Elektron Technology PLC Sale of Elektron Technology UK Limited (3272H)

TIDMEKT

RNS Number : 3272H

Elektron Technology PLC

31 July 2019

Elektron Technology Plc

(AIM: EKT, "Elektron" or the "Group")

Sale of Elektron Technology UK Limited (which holds the Bulgin business)

Proposed Payments to Directors

Proposed Change of name to Checkit plc

and

Notice of General Meeting

Elektron Technology plc announces that it has entered into a conditional agreement with a special purpose vehicle wholly-owned by Equistone Partners Europe, one of Europe's leading mid-market private equity investors, to sell the entire issued share capital of Elektron Technology UK Limited (which holds the Bulgin business) for a total cash consideration of GBP105 million, before adjusting for net debt/cash and subject to working capital and other adjustments at Completion (the "Proposed Transaction"). Net proceeds after all costs including the settlement of the LTIP liability are expected to be in the region of GBP94 million. The Proposed Transaction creates significant value for Shareholders and will result in a major restructuring of the Group, as outlined below.

Details of the proposals are set out in a circular (the "Circular") which is being sent to Shareholders today and will also be made available for download from the Company's website at www.elektron-technology.com/investors/.

As the Proposed Transaction will constitute a fundamental change of business of the Company and its subsidiaries ("Group") pursuant to the AIM Rules it will require the approval of Shareholders at a general meeting ("General Meeting") to be held at 11.00 a.m. on 3 September 2019 at the offices of Fieldfisher LLP, 9th Floor, Riverbank House, 2 Swan Lane, London EC4R 3TT. Shareholders will also be asked to approve certain bonus and incentive payments to be made to the Executive Directors and recommended by the Remuneration Committee.

It is intended that John Wilson, Group CEO, will remain with the Bulgin business being sold. He will also continue as a Director of the Group in a non-executive capacity to ensure continuity and to enable the Group to benefit from his commercial and technical expertise. Keith Daley will remain as Executive Chairman and become solely responsible for the running of the Group alongside Andy Weatherstone, Chief Financial Officer.

Following Completion of the Transaction and the issuance of the Group's Interim Report for the six months to 31 July 2019 (currently expected to be announced in October 2019), the Board, subject to applicable Company law, currently expects to return a majority of the net proceeds from the transaction by giving Shareholders the opportunity to sell a proportion of their shares back to the Company by way of a tender offer.

Subject to Shareholder approval and conditional on completion of the Proposed Transaction, the Group proposes to change its name to Checkit plc.

Highlights

-- Fundamental transformation of the Group from a specialist electronics manufacturer to a Service as a Software company focussed on the fast growing field of real time operations management

-- Total cash consideration of GBP105 million, represents a 15.1% premium to the market capitalisation of the Group as at the close of business on 30 July 2019

-- Following the Proposed Transaction, it is estimated that the Group's net cash position will be approximately GBP95 million

-- The Board has formed the view that the Proposed Transaction provides the Group with the most appropriate option in terms of:

o maximising the amount of cash that will be available for reinvestment or distribution to the Shareholders;

o giving the highest level of certainty for Shareholders;

o maximising the value received for the Group's trade and assets being disposed of and;

o separating very different business activities.

-- The Board currently expects to return the significant majority of the net proceeds after costs to Shareholders by way of a tender offer

-- The retained sale proceeds (after returning funds to shareholders) are expected to be applied to drive the future growth of Checkit, in combination with Next through investment in new product development, organisational development, sales and marketing. The Board will also examine selectively potential acquisitions as a source of growth

-- Proposed name change to Checkit plc which will more appropriately reflect the future business of the Group

Performance of the Next acquisition

The Board is pleased to report the Next is performing according to expectations. Plans to integrate Checkit and Next (including the recruitment of new key senior roles) are well advanced.

Commenting Keith Daley, Executive Chairman, said:

"We have been working on a sale of Bulgin for many months and are delighted to have reached agreement on this deal which will realise significant value for Shareholders.

Subject to shareholder approval, once we have completed the transaction the remaining group and team shall be able to focus all of our energies on Checkit. The vision is to create a global leader in real-time operations management software. The early signs of the Checkit/Next combination are encouraging and we view the future with enthusiasm and confidence."

For further information:

 
 Elektron Technology plc                         [phone] 
 
 Keith Daley (Executive Chairman) 
 John Wilson (Chief Executive Officer) 
 Andy Weatherstone (CFO & Company Secretary) 
 
 Yellowstone Advisory (Investor Relations 
  Consultant) 
  Alex Schlich / Kate Divito                      [phone] 
  N+1 Singer (Nominated Adviser and Broker)       [phone] 
 
 Shaun Dobson / Jen Boorer 
 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 (MAR). Upon publication of this announcement, this inside information is now considered to be in the public domain.

The following summary is extracted from the Circular being sent to Shareholders. It should be read by Shareholders in conjunction with the Circular, which includes definitions of terms used but not otherwise defined in this announcement. Such terms shall have the same meaning as are given to them in the Circular.

