on Selection
Selection is a supplier of IT solutions and Cloud related
services providing:
-- professional, flexible and reliable IT support;
-- fully managed IT solutions and Cloud related services;
-- bespoke IT project delivery; and
-- expert, strategic IT consultancy and advice.
Selection works with a variety of customers throughout the UK,
delivering solutions that help clients improve their performance
and productivity while reducing costs by deploying a range of IT
solutions and related services.
Detailed information on Selection and its business activities is
set out below.
Reasons for Acquisition
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In line with its investing policy the Company's stated strategy
has been to seek investment in a business with, amongst other
characteristics, experienced senior management, good growth
opportunities, demonstrated profits, positive cash flows and good
revenue visibility. The Directors believe that in Selection they
have identified a business that meets these criteria and which
represents a strong and stable platform from which to make further
acquisitions to supplement organic growth. As such, the Acquisition
signals a longer-term strategy to position the Company as a
consolidator within the IT services sector, which the Directors and
Proposed Directors believe offers ample opportunities for further
acquisitive growth.
More specifically, the Directors and Proposed Directors believe
that there are greater opportunities to generate longer term
shareholder value through the Acquisition than by a return of the
Company's cash to shareholders and consider that the opportunity
represented by the Acquisition is in the best interests of the
Company and Shareholders for the following reasons:
-- Structural and technological change has created high growth
segments in the IT services market as businesses increasingly look
to external providers for outsourced cloud management services,
data centre hosting, network services and IT infrastructure
modernisation.
-- Selection is an established business with significant
recurring revenue (c. 65% of total revenues in the last financial
year to 30 June 2015) from delivering IT services into a broad
client base with improving margin profiles and strong cash
generation.
-- Selection's service offering and customer engagement model
cultivates long-term customer relationships that drive an
increasing proportion of contracted revenues.
-- Selection's strategy is aligned to the structural trends and
growth segments within the IT services market. Data centre, network
services and Cloud based offerings all support the transformation
of aclient's IT infrastructure and systems and Selection is
increasingly delivering this transformation on an outsourced
basis.
-- Members of the Selection management team have substantial
sector expertise and in depth knowledge of the current client base
and target market.
The Directors and Proposed Directors believe that the
opportunity exists to increase shareholder value through an
acquisition strategy focused on driving consolidation of the
fragmented IT solutions and Cloud services sector and in particular
extending Selection's capabilities in data centre hosting and
network services. The Directors and Proposed Directors believe that
increased scale and reach will be necessary in the future to
compete in the IT services market. Many of the current players
could be regarded as sub-scale and a consolidation strategy
provides the opportunity for value creation from revenue and cost
synergies.
Furthermore, an enlarged business should have a stronger
competitive market proposition as a result of a broader portfolio
of products and a wider customer base.
Growth strategy for the Enlarged Group
The Directors and Proposed Directors believe that the Enlarged
Group, with an established IT solutions and Cloud services
business, will have a solid platform from which to accelerate
growth.
The strategic objectives are to grow through:
-- broadening the current customer base;
-- cross-selling more services into existing customers; and
-- investing in strengthening the current portfolio of products
and services, and the New Board will target acquisition
opportunities offering data centre hosting, network services and
Cloud based solutions.
This will help to position the Company as a consolidator within
the IT services sector, which the Directors and Proposed Directors
believe offers ample opportunities for further acquisitive growth.
The Directors and Proposed Directors believe, consistent with these
objectives, that there is an opportunity to build a highly
profitable, coherent IT services group with revenues in excess of
GBP100 million within a timeframe of three years.
Organic
The Directors and Proposed Directors believe that mid-market
organisations have historically not been provided with a full
service offering by larger IT infrastructure service providers.
Many customers thus either utilise a high level of internal
resource or have relationships with multiple suppliers. The
Directors and the Proposed Directors are of the view that
opportunities exist for Selection to service these businesses more
effectively, becoming a go-to technology partner of choice with a
strategic aim to be able to deliver a broad range of services from
owned data centre and network assets.
