Duke Royalty Limited Change of Advisors and Operational Update (8483T)

TIDMDUKE

RNS Number : 8483T

Duke Royalty Limited

11 January 2017

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THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AS STIPULATED UNDER THE MARKET ABUSE REGULATIONS (EU) NO. 596/2014. UPON THE PUBLICATION OF THIS ANOUNCEMENT, THE INFORMATION CONTAINED IN THIS ANNOUNCEMENT IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN.

11th January 2017

Duke Royalty Limited

("Duke" or the "Company")

Change of advisors and operational update

Duke Royalty Limited is pleased to announce that it has appointed Grant Thornton UK LLP as its Nominated Adviser and Cantor Fitzgerald Europe and Mirabaud Securities LLP as co-Brokers with immediate effect.

As previously mentioned in the Company's interim statement released to the market on 17 November 2016, the Company has recently been in advanced discussions to raise additional capital, either in the form of equity or debt. In light of these discussions, the Company's intention is to undertake an equity fundraising to raise up to GBP50 million in an equity placing ("Placing") in order to provide the Company with the capital to build a diversified portfolio of royalty finance and associated finance opportunities. It will also seek the re-admission of the Company to AIM by producing an Admission Document.

Background

The Directors believe that royalty finance is an attractive funding opportunity for privately owned businesses, with the potential to generate attractive returns uncorrelated to general equity market performance. The Directors believe that there is a substantial addressable market for royalty finance and that the Company will benefit from the combined talent and experience of the Board and executive team, coupled with the exclusive collaboration that the Company has with Oliver Wyman to assist it to source and assess royalty funding opportunities.

The Directors' strategy is to build a diversified portfolio of royalty streams from companies ("Royalty Partners"), focusing on income growth through the deployment of the Placing proceeds to take advantage of a pipeline of near term royalty opportunities in the SME market. It is an objective of the Company to pay a significant proportion of its free cash flow from the royalty revenues it receives to Shareholders as dividends.

Duke's royalty financing model

Duke will provide its Royalty Partners with long term financing which is expected to have a term of between 25 and 40 years (or even, in certain circumstances, a perpetual term). The contemplated terms of the royalty agreements are such that in the first year, the Royalty Partner would typically pay Duke a monthly distribution or royalty (typically 12-15 per cent. per annum of the financing amount). In the second year, and each year going forward, the monthly distribution would then be linked to the year on year growth in the revenue of the Royalty Partner collared at six per cent. per year of the total increase or decrease in revenue over the prior year.

The Directors envisage that royalty financing will be an attractive alternative source of capital to potential Royalty Partners in transactions which include:

   --     growth capital; 
   --     acquisition financing; 
   --     minority, management or private equity shareholder buy-out; 
   --     balance sheet recapitalisation / debt refinancing; 
   --     estate planning; and 
   --     take-private transactions. 

The Company's royalty financing structure is designed to attract potential Royalty Partners by offering finance at a reasonable cost of capital that is both non-dilutive to their existing owners and which does not result in refinancing risk. In addition, the Company's royalty finance model allows current owners and managers to stay in control of their businesses due to passive management involvement by Duke. Furthermore, the royalty financing from Duke would be repaid by the Royalty Partner over the long term, usually 25 - 40 years (thereby minimising short or medium term refinancing risk). Duke would be provided with monthly operating and financial reports from the Royalty Partners but typically funding would have fewer covenants compared to debt. In addition, unlike private equity financing, it is expected that there will be no pressure imposed by the Company to exit the financing arrangement but Royalty Partners would typically retain a buyback option during the life of the royalty finance agreement to redeem up to 100 per cent. of the royalty provided by Duke to the Royalty Partner. Duke expects that this buyback payment will typically be the greater of (i) a pre-determined fixed amount specified in the royalty financing agreement and (ii) a multiple of the annualised royalty payment from the Royalty Partner to Duke on the date of exercise of the buyback option.

From a Royalty Partner's perspective, the royalty financing model typically carries a lower cost of capital than equity and is designed to better align the interests of the Company with the Royalty Partner due to the long-term nature of a royalty financing agreement.

The Company has built a near term pipeline of potential royalty agreements totalling approximately GBP75 million: a summary of the pipeline is described in the Company's corporate presentation available on the website as described below.

Exclusive Collaboration with Oliver Wyman

On 7 August 2015, the Company entered into an exclusive collaboration agreement with Oliver Wyman, a global management consultancy firm wholly-owned by Marsh & McLennan Companies (NYSE: MMC), for the sourcing of Royalty Financing opportunities in the pharmaceutical and healthcare sectors. Under this collaboration, Oliver Wyman provides the Company with deal origination and undertakes due diligence work on potential Company Partners in the pharmaceutical and healthcare-related market in exchange for a share of the future distributions received by the Company from Company Partners once the relevant Royalty Financing has been completed.