Dear Shareholder,

Proposed sale of the entire issued share capital of ETUK (which holds the Bulgin Business), approval of payments to Directors, change of name and Notice of General Meeting

   1.    Introduction 

Elektron Technology plc (AIM: EKT), has announced today that the Company has entered into a conditional agreement for the sale of the entire issued share capital of ETUK (which holds the Bulgin Business) to the Purchaser. The consideration due to the Sellers under the SPA corresponds to an enterprise value for ETUK of GBP105m on a debt-free, cash-free basis. The consideration due is subject to customary adjustments, as set out in paragraph 14 below. The net proceeds due to the Company after deductions and expenses are expected to be approximately GBP94 million. The Proposed Transaction is intended to maximise value to Shareholders and will result in a major restructuring of the Group, as outlined below.

The Proposed Transaction would be a significant step in the ongoing rationalisation of the various businesses in the Group, leaving Checkit (including the recently acquired Next) as the main business. The Proposed Transaction, if approved, will realise more than GBP90m, which compares with the Group's market capitalisation of c. GBP10m on 31 July 2016. This demonstrates the exceptional period of success since that time for the Group.

Following Completion of the Transaction and the issuance of the Group's Interim Report for the six months to 31 July 2019 (currently expected to be announced in October 2019), the Board, subject to applicable Company law, currently expects to give Shareholders the opportunity to sell a proportion of their shares back to the Company by way of a tender offer. Further details of the proposed tender offer are set out in paragraph 7 below.

In addition, the Remuneration Committee has recommended to the Board that certain bonus and incentive payments be made to the Executives. These bonus payments comprise the Transaction Scheme, details of which are set out in paragraph 11 below. It should be noted that whilst there is no legal or regulatory requirement for these payments to be voted on and approved by Shareholders, the Remuneration Committee and the Board consider it a matter of good corporate governance that they ask Shareholders to consider and approve them, noting that those payments payable to John Wilson and Andy Weatherstone are integral to the Proposed Transaction.

Separately, the outstanding obligations payable to each of the A Ordinary Shareholders under the 2016 LTIP will be settled as part of the Proposed Transaction and the 2016 LTIP cancelled.

Finally, conditional upon the Proposed Transaction being approved, the Board would like to ask Shareholders to approve the change of name of the Company to "Checkit plc".

As the Proposed Transaction exceeds 75 per cent under one or more of the class tests prescribed by the AIM Rules, it constitutes a disposal resulting in a fundamental change of business pursuant to Rule 15 of the AIM Rules. Accordingly, the Proposed Transaction is conditional upon the approval by Shareholders of the Resolution 1 as set out in the Notice of General Meeting.

The purpose of the Circular is to provide Shareholders with information on the Proposed Transaction and the Transaction Scheme and to explain why the Directors consider the Proposed Transaction and the Transaction Scheme to be in the best interests of the Group and the Shareholders as a whole and why those Directors entitled to vote and count in the quorum recommend that you vote in favour of the Resolutions to be proposed at the General Meeting to be held at 11.00 a.m. on 3 September 2019 at the offices of Fieldfisher LLP, 9th Floor, Riverbank House, 2 Swan Lane, London EC4R 3TT.

Shareholders should read the Circular in its entirety.

   2.    Background to and reasons for the Proposed Transaction 

Bulgin is a designer and manufacturer of connectors, switches and bespoke applications (being products which are custom-developed for a specific customer application). Bulgin's product range includes ruggedised products used in harsh environments where a high level of ingress protection is required. Market launches of substantial newly-developed products, combined with iterative product development and bespoke solutions, are key to Bulgin's strategic offering.

Over the past six years, management has focused on improving profitability and generating organic growth, with an increasing proportion of sales from its higher value non-commoditised product offering. In addition, the business has undergone significant distributor and product rationalisation activity and investment in new product development. Its engineering expertise has been leveraged to introduce value add, product customisation capability to the offering. The strategic transformation of the Bulgin Business has been designed to focus on exploiting growth markets through innovative new products to unlock higher levels of sales and margin growth. Recent results demonstrate the continued successful execution of this strategy.

Simultaneously, the Board has executed a strategy of focusing on the two most promising opportunities, namely Checkit and Bulgin by divesting all of the Group's smaller businesses. This process is almost complete and a buyer is being sought for the last of the thirteen disposals, Elektron Eye Technology. As announced in 2018, Checkit has progressed from its start-up phase to scale-up and the Group announced the acquisition of Next in May 2019. This is a transformational deal for Checkit, immediately adding scale by increasing the size of the enlarged technology business approximately nine-fold and one which the Board believes will accelerate Checkit's path to profitability.

As a result of the development of both Bulgin and Checkit, the Board concluded that it is no longer appropriate to maintain a Group consisting of two businesses with very different activities namely manufacturing and SaaS. It had already received an approach from a third party, as announced on 5 February 2019, which valued Bulgin at a substantial premium to the then market capitalisation for the whole Group. As a consequence, the Board decided to place the Bulgin Business for sale assisted by Livingstone Partners LLP, an independent global mergers & acquisitions adviser, by undertaking a competitive bidding process for Bulgin, which has led to the Proposed Transaction.

