31st Mar 2008 16:10
Pace Micro Technology PLC31 March 2008 Pace Micro Technology plc Announcement of revised acquisition terms, publication of prospectus and resumption of share trading 31st March 2008 Pace Micro Technology plc ("Pace" or "the Company"), a leading digital TVtechnology company, today announces the publication of a shareholder prospectus(the "Prospectus") detailing its proposed acquisition of the Set Top BoxDivision and Connectivity Solutions Business ("the Philips STB and CS Business"or "the Business") of Royal Philips Electronics ("Philips") (the "Acquisition")on revised terms agreed with Philips earlier today. Copies of the Prospectus in relation to the Acquisition, originally announced on19 December 2007, have today been posted to shareholders and will shortly beavailable on the Pace website. The existing shares in the Company, which havebeen suspended from trading, are expected to recommence trading from tomorrow,Tuesday 1 April 2008. The new shares to be issued to Philips are expected tocommence trading upon completion of the Acquisition ("Completion"). Commenting on the Acquisition, Neil Gaydon, Chief Executive Officer of Pacesaid: "We are very pleased to have reached a revised agreement with Philips to acquireits set-top box and connectivity solutions business. Following a rigorousprocess of due diligence and appraisal we are confident that the proposedacquisition represents a significant value-enhancing opportunity for both Paceand our shareholders." Key revised terms of the Acquisition On 19 December 2007, Pace announced it had entered into an agreement withPhilips to acquire the Philips STB and CS Business valuing it at up to €95million (approximately £68 million) on a cash-free and debt-free basis. As a result of changes in trading terms with certain key customers and a numberof other matters that were identified after 19 December 2007, the terms of thetransaction were amended under a settlement agreement signed by the partiesearlier today, which included the reduction of the total consideration payableby Pace for the Philips STB and CS Business from up to €95 million(approximately £68 million) to up to €88 million (approximately £63 million). Up to €83 million of the revised consideration (approximately £59 million) willbe satisfied by the issue of up to 64,481,049 (see note 1) new Pace ordinary shares ("the New Ordinary Shares") to Philips, with the balance of €5 million being payable in cash (subject to the satisfaction of certain conditions). At completion of the Acquisition, Philips will hold approximately 21.6% percent. of the enlarged share capital of Pace (see note 2) ("Enlarged Share Capital"), with 17% of the Enlarged Share Capital subject to a one year lock-in from the date of Completion. The agreement is conditional on, inter alia, Pace shareholders approving theAcquisition, which is to be sought at a general meeting of shareholders on 16April 2008. Summary background on the Philips STB and CS Business The Philips STB and CS Business employs approximately 335 staff predominantly based in France and is a designer and leading supplier of a range of digital TV products including satellite, cable, terrestrial and IPTV set-top box products. For the year ended 31 December 2007, the Philips STB and CS Business generated revenue of €415.7m (approximately £328.3m). The Philips STB and CS Business has long-established relationships with a number of key payTV operators in multiple geographies, major IPTV customers and an established international retail business. As part of this transaction, Pace will be entitled to utilise the Philips brand in retail distribution for an agreed range of products for up to three years from completion of the Acquisition. Summary of the rationale for the Acquisition Pace and the Business each have over 20 years' experience in the set-top boxmarket and they are two of the world's leading set top box companies. Combinedthey will have a broader customer and product portfolio than that of theexisting Pace Group. The Directors expect there to be a number of key areas in which the operatingand financial performance of Pace and the Philips STB and CS Business (togetherthe "Enlarged Group") will be improved as a result of the Acquisition: - A broader customer base, with limited overlap - Addition of new technologies and business streams to Pace - Scope for operating improvements - Margin improvements as a result of implementing the Pace operating model - Opportunities for potential cost savings The Board believes that the Enlarged Group has significant potential to furtherdevelop its position as one of the world's leading set-top box companies with aglobal customer portfolio of major payTV operators. The engineering skill-setfor the delivery of digital TV into the home will be extended and the EnlargedGroup will be capable of creating products across more technology platforms thana number of its competitors. This will enable