Selection has also developed a strong relationship with the
Service Provider/Systems Integrator Atos, and generates c. 30% of
its revenues from this indirect channel to market. Selection
currently has 24 separate contracts with Atos and the Directors and
Proposed Directors believe there is potential to expand this
relationship going forward as well as there being a potential
opportunity for Selection to replicate the Atos relationship with
other Service Providers/Systems Integrators in the future.
The Directors and Proposed Directors believe that the existing
customer base and target market should continue to offer
significant opportunities to provide a broad range of IT related
services under long term managed services contracts, which will
allow Selection to increase the level of recurring revenues within
the business and thus strengthen the forward order book.
Selection has made two strategic acquisitions in the last four
years which have strengthened its capabilities in Cloud services
(Cloud Data Limited) and in network services (Aggregated Telecom
Ltd, known as 8el). The Directors and the Proposed Directors
believe that these acquisitions have allowed Selection to provide
complementary solutions over and above the existing capabilities
that already existed in Selection, and this has supported the move
into developing longer-term and more complex relationships with the
larger end of the customer base. Selection also delivers a broad
range of IT related project-based and procurement services to
customers with c. 25% of revenues derived from these
activities.
Selection's customer base includes both private and public
sector customers, and over the last two years it has invested
significantly in building a more capable and effective sales team
that can continue to grow the customer base across all sectors.
Acquisitions
The future strategy of the business is to make targeted
acquisitions. Specifically, the aim is to source assets offering
data centre infrastructure, network connectivity and managed
services, with customers that can be transitioned through the
Enlarged Group's offering, or companies that would complement or
broaden current skills sets and technology plays. More
specifically, the strategy will aim to increase the Enlarged
Group's scale and reach whilst adding a broader skills and product
portfolio with which to service a larger client base.
The New Board intends to target opportunities with potential to
improve the Enlarged Group's ratio of recurring revenues, with a
focus on improving cash generation and driving margin accretion
through synergies.
The New Board believes the potential synergies from execution of
this strategy could be significant and support the wider strategic
rational. Operating efficiencies from acquisitions could include
property consolidation, elimination of corporate overhead and
operational rationalisation and greater purchasing power when
dealing with product vendors.
Particular focus will be given to data centre hosting, network
services, hosted desktop/VoIP, unified communications and managed
security. In line with this strategy a number of potential
acquisition targets have already been identified that would
strengthen the Enlarged Group's portfolio of products and services
and support accelerated growth. The New Board will seek to actively
engage these targets as soon as practicable following
Admission.
Current trading
Castle Street Investments
The Company's recent focus has been to seek to transition into a
well-capitalised investment vehicle. The Directors believe that
good progress has been made since the last financial year-end to
settle outstanding liabilities and residual receivables. Castle
Street Investments' cash position, net of liabilities, at 31
December 2015 is expected to be in excess of GBP22 million (c.30.5
pence per share), before taking account of the costs associated
with the Selection transaction.
Selection
Since the date to which the latest financial information
included in this document has been prepared, Selection has
continued to trade in line with the Proposed Directors'
expectations, winning new business, and securing a place on the
government G Cloud 7 contracting framework with the Crown
Commercial Service, enabling it to bid for public sector contracts
across the UK. As a result of Selection's current capital
structure, it continues to incur high default interest charges on
the loan stock, leading to a deterioration in net losses versus
budget. The loan stock and accrued interest will be settled as part
of the Acquisition.
Enlarged Group
The Directors and the Proposed Directors are encouraged by the
trading environment within the wider IT services sector and expect
that the combined resources available following completion of the
Acquisition represent a strong platform from which the Enlarged
Group is well-positioned to prosper.
Additionally, the Company has received an offer from Royal Bank
of Scotland plc for a new GBP7 million revolving credit facility
and a GBP2 million overdraft facility alongside a GBP10 million
accordion post Admission.