   3.    Effect of the Proposed Transaction on the Group 

Following the Proposed Transaction, it is estimated that the Group's net cash position will be approximately GBP94 million after taking account of the costs associated with the matters set out herein and initial restructuring costs but before deduction of the proposed return of capital by way of tender offer, as described below. Further details of expected costs are given in paragraph 14 below.

The Board has carefully considered the merits of the Proposed Transaction and has formed the view, based on its analysis, that the Proposed Transaction provides the Group with the most appropriate option in terms of (i) maximising the amount of cash that will be available for reinvestment or distribution to the Shareholders; (ii) giving the highest level of certainty for Shareholders; (iii) maximising the value received for the Group's trade and assets being disposed of and (iv) separating very different business activities.

   4.    Information on the Purchaser 

The Purchaser is a special purpose vehicle which is wholly-owned by Equistone Partners Europe and which has been newly incorporated for the purposes of the Proposed Transaction. Equistone (www.equistonepe.com) is an independent mid-market European private equity firm, which operates across France, Germany, Switzerland and the UK, investing as a strategic partner alongside management teams. In each of its markets, it looks for strong businesses with the potential to grow, supported by its capital and guided by its experience.

   5.    Information on Bulgin and its financial performance 

Bulgin is widely-recognised as a provider of environmentally sealed connectors and critical components, with over 95 years' standing in the industry.

The recent financial performance of Bulgin was set out in the Group's preliminary results announcement released on 12 June 2019. Bulgin's orders and sales for the year ended 31 January 2019 were both at record levels of GBP32.0 million and GBP30.1 million respectively and c. 10% ahead of the previous year, benefitting from distribution sales growth, end user growth and new product introductions. For the year ended 31 January 2019, Bulgin reported EBITDA of GBP9.4million and operating profit of GBP9.0 million.

As at 31 January 2019, the net book value of the net assets attributable to the Bulgin Business, excluding cash was GBP3 million.

   6.    Summary of the SPA 

On 31 July 2019, the Purchaser and the Sellers entered into the SPA, pursuant to which the Sellers have conditionally agreed to sell the entire issued share capital of ETUK to the Purchaser for a total consideration of approximately GBP105 million (gross).

The consideration corresponds to an enterprise value of ETUK of GBP105m on a debt-free, cash-free basis. After adjusting for net debt, debt-like items and working capital, this corresponds to total consideration for the shares in ETUK of GBP104.5m, subject to customary post-closing adjustments.

The aggregate consideration is subject to adjustments in respect of working capital and net debt/cash and will be reduced by the expenses to be incurred in connection with the Proposed Transaction, which are detailed in paragraph 14 below. Accordingly, it is expected that the net proceeds receivable by the Company will be approximately GBP94 million.

The consideration due to John Wilson will take the form of both cash and GBP675,000 of consideration loan notes to be issued by the Purchaser (the "Consideration Loan Notes"). The intention is for the Consideration Loan Notes to be exchanged ultimately for shares in Regatta Topco Limited, being the top holding company in the Purchaser's group and loan notes issued by Regatta Midco Limited, being a wholly owned subsidiary of Regatta Topco Limited, through a series of put and call option arrangements which will be implemented immediately following Completion.

Completion of the SPA is subject to the satisfaction of a number of conditions, including:

-- the passing of the Resolution numbered 1 as set out in the Notice of General Meeting (the "Shareholder Approval Condition"); and

-- the Austrian competition authorities clearing the market concentrations arising as a result of the Proposed Transaction or the market concentrations otherwise being deemed to be cleared (the "Antitrust Condition").

In the event that the Shareholder Approval Condition is not satisfied by 31 October 2019 (or such other date as may be agreed between the parties), the SPA shall lapse. The General Meeting has accordingly been convened for 3 September 2019.

In the event that the Antitrust Condition is not satisfied by 31 October 2019, the Sellers and the Purchaser shall seek to agree a mutually acceptable solution in order to obtain satisfaction of the Antitrust Condition. In the absence of any such agreement, the SPA shall lapse. The Directors believe that the clearance from the Austrian antitrust authorities is expected to be received within the next four weeks. However, the Austrian competition authorities could require a longer period to complete their review.

The Board currently expects that Completion will occur on or around 24 September 2019.

The Board has taken specific advice on the structure of the Proposed Transaction and has been advised that the sale of the shares in ETUK pursuant to the SPA should qualify for Substantial Shareholding Exemption (as defined in the Taxation of Chargeable Gains Act 1992) and as such no taxation should arise.

Further details of the apportionment of the consideration between the Sellers and the form it takes is set out in paragraph 10.2 below.

Conditional upon Completion of the SPA, Elektron has also entered into the TSA by which Elektron shall continue to provide and receive from ETUK certain services. This is necessary to ensure a successful separation of the businesses.