the Enlarged Group to extend itsmarket reach into new technologies such as IPTV, into new geographies, includingLatin America, and to grow its research capability by combining work in areasthat are expected to drive the next stage of market development, such as homenetworking. The Directors of Pace (the "Directors" or the "Board") also believe the PhilipsSTB and CS Business will bring a new cultural dimension to Pace includingmainland European sales skills and relationships. Pace will apply its proven operating model to the Business, which the Boardbelieves has the potential to drive further growth in revenue and margins anddeliver certain cost synergies to create value for shareholders. There will be an analyst presentation on 1st April at 9.00am at the Turner Room,Brunswick Group LLP, 16 Lincoln's Inn Fields, London, WC2A 3ED. For further information, please contact: Pace Micro Technology plc +44 (0) 1274 532000Neil Gaydon Chief Executive OfficerStuart Hall Chief Financial OfficerHelen Kettleborough Director of Corporate Communications RothschildScott Sheldon +44 (0) 207 280 5000David Forbes +44 (0) 113 200 1900 Hoare Govett LtdAlexander Garton +44 (0) 207 678 8000 Brunswick Group LLP + 44 (0) 207 404 5959Fiona LaffanSarah WestTim Williamson 1 The maximum number of New Ordinary Shares to be issued is based on the averageclosing middle market quotation of a Pace ordinary share (as derived from theDaily Official List published by the London Stock Exchange) for the 10 businessdays prior to 19 December 2007, translated at the prevailing exchange rate on 19December 2007 of €1.397:£1. 2 Assuming the maximum number of New Ordinary Shares is issued and no exerciseof share options over existing Pace ordinary shares. This announcement has been prepared by, and is the sole responsibility of, theDirectors of Pace. N M Rothschild & Sons Ltd, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting as financialadviser and sponsor to Pace and no-one else in connection with the mattersreferred to herein and will not be responsible to anyone other than Pace forproviding the protections afforded to clients of N M Rothschild & Sons Ltd orfor giving advice in relation to such matters. This announcement does not constitute a prospectus relating to the Company anddoes not constitute, or form part of, any offer or invitation to sell or issue,or any solicitation of any offer to purchase or subscribe for, any shares in theCompany in any jurisdiction nor shall it, or any part of it, or the fact of itsdistribution, form the basis of, or be relied on in connection with or act asany inducement to enter into, any contract therefor. This announcement may include "forward-looking statements". Theseforward-looking statements contain the words "anticipate", "believe", "intend","estimate", "expect" and words of similar meaning. All statements other thanstatements of historical facts included in this announcement, including, withoutlimitation, those regarding Pace, the Business or the Enlarged Group's financialposition, business strategy, plans and objectives of management for futureoperations (including development plans and objectives relating to products andservices) are forward-looking statements. Forward-looking statements are subject to risks and uncertainties andaccordingly the actual future financial results and operational performance ofPace, the Business and the Enlarged Group may differ materially from the resultsand performance expressed in, or implied by, the statements. These factorsinclude but are not limited to those described in the Prospectus. These forward-looking statements speak only as at the date of this announcement.Pace expressly disclaims any obligation or undertaking to update or revise anyforward-looking statements contained herein to reflect actual results or anychange in the assumptions, conditions or circumstances on which any suchstatements are based unless required to do so by the Financial Services andMarkets Act 2000, the Listing Rules or Prospectus Rules of the FinancialServices Authority or other applicable laws, regulations or rules. The financial information set out in this announcement relating to the PaceGroup does not constitute statutory accounts with the meaning of section 240 ofthe Act. The Reporting Accountants have given unqualified audit reports on thestatutory accounts of the Company for the seven months ended 31 December 2007and for each of the three financial years ended 2 June 2007, 3 June 2006 and 4June 2005, within the meaning of section 235 of the Act. None of these reportscontained any statements under 237(2) or (3) of the Act. Statutory accounts ofthe Company for the seven months ended 31 December 2007 and each of the threefinancial years ended 2 June 2007, 3 June 2006 and 4 June 2005 have beendelivered to the Registrar of Companies in England and Wales pursuant to section242 of the Act. TRANSACTION OVERVIEW 1. Introduction Pace entered into an agreement