Directors, Proposed Directors and Senior Management
Directors
Details of the current directors of Castle Street Investments
are as follows:
Bill Dobbie, aged 56, Non-Executive Chairman
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Bill is an experienced entrepreneur and director specialising in
internet, telecoms and technology businesses and founder of Castle
Street Investments (formerly Cupid plc). Bill founded Cupid
following 7 years at Iomart Group plc in roles spanning founder to
non-executive positions.
Bill has been a director of Demon Internet, Prestel, Teledata,
Scottish Telecom (Thus) and several other companies. Bill is
currently a director of Cloudsoft Corporation, a private entity
that produces software for managing public and private cloud
infrastructure, and Edinburgh Alternative Finance Ltd, a peer to
peer lender. He is also a non-executive director of Tag-Games Ltd,
a provider of mobile and social games.
Upon Admission, Bill will step down from his current role as
Chairman but will remain as a Non-Executive Director.
Niall Stirling, aged 58, Chief Financial Officer and Company
Secretary
Niall joined Castle Street Investments (formerly Cupid plc) as
Chief Financial Officer in January 2013 and has over 20 years'
experience in senior financial and operational roles in branded
consumer businesses in the UK, US and across Europe.
After training with Ernst & Young Niall worked at Coca-Cola
Schweppes and then as finance director brands for Highland
Distillers, owners of The Famous Grouse and The Macallan. As
commercial director at Maxxium he set up a premium drinks
distributor joint venture turning over GBP300 million. He then
spent 5 years with Red Bull, including 2 years as chief financial
officer of Red Bull North America Inc. Prior to joining Castle
Street Investments Niall spent 4 years as chief financial officer
and then executive director of operations of the Performing Rights
Society.
Niall is currently Chief Financial Officer and Company Secretary
and will step down as a Director and the Company Secretary upon
Admission.
Max Royde, aged 43, Non-Executive Director
Max is a partner at Kestrel Partners LLP, a smaller company fund
management business. He is also a non- executive director of
Gresham Computing plc. Max was appointed as a Director of the
Company at the beginning of February 2015 and will step down as a
Director upon Admission.
Proposed Directors
On Admission, it is proposed that the following will be
appointed to the board of directors of the Company:
Jonathan Watts, aged 61, Proposed Non-Executive Chairman
Jonathan is an experienced board executive with corporate
governance experience within the IT, Telecommunications and Banking
sector in the UK, Australasia and US. Jonathan was President and
Founder of GEO Networks, and has held board positions with Alliance
and Leicester, Colt Telecommunications, NB3, Bell South and Control
Data Corporation.
Andy Ross, aged 51, Proposed Chief Executive Officer
Andy is a partner in MXC Capital and upon Admission will also
become Chief Executive Officer of the Enlarged Group. He has over
35 years of experience in the IT industry and has previously held
chief executive officer roles at Northgate Managed Services and
Valldata, and senior director roles at Atos, EDS, Sema Group and
KPMG.
Julian Phipps, aged 49, Proposed Chief Financial Officer
Julian is an experienced chief financial officer having spent
over 20 years working in the technology sector. He has worked for a
number of large IT and Telecommunications businesses including
Updata, Northgate Managed Services, Sungard Availability Services
and Parity. Prior to working in the technology sector Julian worked
for Coopers and Lybrand in Switzerland, Luxembourg and London.
Katherine Roe, aged 38 (Independent Non-Executive Director)
Katherine is an experienced Investment Banker having worked at
Morgan Stanley and Panmure Gordon. Katherine has extensive
experience in advising companies on a range of strategic options,
and has worked on multiple IPO launches, equity capital
fundraisings and M&A transactions. Katherine is currently Head
of Investor Relations and Corporate Communications for Wentworth
Resources, a publically listed oil and gas exploration and
production company.