   7.    Proposed return of cash to Shareholders by way of tender offer 

Following Completion, it is estimated that the Group's net cash position will be approximately GBP95 million after taking account of the costs of the Proposed Transaction and the other matters set out herein, including those costs set out in paragraph 14 below.

Following both Completion and the issuance of the Group's Interim Report for the six months to 31 July 2019 (currently expected to be announced in October 2019), the Board, subject to applicable Company law, currently expects to return the significant majority of the cash by providing Shareholders the opportunity to sell a proportion of their shares back to the Company by carrying out a tender offer.

The Board currently expects the tender offer price to be 65p per Ordinary Share (which the Independent Board, having consulted with N+1 Singer, the Company's nominated adviser, considers to represent a fair valuation for the Group). However, as the share price of the Company at the time of making of the offer cannot currently be known, the Board reserves the right to alter this price if the share price of the Company following Completion does not perform as currently expected or, following consultation with Shareholders, a different price would be in the best interests of Shareholders as a whole.

The specific terms of the tender offer will be set out in a separate circular in due course and will be subject to Shareholder approval.

The Board intends to consult with Shareholders and further updates will be made, following completion of the Proposed Transaction, as appropriate.

   8.    Board composition following Completion 

Following Completion, it is intended that John Wilson will remain with the Bulgin Business and will remain the CEO of ETUK.

He will also continue as a Director of the Company, but this will be in a non-executive capacity to ensure continuity and to enable the Group to benefit from his commercial and technical expertise. Keith Daley will remain as Executive Chairman and will take over the executive running of the Group alongside Andy Weatherstone as Chief Financial Officer.

It is intended that the composition of the Board will be reviewed following the proposed return of cash to shareholders.

   9.    Description of the business of the Group following Completion and proposed change of name 

Following Completion, the Group's operations will comprise Checkit (incorporating Next, which has recently been acquired) and Elektron Eye Technology.

The Checkit Real-Time Operations Management System helps businesses where critical tasks, measurements and processes are essential for managing an efficient operation, but which are currently performed, recorded and monitored inadequately in almost all cases - wasting cost, placing revenues and growth at risk and denying managers visibility. Checkit supports customers by continuing to expand its portfolio of capabilities and services which in turn enable customers to manage their businesses more effectively using its Work Management processes, Internet-of-Things technologies and data analytics.

As noted above, the Group recently completed the acquisition of Next. Like Checkit, Next enables management teams to connect with, monitor and control businesses to optimise productivity and profitability. Through its Tutela brand Next provides high-end service based temperature monitoring for healthcare and life sciences businesses within the UK. In addition, through its Next and Axon brands it provides data related Building Energy Management System ("BEMS") services. Next has a major relationship with a leading retailer covering both of the foregoing areas.

As previously announced, Elektron Eye Technology is non-core and the Group will look to sell this business in due course.

The Board intends to use the retained portion of the sale proceeds from the Proposed Transaction (i.e. the balance of the consideration received, following the tender offer) to drive the future growth of Checkit, in combination with Next. Funds will be spent on new product development, organisational development, sales and marketing. The Board will also examine selectively potential acquisitions as a source of acquisitive growth. It should be noted that as a fast growing business that is in the early stages of its development, Checkit (including Next) is expected to be loss making in the current year.

It is the view of the Directors that the name Elektron would no longer be appropriate following the sale of Bulgin. Accordingly, the Directors propose changing the Company's name to Checkit plc, subject to Shareholder approval. This will more appropriately reflect the focus of the Group and will have efficiency benefits by reducing the number of websites to be maintained. Should Shareholder approval be granted for the name change, the Group intends to change its ticker to CKT.L. The Company's investor website www.elektron-technology.com will be transferred to www.checkit.net.

10. Cancellation of 2018 LTIP and satisfaction of outstanding obligations

   10.1        Background and settlement of existing obligations 

The 2016 LTIP was structured under the tax-advantaged Employee Shareholder Shares scheme.

Pursuant to the LTIP, the A Ordinary Shares have been issued to the A Ordinary Shareholders (being John Wilson and Andy Weatherstone). The A Ordinary Shares are subject to certain specific vesting conditions set out in the Articles of ETUK (being, in summary, achieving a share price in excess of 20p for 100% vesting and having GBP8m in cash as at 31 January 2019, evidenced in the published 2019 annual audited accounts for the Group).

The A Ordinary Shares are currently scheduled to fully vest on 3 October 2019 or on completion of a "Sale Event" (as defined in the Articles of ETUK). The Proposed Transaction represents a substantial realisation of the underlying assets of the Group and is being treated as a "Sale Event" for the purposes of the Articles of ETUK.