with Philips on 19 December 2007 to acquire thePhilips STB and CS Business, conditional on the successful conclusion of theconsultation procedure with Philips' relevant works council in relation to theAcquisition. Pursuant to that agreement, Pace entered into a formal sale andpurchase agreement with Philips on 14 February 2008, valuing the Business at upto €95 million (approximately £68 million) on a debt-free, cash-free basissubject, inter alia, to approval by Pace shareholders. As part of the transaction, Pace and Philips have agreed to enter into atrademark licence ("Trademark Licence"), which entitles Pace to utilise thePhilips brand in retail distribution for an agreed range of products for up tothree years from Completion. As a result of changes in trading terms with certain key customers and a numberof other matters that were identified after 19 December 2007, the terms of thetransaction were amended under a settlement agreement on 31 March 2008 whichincluded the reduction of the total maximum consideration payable for theBusiness from €95 million (approximately £68 million) to €88 million(approximately £63 million). Up to €83 million (approximately £59 million) of the revised consideration willbe satisfied by the issue of up to 64,481,049 New Ordinary Shares to Philips.The balance of €5 million (approximately £3.5 million) will be payable in cashin two instalments of €2.5 million each on the second and third anniversaries ofCompletion, contingent on the Trademark Licence not being terminated. If theTrademark Licence is terminated prior to the date of payment of the relevantinstalment, the relevant instalment will be reduced pro rata to the number ofmonths which have elapsed. Assuming the issue of 64,481,049 shares, being the maximum number of NewOrdinary Shares capable of being issued as consideration under the sale andpurchase agreement (as amended), and no exercise of existing options overexisting Pace ordinary shares, at Completion the Enlarged Share Capital of Paceis expected to be 298,198,633 ordinary shares and would (on a fully dilutedbasis) be held as to approximately 78.4 per cent. by the existing Paceshareholders and as to approximately 21.6 per cent. by Philips. The Acquisition constitutes a ''Reverse Takeover'' under the Listing Rules andCompletion is conditional, inter alia, upon the approval of Pace shareholdersand for this reason a General Meeting has been convened for 16 April 2008. Atthe General Meeting, shareholder approval will also be sought to create andauthorise the issue of the New Ordinary Shares and to increase the Directors'authority to issue shares generally. In addition, the Company is required tomake an application to the UKLA for the Enlarged Share Capital to be admitted tothe Official List. 2. Background to and reasons for the Acquisition The Pace management team commenced a wide-ranging strategic review of the Pacebusiness in April 2006 to reinvigorate Pace's business and to seek to create theoptimum business structure for a successful set-top box business. The outcome ofthe strategic review was a business restructuring programme to: • re-focus Pace's organisation around the technologies and needs of its customers; • develop a new business operating model and methodology to: • improve product execution and customer-driven decision making; • increase operational efficiencies; and • drive new diversification opportunities; and • initiate the development of a new high performance company culture, starting with Pace's executive team, based on a new vision of ''Great products to our customers, every time''. The Directors believe that completion of the strategic review and therestructuring programme was a key factor in the improvement in gross marginperformance and return to profitability for Pace for the year ended 2 June 2007and the seven months ended 31 December 2007. Against the backdrop of the strategic review, the restructuring programme andthe resulting improvement in financial and operating performance, the Directorsassessed a number of opportunities to grow and develop the Pace business. Aspart of this review, the Directors considered the impact of and opportunitiespresented by industry consolidation. The Directors concluded that there weresignificant potential benefits arising from acquiring new technologies,customers and established routes to market from competitor companies which wouldaccelerate the growth of Pace's business, better serve customers and provideaccess to new products and geographies. The opportunity to acquire the PhilipsSTB and CS Business provides Pace with an opportunity to realise some of thebenefits of consolidation and accelerate the growth and development of the PaceGroup. Pace and the Business each have over 20 years' experience in the set-top boxmarket and they are two of the world's leading set-top box companies. Combined,they will have a broader customer and product portfolio than that of theexisting