Principal terms and conditions of the Acquisition
On 31 December 2015, the Company entered into the Acquisition
Agreement with the Vendors pursuant to which the Company has
conditionally agreed to acquire the entire issued share capital of
Selection. The consideration for the Acquisition is calculated on
the basis of the equity value of Selection as at 31 December 2015
(as per a set of locked box accounts agreed between the Company and
the Vendors), being GBP7.9 million, less the interest payable to
certain of Selection's creditors on Selection's outstanding
indebtedness with such creditors (the "Indebtedness") for the
period from the date of the Acquisition Agreement until Completion.
The consideration is to be satisfied as to GBP7.5 million in cash
and GBP0.4 million in the form of the Consideration Shares to be
issued at the Placing Price to certain shareholders of Selection.
The Company will also, on Completion, repay the Indebtedness on
behalf of Selection, being a payment of GBP26.9 million.
Pursuant to the terms of the Acquisition Agreement, each Vendor
severally warrants, covenants and undertakes to the Company that,
except in the case of certain agreed items of permitted leakage,
there have been no payments or transfers of value from any
Selection Group Company to that Vendor ("Leakage") from the date of
the locked box accounts until the date of Completion. Each Vendor
is under an obligation to pay to the Company an amount equal to any
Leakage on demand, provided that the Company makes such a demand
for payment within the 12 month period after Completion.
Completion of the Acquisition Agreement is conditional, amongst
other things, upon completion of the Placing, save in respect of
the placing proceeds.
The Vendors do not comprise all of the shareholders in
Selection, the shareholdings of certain minority shareholders are
being acquired by the Company under separate agreements to be
entered into pursuant to the terms of the Acquisition
Agreement.
Additional information relating to the Acquisition Agreement is
set out in paragraph 12.1(b) of Part VII of this document.
Financing of the Acquisition
The Company will use its existing cash resources along with the
proceeds of the Placing to satisfy the cash consideration of GBP7.5
million payable in respect of the Acquisition as well as repaying
Selection's indebtedness, being a payment of GBP26.9 million. The
remaining GBP0.4 million consideration will be satisfied by the
issue of Consideration Shares.
The pro forma statement of net assets of the Enlarged Group set
out in Part VI of this document shows pro forma net cash of GBP13.9
million as at 30 June 2015 after adjusting for the Acquisition.
The Placing and the MXC Warrants
In order to part fund the cash consideration for the Acquisition
and the associated transaction costs, to strengthen the balance
sheet in line with its future strategy of making targeted
acquisitions within the IT services sector, and for general working
capital purposes the Company is seeking to raise GBP30 million
pursuant to the Placing through the issue of the Placing Shares at
the Placing Price. The Placing Shares will represent approximately
57.9 per cent. of the Enlarged Issued Share Capital immediately
following Admission. Further details of the Placing Agreement which
contains the terms upon which the Placing is being undertaken are
described in paragraph 12.1(a) of Part VII of this document. The
Placing is not being underwritten. Following Admission the Placing
Shares will rank pari passu with the Existing Ordinary Shares.
In consideration of MXC Capital's agreement to subscribe in the
Placing for 43,000,000 Ordinary Shares to the value of GBP12.9
million, MXC Capital has been granted evergreen warrants over 5 per
cent. of the Enlarged Issued Share Capital at the Placing Price
(the "Warrants"), subject to adjustment to reflect any further
equity issues Further details of the Warrants and the Warrant
Instrument are set out in paragraph 12.1(e) of Part VII of this
document.
Management incentivisation arrangements
The Directors and Proposed Directors believe that the success of
the Enlarged Group will depend to a high degree on management and
other members of staff being appropriately motivated and rewarded.
The Enlarged Group is therefore proposing to establish the New
Employee Share Scheme, designed to assist in the recruitment,
motivation and retention of staff and which, for executive
directors and senior managers, carries performance conditions which
align the interests of the management team with those of
Shareholders.