As part of the Proposed Transaction, it has been necessary to agree a value for the A Ordinary Shares payable to the A Ordinary Shareholders by the Purchaser. The valuation mechanism for the A Ordinary Shares upon a Sale Event is set out in the Articles of ETUK, with reference to the volume weighted average price of an Ordinary Share for the 30 day period post Completion (the "Post Completion VWAP"). The Post Completion VWAP can only be used to determine the valuation of an Ordinary Share following Completion. As each of the Sellers and the Purchaser required certainty regarding the amount of the consideration receivable at the time of entering in to the SPA, the Independent Board determined that an alternative mechanism be used.

Accordingly, the Independent Board has followed the pricing mechanism set out in the Articles of ETUK so far as possible, but instead of using the currently-unknowable Post Completion VWAP, it has determined that a price of 65 pence should be used for the purposes of the mechanism (that is, (A-B+C) x 1,000, where A is 65p, B is 10 pence and C is nil (being the amount of cash distributions paid to Shareholders during a period)) to determine the fixed consideration. The Independent Board has consulted with N+1 Singer, the Company's nominated adviser, and considers that the price of 65 pence per share reflects a fair valuation for the Group.

The use of this pricing mechanism for a Sale Event is an integral part of the Proposed Transaction as it is the mechanism by which the consideration for the A Ordinary Shares has been calculated. Accordingly, by approving the Proposed Transaction pursuant to Resolution 1, Shareholders will also be approving the Sale Event and the use of this method as set out in this section.

It should be noted that should the Proposed Transaction have taken place after the vesting date as per the Articles of ETUK, John Wilson and Andy Weatherstone would have met all the vesting hurdles and thus any further uplift in price appreciation. The acquisition of the A Ordinary Shares pursuant to the SPA as described herein will settle and extinguish the existing obligations of the Group under the 2016 LTIP.

It should be noted that if Resolution 1 is not approved and the Proposed Transaction does not go ahead, the 2016 LTIP will not be cancelled and the matters set out in this paragraph will not take effect. Accordingly, the A Ordinary Shares will vest as usual in accordance with the terms of the 2016 LTIP.

   10.2        Apportionment of consideration between the Sellers under the SPA 

The consideration payable by the Purchaser to the Sellers pursuant to the SPA corresponds to an enterprise value of GBP105m on a debt-free, cash-free basis. After adjusting for net debt, debt-like items and working capital, this corresponds to total consideration for the shares in ETUK of GBP104.5m, subject to customary post-closing adjustments payable to the Company. The gross proceeds will be apportioned between the Company (the owner of the Ordinary Shares) and John Wilson and Andy Weatherstone (the owners of the A Ordinary shares) as follows:

 
 Seller              Cash          Loan notes (convertible into equity in members of the Purchaser's       Total 
                                   group) 
 Company             GBP100.875m   -                                                                       GBP100.875m 
                    ------------  ----------------------------------------------------------------------  ------------ 
 John Wilson         GBP2.075m     GBP0.675m                                                               GBP2.750m 
                    ------------  ----------------------------------------------------------------------  ------------ 
 Andy Weatherstone   GBP1.375m     -                                                                       GBP1.375m 
                    ------------  ----------------------------------------------------------------------  ------------ 
 TOTALS              GBP104.325m   GBP0.675m                                                               GBP105.000m 
                    ------------  ----------------------------------------------------------------------  ------------ 
 

As more particularly described in paragraph 6 above, the consideration due to John Wilson pursuant to the SPA will be part cash and part loan notes, the intention as regards the latter being that they ultimately be converted into equity of certain entities in the Purchaser's group.

The LTIP liability to the Group immediately prior to the issuance of the Circular was approximately GBP3m.

   10.3        Limited tax gross-up 

Payments to John Wilson and Andy Weatherstone in respect of the 2016 LTIP are generally expected to be subject to capital gains tax. As it has not been possible to fully comply with the valuation mechanism for the A Ordinary Shares prescribed by the ETUK Articles, the Company has agreed to provide a gross up of any additional tax obligations that may arise in respect of the difference between the sum actually received by the A Ordinary Shareholders and the sum they would otherwise have received if the mechanism prescribed by the Articles of ETUK had been followed. The rate used for grossing up will be 27% calculated by deducting the Capital Gains tax rate from the sum of Income Tax and National Insurance percentage rates due on payments.

11. The Transaction Scheme

   11.1        Background 

Following the receipt of an unsolicited approach during financial year 2019 it was clear to the Board that there remained significant value in the Group which was not reflected in its share price. In addition the significant growth potential of Checkit was being overshadowed by the larger Bulgin business. As a consequence the Board considered that the Group's two main underlying businesses, Bulgin and Checkit, should be separated and thus engaged in a competitive bidding process for Bulgin.

From the Remuneration Committee's perspective, this created a situation that needed to take account of the following:

-- the 2016 LTIP was due to mature in short order and retention of the Executives remained central to the ongoing profitability of Bulgin and the scale-up of Checkit;

-- a new LTIP could not be adopted as the structure of the business in the medium term was unknown and the Group was in a close period;

-- a successful divestiture within the Group would require an enormous effort and stretch for the Executives;

-- some of the Executives would be required to depart with the Bulgin Business being sold as well as underpinning the value of the Proposed Transaction by committing their own funds as part of the new management's equity package, giving operational warranties and providing restrictive covenants to the buyer;

-- other Executives would need to remain with the Group in order to oversee the necessary post transaction restructuring;

-- all Executives would need to be particularly driven by having an appropriate scheme in place to deliver a successful result.