Pace Group and the Business will bring to the Enlarged Group a newcultural dimension, including mainland European sales skills and relationships.Pace's existing strength is in its relationships with Anglo, Australian andAmerican customers. Benefits of the Acquisition The Directors expect there to be a number of key areas in which the operatingand financial performance of Pace and the Business will be improved as a resultof the Acquisition. A broader customer base, with limited overlap •Pace and the Business have limited customer overlap and, where overlap occurs, complementary products are supplied, which should result in revenue growth and broader customer relationships with those customers; •Significant scope to strengthen Pace's current market position by acquiring a set-top box company with a similarly strong position; and •Expanded geographic reach into new markets, primarily in Europe and Latin America, and opportunities for growth in these new markets following the Acquisition. Addition of new technologies and business streams to Pace •The addition of new technologies to the Pace product portfolio, in particular, capabilities in IPTV, which the Directors believe will improve Pace's position in what is expected to be an important sector for future growth; •Potential for further new business opportunities through the connectivity solutions business being acquired, such as through the cross-selling of products; •Extension of the engineering team that will widen Pace's software and applications knowledge. Importantly, this includes skills in conditional access systems, which will increase the number of payTV operators that can be targeted by the Enlarged Group; and •Addition of the Philips STB and CS Business' established retail business, with scope for future growth of this business within the Enlarged Group. Scope for operating improvements •Margin improvements as a result of implementing the Pace operating model There is potential for substantial benefits and growth in margins through theapplication of Pace's operating model and business structure to the EnlargedGroup. The Directors believe that Pace's approach has already delivered amaterial improvement in Pace's own operating and financial performance in theyear ended 2 June 2007 and the seven months ended 31 December 2007. The Business reported gross margins of 10.3% and 14.1% for the years ended 31December 2006 and 31 December 2007 respectively. The Directors believe that theBusiness' gross margins can be improved towards Pace's gross margin over time,partly as a result of the adoption of Pace's operating model. Pace reportedgross margins of 15.9% for the year ended 2 June 2007, which improved to 20.3%for the seven months ended 31 December 2007. The Directors believe that Pace's business structure will enable significantperformance gains within the Enlarged Group. A key area of the Pace operatingmodel has been to better focus commercial and engineering teams on importantcustomer needs such as delivering new technology first, competitive pricing andspeed to market, while also improving profitability. Pace's organisational structure comprises business units with dedicatedcross-functional teams for groups of customers that share common technologyplatforms. Each business unit is managed by a management team with a flatstructure, comprising commercial, technology and product delivery (engineering)staff, all usually based in the same area to ensure strong communication andalignment and to avoid slow upward management decision making. Each businessunit maintains a close working relationship with its customers and is wellplaced to make decisions based on product roadmap priorities and support issues.In turn, the business unit has a gross margin target that is linked toremuneration and performance incentives, which has helped to drive growth andprofitability. This approach, in addition to new business systems and processes that have beendeveloped in-house specifically for this industry, has delivered increased grossmargin and improved time to market, while producing improved customersatisfaction. The Directors believe that adoption of the Pace operating modelcan lead to similar benefits for the Enlarged Group over time following theAcquisition. •Opportunities for potential cost savings There is potential for improved operational efficiencies, in particularopportunities to generate greater efficiencies in the global supply chain,including manufacturing and purchasing. The Business is currently subject to a number of re-charged costs from thePhilips Group relating to central or support services, such as legal andtreasury functions, central marketing costs and supply chain administrationcosts. The provision of certain of these services by Philips will be subject toa transitional services agreement, but over time the Directors believe that manyof these recharged costs can be eliminated from the ongoing operating costs ofthe Enlarged