6th Dec 2005 07:03
Bespak PLC06 December 2005 For immediate release 6 December 2005 Bespak plc Proposed US$95 million acquisition of King Systems Corporation 'A significant step in implementing Bespak's new strategy' Summary Bespak plc ("Bespak" or the "Company") (LSE: BPK), a leader in specialty medicaldevices, today announces a significant step in implementing its new strategy.The Company has agreed to acquire King Systems Corporation ("King"), a leadingUS supplier of disposable airway management devices with 505 employees infacilities in Indiana and Ohio, for a maximum consideration of US$95m (£54.3m),subject to shareholder approval (the "Acquisition"). Consideration • The $95m consideration is in two parts: an initial payment of $75m in cash and $10m in new Bespak shares will be based on King attaining $9.3m adjusted EBITDA in 2005; a second payment of $10m in cash will be based on King attaining $11.0m EBITDA in 2006. The cash consideration will be funded from new borrowing facilities. Expected benefits of the Acquisition • King is a US medical device business highly complementary to Bespak, supplying single-use face masks, breathing circuits and laryngeal tubes used in surgery and critical care settings. • It will bring Bespak a strengthened footprint in the US, where King enjoys good market positions and strong brand recognition. • The acquisition helps refocus Bespak away from unpredictable pharmaceutical programmes and should provide steady cash flows. • King's sales in 2004 were $45.1m (£25.8m). Earnings before interest, tax, depreciation and amortisation (EBITDA) were $4.9m after charging $3.3m of expenses which will not be incurred in the future. • Key management will remain in place to assure a successful transition. Kevin Burrow, King's VP of Sales & Marketing, will become President and will report to Mark Throdahl, Bespak Chief Executive. Mr. Burrow and other members of the senior management have entered into employment contracts and are incentivised to remain with and grow the business. Commenting on the Acquisition, Mr. Throdahl said: "Acquiring King is an attractive first step in Bespak's strategy to diversifyinto medical devices sold to hospital customers. King will immediately add toBespak's scale and provide a platform for further acquisitions in the US andEurope. King has strong market positions, a well-recognised trade name in theUS and a committed management team which has built the business from scratch." Analysts' Call An analysts' call will be held at 10:00 am GMT on 6 December to discuss theacquisition. Please contact Tim Thompson or Eleanor Williamson on 0207 466 5000(timt/[email protected]) for dial-in details. A recording of thisconference call will be available from 12:30pm GMT on 6 December 2005 for 1week. To access this recording, please dial: 0845 2455205. The code for thereplay is 3040462#. For further information, please contact:Bespak plc Tel: +44 (0) 1908 525241Mark Throdahl - Chief ExecutiveMartin Hopcroft - Group Finance Director Buchanan Communications Tel: +44 (0) 20 7466 5000Tim Thompson / Mark Court / Mary-Jane Johnson About Bespak plc Bespak, a leader in specialty medical devices, is at the forefront of developingnew delivery systems for the pharmaceutical industry. Sales in its lastfinancial year were £79.4m and profit before tax and exceptionals was £11.5m.Bespak's product range includes metered dose inhalers, dry powder devices,actuators and compliance aids. The company also develops and manufactures drugdelivery devices for leading global pharmaceutical companies. The group, whichhas facilities in King's Lynn and Milton Keynes in the UK, is a public companyquoted on the Official List of the London Stock Exchange (LSE: BPK). For moreinformation, please visit www.bespak.com. About King Systems Corporation King Systems, a leading US supplier of disposable airway management products, isbased in Indianapolis, Indiana. The company has a wide range of disposable facemasks, breathing circuits and laryngeal tubes used to maintain the patient'sairway in critical care settings such as during general anaesthesia or inintensive care units. 90% of King's sales are in the USA, where King sellsthrough a 35-person sales force calling on anaesthetists, hospitals and hospitalpurchasing networks. It also has distributors in Canada, Mexico, South America,Europe and the Asia Pacific region. For more information, please visitwww.Kingsystems.com. This summary should be read in conjunction with the full text of the followingannouncement. Nothing in this announcement should be construed as a profit forecast or beinterpreted to mean that the future earnings per share or profits of Bespak willnecessarily be greater than the historic published earnings per share. Introduction Bespak announces that it has agreed to acquire King Systems Corporation for amaximum consideration of $95 million (£54.3 million). An initial payment of $85million (less net debt to be assumed by Bespak) will be made at Completion(expected to be by 23 December 2005) payable as to $75 million in cash and $10million in new Bespak shares. In addition, a cash payment of up to a maximum ofa further $10 million may be made based on the US EBITDA performance of King forthe 12 months ending 31 December 2006. If