Any new scheme to be put in place would need to ensure that:

   --    the Group is successful in delivering the Bulgin Business to the Purchaser; 

-- the Group post Completion has the team in place to ensure successful transition of the remaining Group without Bulgin;

-- all the stakeholders' interests are considered to ensure a deliverable transaction could be put to Shareholders; and

-- potential conflicts of interest are carefully managed particularly for management departing with the business.

Against this background, the Remuneration Committee, having consulted with independent remuneration consultants H2 Glenfern, structured the Transaction Scheme to take account of the deliverability of the Proposed Transaction, the investment requirement of John Wilson and the overall impact of the Proposed Transaction on their future roles and remuneration. Further considerations have been noted in paragraph 12 below.

The Remuneration Committee welcomes the fact that it remains with the Shareholders to approve the Transaction Scheme and it is for this reason that Shareholders are being asked to consider and, if thought fit, approve the Resolutions.

   11.2        Bonus payments to Directors 

Pursuant to the Transaction Scheme, it is proposed that the following payments are made to John Wilson, Andy Weatherstone and Keith Daley:

   (a)          Incentive payment to John Wilson 

As part of the Proposed Transaction, and given the importance of John Wilson's role both in the Proposed Transaction and under the existing and future ownership of Bulgin, it has been agreed between the Company, Equistone and John Wilson that he will receive a payment from the Company of GBP1.105 million gross (GBP586,000 net of Income tax and National Insurance) on Completion in consideration for agreeing to (i) leave the Group (at Equistone's sole request) (ii) accepting GBP675,000 in loan notes (convertible into equity of certain members of the Purchaser's group) as part of the consideration his A Ordinary Shares (see paragraph 10.2 above); and (iii) lead Bulgin as Chief Executive Officer under the new ownership.

No further amounts are payable to John other than his salary and other contractual monthly payments and benefits (including payments under the CSOP) which are due up until the date of Completion whether in respect of annual performance bonuses or severance or otherwise. The market value options granted in 2016 will be terminated.

This payment is to be put to Shareholders pursuant to Resolution 1 as part of the overall Proposed Transaction.

   (b)          Incentive payment to Andy Weatherstone 

Andy Weatherstone will remain with the Group post Completion. As part of the Proposed Transaction, it is proposed that Andy will receive a completion bonus of GBP250,000 (with no further annual bonus payable in 2019/20 financial year) and it has been agreed between the Company, Equistone and Andy that he will be required to amend his current employment contract such that he will perform his current role within the Group whilst still providing support to Bulgin pursuant to the TSA, which may require up to 50% of his time for a period of up to 12 months following Completion. In consideration for providing such support as required, the Company will make a payment of GBP215,000 to Andy Weatherstone (the "TSA Benefit"). The above sums will be payable upon Completion. The TSA Benefit may be clawed back by the Company in certain circumstances, including where the service has not be provided by Andy Weatherstone under the terms of the agreement.

These payments are to be put to Shareholders pursuant to Resolution 1 as part of the overall Proposed Transaction.

   (c)           Incentive payments to Keith Daley 

Keith Daley has been responsible for negotiating and structuring the Proposed Transaction. It has been noted that Keith does not participate in the LTIP. As part of the Transaction Scheme, the Remuneration Committee proposes the following bonus payments:

i. A completion bonus and price enhancement bonus (determined on a sliding scale depending on the level of disposal above a minimum amount of proceeds received). At an offer value of GBP105 million, this amounts to a maximum of GBP725,000 (the "Total Bonus").

Keith Daley's continued involvement in the Group remains pivotal over the next 12 months to integrate Next, adjust the corporate structure, organise human resources and set overall group strategy. The following ensures the retention of Keith during this period of immense change particularly as no long term incentive has been put in place yet:

ii. A retention bonus of GBP200,000 payable in 12 monthly tranches each of GBP16,667, starting the first full month post Completion; and

iii. A reorganisation bonus of GBP200,000 payable on successful completion of to be agreed specific operational and system targets and the disposal of Elektron Eye Technology.

These payments are to be put to Shareholders pursuant to Resolution 2.

12. Further considerations

The Remuneration Committee recognises that whilst the actual and potential value of these awards are significant, such value needs to be considered in the context of the exceptional return achieved by Shareholders since the adoption of the 2016 LTIP. The total value return is above GBP80m as at close of business on the day prior to the publication of the Circular (being a cumulative annual growth rate ("CAGR") of 113%). The total award to the Executive equates to 6.8% of total proceeds. The settlement and extinguishment of the 2016 LTIP and the award of the bonuses pursuant to the Transaction Scheme has permitted the Remuneration Committee to present the Proposed Transaction as a deliverable opportunity to Shareholders where each of the underlying stakeholders' interests were duly considered.