Participants in the New Employee Share Scheme will be entitled
in aggregate to 5 per cent. of future Shareholder value generated,
which will be calculated by reference to the growth in the market
capitalization of the Company following Admission over a period of
between 3 to 7 years, as adjusted for the issue of new Ordinary
Shares after Admission (but excluding any new Ordinary Shares
issued pursuant to the New Employee Share Scheme) and taking into
account dividends and capital returns, if any. Andy Ross will
participate in the New Employee Share Scheme in respect of 2 per
cent. of future shareholder value generated and Julian Phipps will
participate in the New Employee Share Scheme in respect of 1 per
cent. of future shareholder value generated. Further details of the
New Employee Share Scheme are set out in paragraph 19 of Part VII
of this document.
In addition, it has been resolved that Jonathan Watts will be
granted options to the value of GBP200,000, exercisable at the
Placing Price.
Lock-ins and orderly market provisions
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The Locked-in Persons have undertaken to the Company and N+1
Singer that, subject to certain limited exceptions, they will not
sell or otherwise dispose of, or agree to sell or dispose of, any
of their respective interests in the Ordinary Shares held by them
and their connected persons at any time during the period of 12
months following Admission. In addition, certain orderly market
provisions will apply for a further period of 12 months after
expiry of the 12 month lock-in period.
Related party transactions
The participation of Kestrel Partners LLP, a substantial
shareholder in the Company, in the Placing constitutes a related
party transaction for the purposes of AIM Rule 13 (the "Related
Party Transaction").
The independent directors, Niall Stirling and Bill Dobbie,
having consulted with the Company's nominated adviser, N+1 Singer,
considers that the terms of the Related Party Transaction are fair
and reasonable insofar as Independent Shareholders are
concerned.
The Takeover Code
The Takeover Code will govern takeover offers for the Company
and other matters to which the Takeover Code applies. For further
detail, see paragraph 20 of Part VII.
Working capital
The Directors and Proposed Directors, having made due and
careful enquiry, are of the opinion that, taking into account the
net proceeds of the Placing and the existing cash resources
available to the Enlarged Group, the working capital available to
the Enlarged Group will be sufficient for its present requirements,
that is for at least the next 12 months from the date of
Admission.
Dividend policy
The New Board does not expect to recommend the payment of any
dividends in respect of the 2016 financial year during which
period, for the reasons set out above, they intend that the
Enlarged Group's free cash resources should be deployed in
implementing the strategic development plan. The level of any
dividends in respect of future financial periods will take account
of the Enlarged Group's profitability, current cash position and
prospects, whilst also having regard to the future cash demands of
the business and its strategy of making targeted acquisitions.
Corporate governance
The Directors and the Proposed Directors recognise the value and
importance of high standards of corporate governance. Accordingly,
whilst the UK Corporate Governance Code does not apply to AIM
companies, the Directors and the Proposed Directors intend to
continue to observe the requirements of the UK Corporate Governance
Code to the extent they consider appropriate in the light of the
Group's size, stage of development and resources. The Directors and
Proposed Directors also propose, so far as practicable, to follow
the recommendations set out in the Corporate Governance Code for
Small and Mid-Size Companies published by the Quoted Companies
Alliance.
New Board
The New Board will continue to be responsible for the overall
management of the Enlarged Group including the formulation and
approval of the Enlarged Group's long term objectives and strategy,
the approval of budgets, the oversight of Enlarged Group
operations, the maintenance of sound internal control and risk
management systems and the implementation of the Enlarged Group's
strategy, policies and plans. Whilst the New Board may delegate
specific responsibilities, there will be a formal schedule of
matters specifically reserved for decision by the New Board; such
reserved matters will include, amongst other things, approval of
significant capital expenditure, material business contracts and
major corporate transactions. The New Board will formally meet on a
regular basis to review performance.
At Admission, the New Board is expected to comprise 5 directors,
of whom 2 are executive and 3 are non-executive. The New Board
considers Jonathan Watts (Non-executive Chairman) and Katherine Roe
(Non-executive Director) to be independent for the purposes of the
UK Corporate Governance Code.
The New Board will have an audit committee and remuneration
committee with formally delegated duties and responsibilities, as
described below.