Oliver Wyman's Health & Life Sciences practice has over 200 professionals in offices around the world. Oliver Wyman brings its global network of professionals, with a deep bench of clinical, health system, and risk experts and a successful track record of valuing biopharmaceutical and other healthcare intellectual property for its Fortune 1000 clientele. Oliver Wyman's Health & Life Sciences practice serves clients in the pharmaceutical, biotechnology, medical devices, provider, and payer sectors with strategic, operational, and organizational advice; deep healthcare knowledge and capabilities allow the practice to deliver fact-based solutions. Under the terms of the collaboration, Oliver Wyman will identify, analyse and assist in the acquisition of royalty interests for regulatory-approved, patent-protected ethical pharmaceutical and other healthcare products.

Outside of the pharmaceutical and healthcare sectors, should the Company and Oliver Wyman agree that Oliver Wyman has industry knowledge and capabilities of value for the purposes of the evaluation of potential Royalty Financings in others sectors, the Company and Oliver Wyman may agree to work together under the same compensation terms as in the August agreement. As of the date of this document, Oliver Wyman has provided its services, upon the same terms as the August agreement, for the purposes of the evaluation of three potential targets in sectors outside of healthcare.

Oliver Wyman is a global management consulting firm with more than 35 years of experience consulting with leading companies in industries such as financial services, health & life sciences, media and technology, leisure and energy. Oliver Wyman has more than 4,000 professionals in over 50 cities across 26 countries in the Americas, EMEA, Asia and Australia.

The Company's strategic relationship with Oliver Wyman combines a global, respected source of deep knowledge with a publicly-quoted royalty company to create a unique offering to potential Company Partners and public investors.

The Directors believe that Duke's relationship with Oliver Wyman brings the Company three distinct advantages:

   1.    a global footprint that allows deal execution anywhere in the world; 
   2.    a global network of professionals from whom it can leverage expertise; and 

3. intellectual capital, proprietary methodology and datasets, and experience in forecasting and risk assessments.

The Company remains responsible for capital raising, negotiating and structuring definitive agreements with potential Company Partners and making the ultimate decision on any Royalty Financing.

The agreement, which was signed on 7 August 2015 is for an initial term of five years (subject to automatic 12 months renewals, unless otherwise terminated in accordance with the terms of the agreement).

Proposed Equity Fundraising

The Company is proposing to raise up to GBP50 million. It is intended that the proceeds from this anticipated fundraising will be used to capitalise on a number of already identified near term opportunities for royalty financing. Over the last 15 months, the Company has been evaluating a number of late stage royalty financing opportunities and from that work the Company has managed to build a near-term pipeline of six potential royalty financing transactions across a number of sectors ranging from leisure through to industrials, healthcare and IT. The aggregate investment value of this near-term pipeline amounts to approximately GBP75m thus providing the Company with a good number of possible royalty financing opportunities that it will look to close post-completion of the proposed fundraising. Whilst there can be no assurance that any of these pipeline royalty financings will close as they remain subject to negotiation, definitive documentation and final due diligence, in the absence of unforeseen circumstances the Board anticipates that the net proceeds of the proposed fundraise should be fully invested (or committed to be invested) within 12 months of Admission. However, there is no fixed period within which the Company would be required to conclude royalty agreements or return funds to Shareholders.

Dividend Policy

Following the Shareholders' approval of the new Investing Policy in June 2015, Duke's focus has been on bringing royalty investing to the European market with the objective of generating predictable and stable cash flows from royalty agreements with a view of paying an attractive, growing and sustainable cash dividend yield for Shareholders.

Although the Company has never paid a dividend, it is the Directors' intention to start paying dividends in the financial year ending 31 March 2018 and that the Company will, in normal circumstances, pay out approximately 80 - 100 per cent. of its free cash flow to its shareholder in the form of dividends. With the proceeds of the Placing, the Company is targeting an annualised dividend yield of between 7 and 8 per cent. once fully invested with a minimum targeted dividend yield of at least 5 per cent in the financial year to 31 March 2018*. It is intended that, any dividend paid by the Company will be paid on a quarterly basis on or around, the end of each calendar quarter.

* This is a target only and not a profit forecast. There can be no assurance that the target can or will be met in this timescale or at all and should not be taken as an indication of the Company's expected or actual future results. Accordingly, potential investors should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable

Duke's Competitive Advantages

The Directors' believe that the Company's structure provides competitive advantages over comparable diversified royalty financing companies. These include:

First mover advantage of diversified royalty financing focused on the UK and Europe

Because it is listed on AIM and domiciled in Guernsey, the Directors believe that the Company's corporate structure will allow deal sourcing from both the UK and Europe, where North American domiciled competitors have generally not been focused. In addition, the Directors believe that the Duke offering will be ideally suited to the European marketplace where there are a high number of private SME companies that match Duke's royalty financing mandate.

Extensive experience in royalty management and capital markets

The Company's CEO, Neil Johnson, having a career in investment banking in both the UK and Canada, pioneered the model for Canadian public companies to list on the UK public markets, helping them raise over GBP3 billion of capital during his tenure as Head of Corporate Finance at Canaccord Genuity's UK operation. His previous firm, where he was co-Founder and CEO, was an alternative finance company listed on the Toronto Stock Exchange.