US EBITDA (adjusted as explainedbelow) of King for calendar 2005 is less than $9.3 million, the purchase pricewill be reduced by up to $10 million. King is a leading supplier of disposable airway management devices used insurgery and critical care settings in the US. It supplies single use face masks,breathing circuits and laryngeal tubes in the anaesthesia disposables market,which has been estimated in a report by Health Advances, LLC, dated 4 October2005, to be US$275 million in the US and approximately US$500 million globally.The Acquisition will immediately improve Bespak's scale, as well as providing aplatform for further acquisitions in the US and Europe. In addition, King willgive Bespak access to a growing segment of the critical care market through acompany with a strong market share position and well-recognised trade name inthe US, and an established and committed management team. The Acquisitionreflects the implementation of the strategy previously communicated to Bespakshareholders. The Acquisition is expected to be earnings enhancing for Bespakbefore amortisation of goodwill and intangibles and before exceptional items inthe first twelve months of ownership. In view of the size of the Acquisition, it is subject to the approval of BespakShareholders at an EGM. A circular and formal notice to convene the EGM to seekshareholders' approval for the Acquisition will be posted to shareholdersshortly. Information on King King is a private company which was founded in 1977. The company has 505employees and is based in Indianapolis, Indiana, the 12th largest city in theUS. In 2004, King's sales were $45.1 million (£25.8 million), EBITDA was $4.9million and EBIT was $3.9 million. However, under the Acquisition Agreement,the Vendors have agreed that certain expenses which totalled $3.3 million in2004, which were taken into account in calculating these EBITDA and EBITfigures, will not be incurred in future years. These included $2.8 millionbeing the excess of the Vendors' salaries incurred in 2004 over the aggregate of$0.75 million which the Vendors will be paid following Completion, $0.2 millionin respect of certain Vendors' benefits and $0.3 million in respect ofentertainment suites at sports stadia. King's established product lines consist of disposable anaesthesia masks andbreathing circuits. In both product lines, King is one of three US marketleaders, with each of the three companies having broadly comparable marketshares. Over the last year King has also introduced two new product lines to the USmarket, a laryngeal tube and a dental mask. Sales of the two new product linesin 2005 have been low as initial penetration of new market sectors has beentaking place, but prospects for future sales are encouraging. Whilst competitorsin the laryngeal tube market include the companies that King competes with formask and circuit sales, the principal competing product is made by a companythat is only involved in the sale of airway management devices. King sells in the US through a 35-person sales force which calls onanaesthetists, hospitals and hospital purchasing networks to sell its products.Products are physically delivered to end user customers via a network ofnational medical supply distributors. It also has distributors in Canada,Mexico, South America, Europe and the Asia Pacific region. King has a 125,000square foot freehold office and manufacturing facility in Indianapolis, and a35,000 square foot leased manufacturing facility in Kent, Ohio called H&M Rubber("H&M"), which supplies components for King's anaesthesia masks and breathingcircuit kits. Background to and reasons for the Acquisition Bespak's strategy is to capitalise on its position as a leading manufacturer ofspecialty medical devices by growing organically and by acquisition, thusbuilding a strong and consistent sales and earnings track record. Bespak'sobjective is to broaden its customer base beyond pharmaceutical companies bytargeting acquisitions in specialty medical device businesses which sell toclinicians in health care institutions and which also play to Bespak's strengthsin regulated product development, precision moulding and automated assembly. King fits this profile very well. It is of comparable underlying profitabilityto Bespak's current Respiratory and Device & Manufacturing Services (DMS)businesses. It has characteristics closely related to Bespak's core respiratorybusiness with considerable manufacturing similarities. Once it has beenabsorbed, Bespak will target bolt-on acquisitions in the same sector. By pursuing this acquisition strategy, the Directors believe that Bespak candevelop greater control of its sales and earnings growth. Bespak's existingRespiratory and DMS businesses have products which are specified in customers'regulatory filings and are usually sole-sourced in long-lived drug franchises.As such, it is difficult to predict the introduction dates for new products, andrevenues are vulnerable to order pattern changes by large customers. The Directors have concluded that King represents an attractive acquisitionopportunity for Bespak. King is a well established business with good marketpositions and brand recognition in the US, and a record of strong underlyingmargins and strong cash generation. King's