13. Related Party Transaction

The Transaction Scheme proposed for John Wilson, Andy Weatherstone (in respect of Resolution 1) and Keith Daley (in respect of Resolution 2) as Executive Directors together constitute a related party transaction pursuant to Rule 13 of the AIM Rules. The Company's Senior Independent Director (Ric Piper) and the Chair of the Remuneration Committee (Giovanni Ciuccio), having consulted with N+1 Singer the Company's Nominated Adviser, consider that the terms of the Transaction Scheme are fair and reasonable insofar as its Shareholders are concerned.

14. Costs of the Proposed Transaction and estimated net proceeds

14.1 Total amount payable to the Executive Directors pursuant to the Transaction Scheme and other payments

The total amounts payable by the Company to the Executive Directors pursuant to the proposed Transaction Scheme (but before any payments due under the CSOP (see paragraph 14.2 below)), together with other related payments is set out below.

 
                                                                                          GBPm 
 Extinguishment of 2016 LTIP Obligations (see paragraph 10.1)                            4.125 
                                                                                        ------ 
 John Wilson and Andrew Weatherstone Transaction Scheme payments (see paragraph 11.2)    1.570 
                                                                                        ------ 
 Keith Daley Transaction Scheme payments (see paragraph 11.2)                            1.125 
                                                                                        ------ 
 ESTIMATED TOTAL AMOUNT PAYABLE TO EXECUTIVE DIRECTORS                                   6.820 
                                                                                        ------ 
 Group National Insurance Cost                                                           0.372 
                                                                                        ------ 
 TOTAL COST TO GROUP                                                                     7.192 
                                                                                        ------ 
 

The total estimated amount payable represents around 6.8% of the gross proceeds of the Proposed Transaction. The Independent Board, Remuneration Committee and Board regard this as an appropriate reward in aggregate given the excellent performance of the Group over the past few years that has culminated in the Proposed Transaction.

Since the inception of the LTIP on 28 July 2016 until the close of business on the day prior to the issuance of the Circular, the share price has increased by 833 % representing an increase of shareholder value of GBP80m.

It should be noted that the value of the LTIP liability to the Group immediately prior to the issuance of the Circular was approximately GBP3m.

   14.2        Other transaction costs 

Adviser and other fees to third parties are estimated to amount to approximately GBP2.1 million and retention bonuses payable on Completion to certain senior managers of Bulgin amount to GBP0.4 million (GBP0.45m inclusive of employer's national insurance)

   14.3        Initial restructuring costs following disposal 

These are estimated to amount to GBP0.75 million and include the cost of relocation of Checkit and Elektron Eye Technology's manufacturing operation's from Bulgin's site in West Molesey, installation of new IT systems, infrastructure and other related separation costs

   14.4        CSOP options and stock appreciation rights 

The Company currently has outstanding a number of CSOP options and stock appreciation rights. A summary of these as they relate to John Wilson, Andy Weatherstone and Bulgin employees is set out below.

 
                              Number of shares   Exercise price (p) 
 CSOP 
                             -----------------  ------------------- 
 John Wilson                           175,000                16.87 
                             -----------------  ------------------- 
 Andy Weatherstone                     571,425                 5.25 
                             -----------------  ------------------- 
 Bulgin employees                    1,113,000           8.00-16.87 
                             -----------------  ------------------- 
 CSOP total                          1,859,425           5.25-16.87 
                             -----------------  ------------------- 
 Stock appreciation rights             230,000                 8.00 
                             -----------------  ------------------- 
 Total                               2,089,425           5.25-16.87 
                             -----------------  ------------------- 
 

The exercise of CSOP options and stock appreciation rights are determined by the rules of the relevant schemes.

John Wilson and Bulgin employees, as good leavers of the Group, will be able to exercise CSOP options within six months of leaving the Group. The stock appreciation rights will be payable on Completion and amount to GBP131,100.

Given that Andy Weatherstone will remain with the Group, he will be able to exercise his CSOP options under the existing terms of the scheme, which will become exercisable from 30th July 2019.

   14.5        Estimated net proceeds 

The estimated net proceeds of the Proposed Transaction receivable by the Company amount to c. GBP94 million, after taking into account the following expenses relating to the Proposed Transaction:

 
                                                                                          GBPm 
 Gross proceeds                                                                         105.00 
                                                                                       ------- 
 Estimated adjustment in respect of working capital and other such items                (0.52) 
                                                                                       ------- 
 Deal costs                                                                             (2.11) 
                                                                                       ------- 
 Payments to Executive Directors                                                        (7.19) 
                                                                                       ------- 
 Retention bonuses to Bulgin senior management (including stock appreciation rights)    (0.59) 
                                                                                       ------- 
 Sub total                                                                               94.59 
                                                                                       ------- 
 Separation and restructuring costs                                                     (0.75) 
                                                                                       ------- 
 Net Proceeds                                                                            93.84 
                                                                                       ------- 
 

15. General Meeting

Set out in Part III of the Circular is a notice convening the General Meeting to be held at 11.00 a.m. on 3 September 2019 at the offices of Fieldfisher LLP, 9th Floor, Riverbank House, 2 Swan Lane, London EC4R 3TT at which the Resolutions will be proposed for the purposes of approving the matters set out below. The Resolutions will each be proposed as ordinary resolutions and will require a simple majority of the votes cast for them to be passed.