Audit committee
The audit committee will continue to be responsible for
monitoring the integrity of the Company's financial statements,
reviewing significant financial reporting issues, reviewing the
effectiveness of the Company's internal control and risk management
systems, monitoring the effectiveness of the internal audit
function and overseeing the relationship with the external auditors
(including advising on their appointment, agreeing the scope of the
audit and reviewing the audit findings).
The audit committee will comprise Jonathan Watts, Bill Dobbie
and Katherine Roe and is chaired by Katherine Roe. The audit
committee will meet at least three times a year at appropriate
times in the reporting and audit cycle and otherwise as required.
The audit committee will also meet regularly with the Company's
external auditors.
Remuneration committee
The remuneration committee will be responsible for determining
and agreeing with the New Board the framework for the remuneration
of executive directors and other designated senior executives and,
within the terms of the agreed framework, determining the total
individual remuneration packages of such persons including, where
appropriate, bonuses, incentive payments and share options or other
share awards. The remuneration of non-executive directors will be a
matter for the chairman and the executive members of the New Board.
No director will be involved in any decision as to his or her own
remuneration.
The remuneration committee will comprise Jonathan Watts, Bill
Dobbie and Katherine Roe and is chaired by Katherine Roe. The
remuneration committee will meet at least twice a year and
otherwise as required.
Share dealing code
The Company has adopted a share dealing code for the directors
and applicable employees of the Enlarged Group for the purpose of
ensuring compliance by such persons with the provisions of the AIM
Rules relating to dealings in the Company's securities (including,
in particular, Rule 21 of the AIM Rules). The Directors and the
Proposed Directors consider that this share dealing code is
appropriate for a company whose shares are admitted to trading on
AIM.
The Company will continue to take all reasonable steps to ensure
compliance by the directors and applicable employees with the terms
of the share dealing code and the relevant provisions of the AIM
Rules (including Rule 21).
General Meeting
Set out at the end of this document is a notice convening the
General Meeting to be held on 20 January 2016 at the offices of DAC
Beachcroft LLP at 100 Fetter Lane, London EC4A 1BN at 10.00 a.m.,
at which the following Resolutions will be proposed for the
purposes of:
-- approving the Acquisition;
-- authorising the Directors to allot the New Ordinary Shares;
-- approving the disapplication of statutory pre-emption
provisions to enable the directors in certain circumstances to
allot the New Ordinary Shares for cash other than on a
non-pre-emptive basis; and
-- ratifying the dividend paid by the Company in July 2014 and
to release all obligations and waive all claims in respect
thereof.
Admission and CREST settlement
As the Acquisition constitutes a reverse takeover under the AIM
Rules for Companies, Shareholder consent to the Acquisition is
required at the General Meeting. If the Resolutions are duly passed
at the General Meeting, the admission of the Company's Existing
Ordinary Shares to trading on AIM will be cancelled (immediately
prior to Admission) and the Enlarged Issued Share Capital will be
admitted to trading on AIM on Admission.
Application will be made to the London Stock Exchange for the
Enlarged Issued Share Capital to be admitted to trading on AIM.
Admission is expected to take place at 8.00 a.m. on 21 January
2016.
CREST is a paperless settlement procedure enabling securities to
be evidenced otherwise than by a certificate and transferred
otherwise than by a written instrument in accordance with the
requirements of CREST. The Articles permit the holding and transfer
of Ordinary Shares to be evidenced in uncertificated form in
accordance with the requirement of CREST. The New Ordinary Shares
are eligible for CREST settlement. Accordingly, following
Admission, settlement of transactions in Ordinary Shares may take
place within the CREST system if the relevant Shareholder so
wishes. CREST is a voluntary system and Shareholders who wish to
receive and retain share certificates will be able to do so.