manufacturing facilities are verysimilar to Bespak's although the potential savings from manufacturing synergieshave not been included in the financial assumptions associated with thistransaction; no disruptive restructuring is anticipated. Benefits of the Acquisition The Directors consider that the principal benefits of the Acquisition are asfollows: • Adjacent business: King manufactures single use, disposablespecialty devices that transport anaesthesia gases and oxygen to and from thepatient, and maintain the patient's airway, in critical care settings. King'sbusiness is, therefore, adjacent to Bespak's existing core businesses as aleading supplier of devices for delivering drugs to the lungs. • Growing company: King's sales have been stable in recent years.Recently, sales have grown as a result of sales initiatives and market sharegains in its core masks and circuits business, as well as by market adoption ofnewly introduced products, in particular a new family of breathing circuits,completely new product lines of laryngeal tubes for both acute and emergencyapplications and dental anaesthesia masks. • Growing market: the US healthcare market is in a long termgrowth phase, driven by a longer living and more health conscious population andadvances in medical technologies which together are increasing spending onhealthcare at a rapid rate. King benefits from this trend because of theincrease it is producing in the number of surgical procedures carried out, twothirds of which involve the use of a general anaesthetic. In addition,clinicians' concerns about patient safety, and patients' desire for morecomfortable procedures, are increasing demand for airway management devices suchas King's recently launched proprietary laryngeal tubes. Trends in the US arealso reflected in other countries, although the US is currently the mostadvanced market in the world in terms of single use devices. • Manufacturing adjacencies: King relies on the same competenciesrequired by Bespak's products: regulated product development, precisionmoulding, extrusion and high speed automated assembly. Quality systems andregulatory expertise are also required. King's mould tool design andmanufacturing capability directly complements Bespak's needs. Bespak's expertisein Six Sigma and automated manufacturing will be available to increase King'smanufacturing productivity. There are opportunities for expanding King'smanufacturing in Bespak's European facilities and expanding Bespak'smanufacturing in King's facilities, with cost reductions through resultant scaleeconomies. • Scale: At approximately $45.1 million (£25.8 million), withfurther growth being experienced to date in 2005, and EBITDA in 2004 being $4.9million (prior to any adjustment for the non-recurring expenses totalling $3.3million), King will have a significant impact on Bespak's financial position,while being of a size that can be managed by the existing Bespak corporate team. • Management: King has a committed management team which sharesBespak's management values and has agreed to remain post-acquisition. • Platform for follow-up acquisitions: The anaesthesiadisposables and related respiratory care devices markets are large andfragmented. There are companies with relevant product lines and/or regional salechannels in the US and Europe that would complement King's US position. Whereappropriate, and following the successful integration of King, Bespak plans topursue these opportunities and build an international position in medicaldisposables for anaesthesia and respiratory care. • Geographical expansion: King's principal market at present isthe US. Healthcare market adoption of disposable anaesthesia delivery systemsand airway management devices is increasing in other countries, as a result ofgrowing appreciation of their benefits compared with re-usable devices,particularly in terms of hygiene and patient safety. Bespak believes that thereare opportunities to grow the sales of King by expanding overseas salescapabilities, and that it has the experience to help King to achieve greaterexport revenues. Financial information on King Summary financial information on King for the three years ended 31 December 2004is as follows: Year ended Year ended Year ended 31 December 31 December 31 December 2002 2003 2004 US$ million US$ million US$ million Turnover......................................................... 37.7 43.6 45.1EBIT............................................................... 3.0 3.2 3.9Profit Before Tax........................................... 2.7 2.7 3.3 Gross assets as at 31 December 2004 were $24.1 million, net assets were $10.0million and net debt was $9.7 million. The level of compensation and expensespaid to the management shareholders of King has historically reflected itsstatus as a private company. Future compensation levels have been agreed withthe Vendors who will remain employed by King. In evaluating the Acquisition, theDirectors have taken into account the fact that the excess compensation over thelevel which will apply after Completion, together with certain othernon-recurring expenses, will not be incurred. King's reported EBITDA for 2004was $4.9 million. However, as explained above, the Vendors have agreed thatcertain expenses, totalling $3.3 