Group. Summary The Board believes that the Enlarged Group has significant potential to furtherdevelop its position as one of the world's leading set-top box companies with aglobal customer portfolio of major payTV operators. The engineering skill-setfor the delivery of digital TV into the home will be extended and the EnlargedGroup will be capable of creating products across more technology platforms thanmany of its competitors. This will enable the Enlarged Group to extend itsmarket reach into new technologies such as IPTV, into new geographies such asLatin America and to grow its research capability by combining work in areasthat are expected to drive the next stage of market development, such as homenetworking. At the same time, the Pace management team will be able to apply its provenoperating model to the Business, which the Board believes has the potential todrive further growth in revenue and margins over time and deliver cost synergiesthat can create value for Shareholders. 3. Information on Pace Pace is a leading technology developer for the global payTV industry. Pace'sprincipal activities are the design, development and distribution of digitalreceivers and decoders for digital TV and the reception or transmission ofinteractive services, telephony and high-speed data. The Company's headquartersare in Saltaire in the UK. Pace employs over 580 people, developing a wide rangeof products and advanced technologies for the digital TV market at sites aroundthe world, including in the US. Summary financial information below relating to Pace for the three years ended 2June 2007 and the seven months ended 31 December 2007, has been extractedwithout material adjustment from the information incorporated by reference inthe Prospectus: Seven Months Year ended Year ended Year ended Year ended 4 June 3 June 2 June 31 December 2005 2006 2007 2007 £'000 £'000 £'000 £'000 IFRS IFRS IFRS IFRSTurnover on continuing operations (includingassociates and joint ventures) 253,326 178,095 386,513 249,875Profit/(loss) on ordinary operationsbeforeinterest, tax and exceptional items(continuingoperations) 8,698 (16,186) 8,320 15,886Operating profit margin 3.4% (9.1 %) 2.2 % 6.4%Gross assets 116,363 108,758 124,811 170,397Gross profit margin 22.6% 18.0% 15.9% 20.3% Note: Investors should read the whole of the Prospectus and should not rely onthe summary financial information set out above. 4. Information on the Philips STB and CS Business The Philips STB and CS Business is a designer and supplier of a range of digitalTV products including satellite, cable, terrestrial and IPTV set-top box andconnectivity products. The business is based in France and employs around 335staff at a number of sites. Summary financial information below relating to the Philips STB and CS Businessfor the three years ended 31 December 2007 is extracted without materialadjustment from the Prospectus Year ended Year ended Year ended 31 December 31 December 31 December 2005 2006 2007 •'000 •'000 •'000 IFRS IFRS IFRSTurnover on continuingoperations (includingassociates andjoint ventures) 456,109 351,546 415,735 Profit/(loss) onordinary operationsbefore interest,tax and exceptionalitems (continuingoperations) 16,182 (46,525) (21,733) Operating profit margin 3.5% (13.2%) (5.2%) Gross Assets 126,796 134,305 131,984 Gross profit margin 17.8% 10.3% 14.1% Note: Investors should read the whole of the Prospectus and should not rely onthe summary financial information set out above. Further financial information on the Philips STB and CS Business is set out inPart IV of the Prospectus. 5. Objectives and strategy of the Enlarged Group The Acquisition will combine two of the world's leading providers of digital TVproducts and systems, focusing on the set-top box market. The Enlarged Group isexpected to be one of the world's largest set-top box companies. The Enlarged Group's strategic priorities will be to: •implement Pace's business structure and operating model in the Business, which Pace believes is an appropriate and suitable structure and model for both growing revenues and improving financial performance within the Enlarged Group; •consolidate new customer relationships and obtain revenue synergies from the Acquisition; •engage new employees with the vision, values and objectives of the Enlarged Group; •utilise the increased scale of the Enlarged Group to create efficiencies in the supply chain; •optimise the development and manufacturing operations of the Enlarged Group; and •leverage the engineering and technology capabilities of the Enlarged Group to identify and create new customer and business opportunities. 