Irrevocable undertakings
Insofar as they are interested in Ordinary Shares, Bill Dobbie,
Kestrel Partners LLP and Richard Griffiths, together with persons
connected with them, have given irrevocable undertakings to the
Company to vote in favour of the Resolutions (and, where relevant,
to procure that such action is taken by the relevant registered
holders if that is not them), in respect of their entire beneficial
holdings totalling, in aggregate, 38,930,431 Ordinary Shares,
representing approximately 54.7 per cent. of the Existing Issued
Share Capital.
INFORMATION ON SELECTION
Information on Selection
Selection is an IT solutions and Cloud services company with
over 300 IT professionals delivering services to over 500 customers
across the UK within both the Public and Private Sectors.
In 2011, Palatine backed a management buy-out that has allowed
Selection to grow supported by an ongoing investment program in
infrastructure and service capability. Significant investment has
been made in ensuring high levels of service quality and Selection
has obtained ISO 9001 and ISO 27001 certifications.
Selection has a full range of IT solutions that are delivered
from Selection's offices in Croydon, Bromley and Reading with
additional Cloud services being delivered from 4 data centres
strategically located in and around London.
Selection's portfolio of services includes:
-- Managed Services
- Lifecycle Management
- Infrastructure Monitoring and Management
- Service Desk
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- Networks
-- Cloud
- Managed Private Cloud
- Self Managed Private Cloud
- Back up and Recovery
- Hosted VoIP
- Systems Management
-- Projects and Products
- Project Management
- On-site Support
- Consulting
- Procurement
Growth in turnover and profit has been achieved via a
combination of organic growth and the strategic acquisitions of
Cloud Data Limited in 2011 and Aggregated Telecom Ltd, known as
8el, in 2013.
Operating structure
Selection has around 370 employees, around 340 of whom are
employed in client facing roles either in sales positions or
primarily in client service delivery. The sales and marketing team
currently has 37 employees.
Selection has 306 staff in technical and service delivery
(including service desk). The majority of staff are based in
Selection's offices in Croydon, Bromley and Reading or on-site at
customer premises. In addition, Selection employs a number of
mobile field-based engineers.
The remaining 42 employees are split between central functions,
primarily human resources, finance and administration and are based
in Croydon and Bromley.
Grahame Harrington (Managing Director) and Mark Woodall (CFO)
will both leave Selection upon Completion of the Acquisition.
Details of key senior management personnel who will continue to be
employed within the Enlarged Group following Completion are set out
below:
Phil Offord - Sales and Marketing Director
Phil is an experienced sales and marketing professional with a
proven track record of transforming sales teams to deliver strong
and sustainable sales performance. Prior to joining Selection in
2014 Phil was UK sales director for Logicalis, having previously
held senior sales positions at Computer Associates. Phil will
remain as Sales and Marketing Director upon Completion.
Paul Clark - Chief Technology Officer
Paul is an experienced chief technology officer who has built a
career working with significant end user organisations including
Game, JP Morgan and Motorola. With experience of IT Managed
Services from both a user and provider perspective, Paul has a
clear view of how technology can be used to deliver business value.
Paul will become Operations Director upon Completion.
Customers and partners
Selection has approximately 500 customers across both the public
and private sectors, with c. 65% of revenues in the year to 30 June
2015 being recurring in nature.
Selection has strong relationships across its customer base,
including significant historical length of tenure with many of its
key customers. The top 25 customers generated c. 70% of total
revenues in the year to 30 June 2015 of which the largest, Atos,
generated c.30%. Selection currently has 24 separate contracts with
Atos and there is potential to expand this relationship going
forward. Other key customers include Accenture, Avis, JO Hambro,
KPMG and Nuffield Health.
Selection has different charging mechanisms depending on the
nature of the solutions and services being provided to
customers:
-- IT services and cloud services - predominantly a monthly
recurring charge based on delivery of a scope of service to an
agreed service level agreement against agreed volumetrics.
-- Projects - charged either as fixed price or time and materials.
-- Products - typically charged on a cost plus margin basis.