Resolution 1: To approve the Proposed Transaction, comprising a fundamental change of business pursuant to AIM Rule 15 and the bonus payments to each of John Wilson and Andrew Weatherstone described therein.

Only the Independent Shareholders plus Keith Daley shall be entitled to vote in respect of this resolution.

Resolution 2: Conditional upon the passing of Resolution 1, to approve the bonus payments to Keith Daley as set out therein.

Only the Independent Shareholders shall be entitled to vote in respect of this resolution.

Resolution 3: Conditional upon the passing of Resolution 1, to change the name of the Company to Checkit plc.

16. Irrevocable commitments

The Company has received irrevocable commitments to vote in favour of Resolutions from Shareholders who hold Ordinary Shares carrying voting rights representing, in aggregate, approximately 52.96 per cent. of the total number of Ordinary Shares in issue as at the date of the Circular. The irrevocable commitments received reflect the voting preferences of the Shareholders giving such commitments and the fact that only certain Shareholders may vote on certain of the Resolutions (see paragraph 15 above and the Notice of General Meeting). Accordingly, the irrevocable commitments received are as follows:

 
 Resolution number              Aggregate percentage of total 
                              voting rights of the Company in 
                      issue for which irrevocable commitments 
                                           have been received 
 1                                                     51.54% 
                    ----------------------------------------- 
 2                                                     29.07% 
                    ----------------------------------------- 
 3                                                     52.96% 
                    ----------------------------------------- 
 

17. Recommendations and irrevocable undertakings

The Independent Board considers that the Proposed Transaction and the Transaction Scheme are in the best interests of the Group and its Shareholders as a whole and that the terms are fair and reasonable. Accordingly, those members of the Independent Board who are entitled in each case to vote and count in the quorum unanimously recommend that you vote in favour of the Resolutions as they have irrevocably undertaken to do in respect of their own legal and beneficial shareholdings representing, as at the date of this document, 13.1 per cent of the total number of Ordinary Shares in issue as at the date of this document.

As only certain Directors who are also Shareholders can vote on certain of the Resolutions (see paragraph 15 above and the Notice of General Meeting), the irrevocable commitments received from Directors in respect of each Resolution are as follows:

 
 Resolution number              Aggregate percentage of total 
                              voting rights of the Company in 
                      issue for which irrevocable commitments 
                            from Directors have been received 
 1                                                     11.68% 
                    ----------------------------------------- 
 2                                                      0.01% 
                    ----------------------------------------- 
 3                                                      13.1% 
                    ----------------------------------------- 
 

18. Expected timetable of principal events

 
 Posting of the Circular and Proxy Form                 31 July 2019 
  to Shareholders 
 Latest time and date for receipt of Proxy   11.00 a.m. on 30 August 
  Forms (or CREST instructions) in respect                      2019 
  of the General Meeting 
 Time and Date of General Meeting             11 a.m. on 3 September 
                                                                2019 
 Anticipated date of Completion                    24 September 2019 
 

Cautionary note regarding forward-looking statements

This announcement contains forward looking statements relating to the Group's future prospects, plans, developments and strategies, which have been made after due and careful enquiry and are based on the Directors 'current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Forward-looking statements are identified by their use of terms and phrases such as "project", "expect", "potential", "believe", "could", "envisage", "estimate", "intend", "may", "plan", "will" or the negative of those, variations or comparable expressions, including references to assumptions. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, including, but not limited to, economic and business conditions, the effects of continued volatility in credit markets, market-related risks such as changes in interest rates and foreign exchanges rates, the policies and actions of governmental and regulatory authorities, changes in legislation, the further development of standards and interpretations under IFRS applicable to past, current and future periods, evolving practices with regard to the interpretation and application of standards under IFRS, the outcome of pending and future litigation or regulatory investigations, changes or developments in technology or its application, project delivery risks, the success of future acquisitions and other strategic transactions and the impact of competition. A number of these factors are beyond the Group's control. As a result, the Group's actual future results may differ materially from the plans, goals, and expectations set out in the Group's forward-looking statements. Any forward-looking statements made in this announcement by or on behalf of the Group speak only as of the date they are made. These forward-looking statements reflect the Group's judgement at the date of this announcement and are not intended to give any assurance as to future results. Except as required by the Financial Conduct Authority, the London Stock Exchange, the AIM Rules for Companies or applicable law, the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this announcement to reflect any changes in the Group's expectations about them or any changes in events, conditions or circumstances on which any such statement is based.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] or visit www.rns.com.

END

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July 31, 2019 02:03 ET (06:03 GMT)