The Company's Chief Investment Officer, Jim Webster, has twice been a senior executive of newly-formed royalty companies over the past 25 years. He was a senior officer from virtually the inception of the first public pharmaceutical royalty investment company, Drug Royalty Corporation listed on the Toronto Stock Exchange. During Jim's tenure, during which he became President, Chief Executive Officer and Chairman of the Investment Committee, he had an internal rate of return of 32.1 per cent.

The Company's Investment Committee member, Justin Cochrane, has 15 years of royalty financing and investment banking experience. Previously, he spent 5 years as an Executive Vice President of Corporate Development for Sandstorm Gold Ltd., a public mining royalty company listed on the Toronto Stock Exchange.

Exclusive deal sourcing and due diligence collaboration with a global management consulting firm

Due to the global nature of the Company's exclusive collaboration with Oliver Wyman, the Directors believe that the Company has a global reach for deal sourcing that its current established diversified royalty financing competitors do not have. In addition, for its due diligence activities, the Company's exclusive collaboration with Oliver Wyman allows the Company to draw on the deep industry knowledge of Oliver Wyman's professionals.

Independent Investment Committee

The management believes the formal structure of an Investment Committee, with a mandate to review and recommend deals to the Company's Board and to opine on the Company's late stage pipeline, creates a robust due diligence process which is unmatched by its competitors. Separating the Investment Committee from the internal management team is designed to increase the level of scrutiny by a team of qualified experienced executives with a broad range of differing skills. Any formal recommendation by the Investment Committee to the Board will have followed extensive due diligence and will provide the Board carefully vetted opportunities from which to make an assessment. Only the Board can enter into and bind the Company into providing such royalty financing to any potential Royalty Partner.

Tax-efficient domicile

As the Company is registered in, and managed from, Guernsey, it is subject to a lower rate of corporate tax compared to its Canadian diversified royalty company peers. This enables the Company to lower the cost of capital for its Royalty Partners, thereby making the Company's financing offering more attractive to potential Royalty Partners.

General

The proposed Placing is still in contemplation and therefore is still subject to the funds being raised and an Admission Document being published. Assuming a successful completion of the fundraising, the Company will then be readmitted to AIM as a Rule 8 investing company, and the requirement to complete a transaction in line with its investing policy in accordance with AIM Rule 15 by 30 March 2017 will no longer apply. An updated corporate presentation on the Company is available on the Company's website www.dukeroyalty.com

For further information:

 
 Duke Royalty Limited        Neil Johnson 
                              Charlie Cannon-Brookes 
                              [phone] 
 
 Grant Thornton UK LLP       Colin Aaronson / Samantha Harrison 
  (Nominated Adviser)         / Carolyn Sansom 
                             [phone] 
 
 Mirabaud Securities LLP     Peter Krens / Edward Haig-Thomas 
  (Joint Broker) 
                             [phone] 
 
 Cantor Fitzgerald Europe    Marc Milmo / Catherine Leftley 
  (Joint Broker)              / Callum Butterfield 
                             [phone] 
 

About Duke Royalty

Headquartered in Guernsey, Duke Royalty Limited provides alternative financing solutions to a diversified range of businesses in Europe and abroad. Duke Royalty's experienced team and exclusive partnership provide financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. Duke Royalty's royalty investments are intended to provide robust, stable, long term returns to its shareholders.

Duke Royalty is listed on the AIM market under the ticker DUKE. For more information, visit dukeroyalty.com.

The information in this announcement is for background purposes only and does not purport to be full or complete. No reliance may be placed for any purpose on the information contained in this announcement or its accuracy or completeness. The material set forth herein is for information purposes only and is not intended, and should not be construed, as an offer of securities for sale in the United States or any other jurisdiction.

This announcement is not a prospectus and investors should not purchase any Ordinary Shares referred to in this announcement except on the basis of information to be published in an Admission Document.

This announcement is not for publication or distribution, directly or indirectly, in or into the United States (including its territories and possessions, any state of the United States and the District of Columbia), Australia, South Africa or Japan. The distribution of this announcement may be restricted by law in certain jurisdictions and persons into whose possession any document or other information referred to herein comes should inform themselves about and observe any such restriction. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.

Any purchase of Ordinary Shares in the proposed placing should be made solely on the basis of the information contained in the Admission Document to be issued by the Company in connection with the Placing and Admission. No reliance may or should be placed by any person for any purposes whatsoever on the information contained in this announcement or on its completeness, accuracy or fairness.

This announcement may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the Company's control and all of which are based on the Company's board of directors' current beliefs and expectations about future events. These forward-looking statements may be identified by the use of forward- looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements reflect the Company's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company's business, the results of operations, financial condition prospects, growth and dividend policy of the Company and the industry in which it operates. Forward-looking statements speak only as of the date they are made and cannot be relied upon as a guide to future performance.

These forward-looking statements and other statements contained in this announcement regarding matters that are not historical facts involve predictions. No assurance can be given that such future results will be achieved; actual events or results may differ materially as a result of risks and uncertainties facing the Company. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. Forward looking statements speak only as of the date of this announcement.

This information is provided by RNS

The company news service from the London Stock Exchange

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January 11, 2017 02:00 ET (07:00 GMT)