Financial information on Selection
The following audited financial information relating to
Selection has been extracted from the historical financial
information set out in Section B of Part V of the admission
document:
Year
ending
Revenue GBP'000s June June June
2013 2014 2015
Managed Services 24,839 26,160 25,454
Projects 4,626 5,491 5,068
Procurement 4,013 4,684 4,022
----------------- -------- -------
Total 33,478 36,335 34,544
================= ======== =======
Year
ending
Gross Profit GBP'000s June June June
2013 2014 2015
Managed Services 9,159 10,273 10,682
Projects 1,684 1,734 1,501
Procurement 918 1,007 1,291
----------------- -------- -------
Total 11,761 13,014 13,474
================= ======== =======
Year
ending
Gross Profit % June June June
2013 2014 2015
Managed Services 37% 39% 42%
Projects 36% 32% 30%
Procurement 23% 21% 32%
----------------- -------- -------
Total Gross Profit % 35% 36% 39%
================= ======== =======
EBITDA 1,992 2,905 3,325
EBITDA % 6.0% 8.0% 9.6%
Net operating cash inflows
pre-exceptional costs 2,210 3,141 1,803
The growth in 2014 was predominantly driven by Managed Services
with the marginal fall in 2015 largely as a result of a drop in
one-off Procurement work.
The gross profit rise in 2015 was driven by Managed Services
with c. 80% of gross profit comes from Managed Services.
Operating EBITDA increased 45% in 2014 and 15% in 2015 supported
by the growth seen in gross margin and the limited increase in
overheads.
The low operating cash conversion in 2015 when compared to the
previous two years reflects the fall in deferred income and tax and
social security creditors.
Market opportunity and competitive environment
The IT services sector is undergoing substantial structural
change driven by a shift towards cloud based technologies and a
growing propensity for businesses to outsource the full life cycle
of their IT investments. Companies face increasing levels of data
traffic and network complexity that increasingly exceeds the scale
and capabilities of in-house IT teams. This shift is a key driver
of growth in the sector as service providers capitalise on the
ability to maximise efficiencies in the provision of technical
expertise and the delivery and maintenance of IT systems, enabling
corporates to support the delivery of business outcomes and focus
resources and capital on core business activities whilst benefiting
from the cost effectiveness of the outsourcing model.
A further catalyst is the emergence of cloud services and
continued improvements in underlying technology. Demand for cloud
services has grown rapidly with awareness of the associated cost,
flexibility and reliability benefits. As corporate budgets remain
under pressure, the substantial reduction in capital expenditure on
IT infrastructure that results from a move to a cloud-based system
will continue to drive growth in the segment. A further benefit to
the consumer is the greater visibility over IT operating costs
derived from long term contracts and service level agreements
typical of relationships with managed service providers. This is
reflected in greater customer stickiness and improved visibility of
revenues for the service provider.
Such contracts typically guarantee network reliability over a
specified period, with cloud technology providing the flexibility
to scale up system capacity depending on demand. The cost of
acquiring and subsequently retaining this capability in house, with
the concurrent guarantee of reliability and security, can be
prohibitively expensive to lower and mid-market consumers and thus
enhances the case for outsourced provision. The long-term,
contracted nature of this service provision can deliver a smoother
investment profile to the customer whilst Selection's expertise can
reduce the risk associated with major changes to IT infrastructure
and systems.
Alongside cloud services and automation recent industry trends
also include customer demand for more workforce-led end user
support services to link technology, processes and culture and
digital transformation as organisations assess the extent to which
their existing infrastructure can support digital plans providing
further benefits to infrastructure services organisations.
The Directors and Proposed Directors believe Selection's focus
on providing a broad range of IT solutions and Cloud services
allows access to the growth segments of the market, with customers
increasingly planning to divest IT teams and infrastructure to
external partners who are able to cope with increasing complexity.
The UK Infrastructure Services market represents a substantial
opportunity: a report from TechMarketView (published in December
2014) estimates the size of the UK Infrastructure Services market
at GBP13.8bn, making it c.40% of the total UK Software and IT
Services market.
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