million, which were taken into account incalculating the 2004 EBITDA figure will not be incurred in future years. It should also be noted that, following Completion, the King Group will incurcertain additional costs which it did not have as a private company, such as thecost of the Vice President of Finance, and certain additional reporting andcompliance costs, but these cannot be fully quantified in advance. These costsand certain other integration expenses are estimated at £0.5 million in thefirst 12 months following completion of the Acquisition. Financial Effects of the Acquisition The Acquisition is expected to be earnings enhancing for Bespak, beforeamortisation of goodwill and intangibles and before exceptional items, in thefirst twelve months following expected Completion. Nothing in this announcementshould be construed as a profit forecast or be interpreted to mean that thefuture earnings per share or profits of Bespak will necessarily be greater thanits historic published earnings per share or profits. Funding of the Acquisition The cash element of the consideration for the Acquisition will be funded fromnew borrowings under (i) a new $35 million term loan facility; and (ii) a new£40 million revolving credit facility, each entered into on 2 December 2005 bythe Company and The Royal Bank of Scotland Plc (acting as agent for NationalWestminster Bank plc) and with a final maturity date falling on the fifthanniversary of the first drawdown under such facilities. Each of the facilitieshas been provided on a committed and underwritten basis, subject only tocustomary conditions for facilities of this type and for a transaction of thisnature. Terms of the Acquisition Under the terms of the Acquisition Agreement, the Vendors have agreed to selland Bespak has agreed to purchase 100% of the outstanding stock of King atCompletion, for an aggregate consideration of $85 million (less net debt to beassumed by Bespak), of which $10 million will be paid in new Bespak sharespriced over a period of twenty trading days before Completion and which theVendors have undertaken to retain until the announcement of Bespak's preliminaryresults for the year ending 28 April 2007 (the "Initial Consideration"). The cash element of the Initial Consideration will be adjusted on a US$ for US$basis by the relationship between a target tangible net worth figure and theactual tangible net worth figure shown in a net asset statement as at the dateof Completion. The cash element of the Initial Consideration will also be reduced by $10.00 foreach $1.00 that US EBITDA, adjusted to exclude the non-recurring expenses whichin 2004 totalled $3.3 million and transaction costs in respect of theAcquisition, for the year ending 31 December 2005 falls below $9.3 million, upto a maximum reduction of $10 million. If US EBITDA, adjusted to exclude only certain additional costs incurred by Kingas a result of its ownership by Bespak and an allowance for certain raw materialprice increases, for the year ending 31 December 2006 is greater than $9.3million, the Initial Consideration will be increased by the amount of suchexcess multiplied by 5.88 up to a maximum additional consideration of $10million . The Acquisition Agreement is conditional on shareholder approval by BespakShareholders. Completion of the Acquisition is expected by 23 December 2005. Under the terms of the Acquisition Agreement, the Vendors have given warrantiesand indemnities in respect of certain financial, property, licensing, pensions,employee, taxation and other matters in respect of King, subject to agreedlimitations on liability. King has also agreed to various undertakings inrelation to the conduct of the King business prior to Completion. The Acquisition Agreement provides that Kevin Burrow, Bart Burrow, Bret Burrow,Kimberly Mace and Kelly Ranker, current executives of King, have each enteredinto an employment agreement with King, which will take effect on Completion,pursuant to which each of those executives will continue to be employed by King.The employment agreements provide that the executives will receive an aggregateannual salary of $750,000. Management and Employees While King has many similarities to Bespak, it serves a different market. Forthis reason, Bespak intends to manage King on a stand-alone basis and minimisethe disruptive changes that often generate post-acquisition risk. King's top management team will be empowered to run the business in the same waythat Bespak manages its three current divisional management teams. King has a total of 505 non-union employees, of which 415 are based inIndianapolis, Indiana and 90 in Kent, Ohio. Bespak intends to implement theAcquisition integration in a way which minimises disruption to them and toKing's customer relationships. As explained above, as part of the Acquisition documentation, the five topexecutives of King have entered into new employment agreements. The employmentagreements extend at least until April 2007 and contain non competition and nonsolicitation obligations. Kevin Burrow has been Vice President Sales andMarketing of King since 1985 and will formally become President on acquisitionby Bespak, having been carrying out the majority of the duties of this role forsome years. He is supported by Kim Mace (Vice President of Human Resources andCustomer Service), Kelly Ranker (Vice President Operations), Bart Burrow (VicePresident Engineering) and Bret Burrow (Vice President Manufacturing). All ofthese management team members are shareholders in King and have been with thecompany for many years. Below the top management team are functional directorsof Marketing, Research and Development, Production, Materials Management andInformation Technology. The co-founder and current President of King, who hasplayed a reducing role in the management of the business for some years, willretire at Completion. King's new President will join the Group's three other general managers onBespak's Operating Committee. He will report to Bespak's Chief Executive, MarkThrodahl, who will become Chairman of King's Board of Directors. A new Vice President of Finance is being recruited to handle the increasedreporting and financial management requirements resulting from King becomingpart of Bespak, and will report both to King's President and to Bespak's GroupFinance Director, Martin Hopcroft. Bespak's financial reporting systems will beintroduced upon Completion and can be expected to assist King's management. Current Trading for Bespak and King and Prospects for the Enlarged Group Bespak In the year ended 30 April 2005, Bespak delivered increased earnings per sharebefore exceptionals despite the anticipated normalisation of sales to itslargest customer. The Company enjoyed strong growth from new products, andefficiencies improved. Bespak won three new device development projects andhistorically has won the majority of new valve programmes which receiveregulatory approval. On 14 November 2005, Bespak announced that trading in the first half of itscurrent financial year was in line with its expectations. There has beenreplenishment of the CFC (chlorofluorocarbon) valve supply chain in the USfollowing the FDA (Food and Drugs Administration) ruling on phase-out of CFCalbuterol formulations, continuing growth in HFA (hydrofluoroalkane) valve salesand inventory building by customers of US-manufactured products in advance ofclosure of the Cary facility. Bespak stated that, looking ahead, two key issues will continue to influence itsperformance. Firstly, customers in the US are continuing to develop theirmarketing plans for the replacement of CFC with HFA in albuterol formulations byDecember 2008. Secondly, Bespak awaits the approval of Exubera(R). In Septemberthe FDA's clinical advisory panel recommended approval of Exubera(R) in the US,whilst in October the Committee for Medicinal Products for Human Use (CHMP) ofthe EMEA (European Agency for the Evaluation of Medicinal Products) recommendedapproval of Exubera(R) in Europe. In the second half of its current financial year, Bespak expects to incuradditional expenditure to strengthen the businesses, general inflationary costpressures and reversal of inventory building by customers of previouslyUS-manufactured products that have been transferred to the UK, which leadsBespak to be cautious in the short term. However, Bespak is increasinglyconfident in the prospects for growth of Exubera(R). King Bespak is acquiring King at a time when King is experiencing good growth bothfrom sales increases in its established product lines and from several recentlyintroduced products, in particular a new family of breathing circuits,completely new product lines of laryngeal tubes for both acute and emergencyapplications and dental anaesthetic masks. Unaudited sales in the first ninemonths of calendar 2005 rose strongly from the same period in 2004, driven bysales of the new Flex 2 circuit products and initial sales of disposablelaryngeal tubes (airway management devices) and dental anaesthesia masks. Enlarged Group The Directors are of the opinion that the prospects of the Enlarged Group willbe enhanced by the Acquisition. King's sales have been stable in recent years.Recently, sales have grown as a result of sales initiatives and market sharegains in its core masks and circuits business, as well as by market adoption ofnewly introduced products, in particular those listed above. Furthermore, the UShealthcare market is in a long term growth phase, as explained above. Pension Liabilities Bespak has been granted clearance for the Acquisition by the UK pensionsregulator following Bespak's agreement to pay into its defined benefit pensionscheme, in addition to its normal contributions, £9 million upon completion ofthe Acquisition, with the remainder of the FRS deficit of £15.6 million as at 30April 2005 being paid off over five years. For further information, please contact: Bespak plc Tel: +44 (0) 1908 525241Mark Throdahl - Chief ExecutiveMartin Hopcroft - Group Finance Director Buchanan Communications Tel: +44 (0) 20 7466 5000Tim Thompson / Mark Court / Mary-Jane Johnson Citigroup Global Markets Limited ("Citigroup") is acting for Bespak and no-oneelse in connection with the matters referred to in this announcement and willnot be responsible to anyone other than Bespak for providing the protectionsafforded to clients of Citigroup or for providing advice in relation to thesematters. Note: Currency conversion calculated at a rate of $:£ of 1.75:1. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
CSRT.L