6. Financial effects of the Acquisition Pace is purchasing the Philips STB and CS Business for up to €88 million(approximately £63 million) on a debt-free, cash-free basis. The Board believesthis represents a reasonable purchase price for the Philips STB and CS Business,given the medium- and long-term potential to improve the level of profitabilityand operating performance of the Business and the significant scope forsynergies within the Enlarged Group. The historic financial performance of the Philips STB and CS Business over thepast two financial years has been below management's expectations. However, theDirectors believe that there is significant potential to improve the operatingand financial performance of the Business in the future. The Directors expect the Acquisition to be earnings dilutive in the year ending31 December 2008. However, the Directors expect the Acquisition to enhanceearnings per share in the year ending 31 December 2009, the first full yearfollowing the Acquisition1. The unaudited pro forma statement of net assets of the Enlarged Group, preparedfor illustrative purposes only and showing the effects of the Acquisition andthe issue of the New Ordinary Shares, is set out in Part IX of the Prospectus. It is envisaged that one-off costs (excluding fees in relation to theAcquisition) estimated to amount to £2.0 million, in aggregate, associated withthe integration of the Philips STB and CS Business will be incurred in the yearending 31 December 2008. The Acquisition will result in the recognition of goodwill and intangibleassets. In accordance with IFRS, intangible assets other than goodwill areamortised in the income statement over their estimated economic life. 7. Current trading and prospects Pace The Board is pleased with progress and the benefits that Pace is delivering inthe form of a solid, sustainable platform for growth that has been embeddedacross the Pace Group. While the market remains difficult to predict and Pace's performance is largelypredicated on the performance of its customers, the Board is confident that Paceis investing in the right products and technologies to meet the demands of itsgrowing customer base. Further, Pace is currently in advanced negotiationsregarding a significant order for a new product that would, if confirmed, bedelivered in 2008 and 2009. Following the exceptional sales performance and improvements made by Pace in2007, the Board is confident it is on track to meet its expectations for the2008 financial year. The Philips STB and CS Business Following the year ended 31 December 2007, the Philips STB and CS Business hascontinued to trade broadly in line with the Business management team'sexpectations. The Enlarged Group The Directors are confident of the financial and trading prospects of theEnlarged Group due to both the encouraging state of recent trading conditionsand contract wins in Pace's business and also due to the benefits that areexpected to accrue as a result of the Acquisition as described further in theProspectus. 8. Information on the New Ordinary Shares The New Ordinary Shares will, when issued, rank in full for dividends and otherdistributions and otherwise pari passu in all respects with the existing Paceordinary shares. Applications have been made to the FSA for the New Ordinary Shares to beadmitted to the Official List and to the London Stock Exchange for the NewOrdinary Shares to be admitted to trading on the London Stock Exchange's mainmarket for listed securities. It is expected that Admission will becomeeffective and dealings in the New Ordinary Shares will commence on 21 April2008. 9. Management and Board of the Enlarged Group The Board of Pace will remain as constituted at present. No employees of thePhilips STB and CS Business or Philips Group are expected to join the Board ofPace following the Acquisition. 10. Dividend policy Whilst recognising the move by Pace towards a sustainable and profitablebusiness, the Directors have not recommended the payment of a dividend for theperiod ended 31 December 2007. The Board will keep the matter under review andany decision to recommend the payment of a dividend in future will reflect theEnlarged Group's cash flow and desired capital structure, as well as its futuregrowth opportunities. 11. General Meeting A notice convening the General Meeting, to be held at 10.00 a.m. on 16 April2008 at Pace Micro Technology plc, Salts Mill, Victoria Road, Saltaire, WestYorkshire BD18 3LF is set out in the Prospectus. Notes: 1 The statement that this Acquisition is expected to be earnings dilutive forPace in the year ending 31 December 2008 and earnings enhancing in the yearending 31 December 2009 relates to future actions and circumstances, which, bytheir nature, involve risks, uncertainties and other factors. These statementsdo not constitute a profit forecast and should not be interpreted to mean thatearnings for any future financial period would necessarily match or be greateror less than those for any preceding financial period. Earnings in this contextrepresent net after tax earnings on an IFRS basis, excluding the amortisation ofintangible assets and any exceptional items. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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