RedstoneConnect PLC Proposed £21.6m cash disposal & Notice of GM (4385P)

TIDMREDS

RNS Number : 4385P

RedstoneConnect PLC

29 May 2018

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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 the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

29 May 2018

RedstoneConnect Plc

("RedstoneConnect" or the "Company")

Proposed GBP21.6 million cash disposal of its Systems Integration and Managed Services divisions

and

Notice of General Meeting

RedstoneConnect (AIM: REDS), a leading provider of technology and services for smart buildings and commercial spaces, today announces that it has conditionally agreed to sell Comunica Holdings Limited and Commensus Limited (which together comprise the Company's Systems Integration and Managed Services divisions) to Excel I.T. Services Limited, a leading IT infrastructure company and support partner to global corporations, for a total consideration of GBP21.6 million in cash ("the Disposal"). GBP19.6 million of the consideration is payable in cash on Completion and up to a further GBP2 million will become payable on or before final completion of an already contracted project by Redstone Converged Solutions Ltd (a subsidiary of Comunica Holdings Limited) provided such project is carried out on a profitable basis. In addition, intercompany loans as at 31 January 2018 of, in aggregate, approximately GBP1.4 million owed by the Company to the Sale Group are being waived as part of the Disposal.

The Disposal is of sufficient size relative to that of the Existing Group to constitute a disposal resulting in a fundamental change of business pursuant to Rule 15 of the AIM Rules and Completion is, therefore, conditional upon the approval of Shareholders.

A circular to shareholders (the "Circular") containing a notice of General Meeting is being posted to shareholders today and will be available on the Company's website www.redstoneconnect.com. The General Meeting is to be held at 10.00 a.m. on 15 June 2018 at the offices of DAC Beachcroft LLP, 100 Fetter Lane, London EC4A 1BN. The Company has received irrevocable undertakings from the Directors and certain other Shareholders and a letter of intent to vote in favour of the Resolution in respect of holdings totalling in aggregate 7,169,351 Ordinary Shares, representing approximately 34.4 per cent. of the Company's issued share capital.

Capitalised terms in this announcement shall have the same meaning ascribed to them in the Circular.

Background to and reasons for the Disposal

-- RedstoneConnect is focused on technologies that make real estate more efficient and businesses more effective as a result

   --     RedstoneConnect currently has three business divisions: 

o Systems Integration - integrated and digital infrastructure for buildings and commercial spaces;

o Managed Services - IT support services and hosted cloud-based IT support services; and

o Software - software to improve building-user experience, utilisation and efficiency, with the Connect software platform and OneSpace occupancy management software solution.

-- Following the acquisition of Connect IB in March 2016, the Board has been focused on both broadening and developing its software capabilities, which includes the mapping and wayfinding of smart buildings and occupancy management solutions

-- The Systems Integration and Managed Services divisions operate in more mature markets and therefore the Board believes that higher levels of growth are available to the Company's Software division

-- Following the Disposal, management will be able to focus exclusively on expanding the Company's Software business (the "Continuing Group")

Deal rationale

The Board sees significant opportunities for growth in the smart software and co-working space technology markets especially in the agile working and the connected office environment, a core target market for the Group's occupancy management software solution, OneSpace.

The Board believes that there is a change in the business environment where employee mobility and agile working is challenging modern organisations to adapt their approach to effective and efficient use of the workspace. This is driving demand for workspace management solutions. In 2017, the global market for occupancy analytics based software services was estimated to be worth $1.5 billion with the market size forecast to grow by a compound annual growth rate of approximately 25% to over $4.6 billion by 2022. The Board believes that its existing OneSpace software solution is well positioned to address this market opportunity.

The Disposal will provide the Board with the opportunity to accelerate the growth of the Company's Software division, highlighted by the following:

-- It creates a focused operational base from which to execute the Board's strategy of becoming a leading software and SaaS driven company, focused on the high growth smart buildings and co-working space technology markets;

   --     It provides investment capital to accelerate the Company's technology platform, through the: 

o further development of OneSpace to broaden the functionality and modular offering, thereby increasing the market opportunity from multi-national enterprises and increasing mid-market reach;

o acceleration of the Company's routes to market by further investment to expand its sales and marketing capability, both through adding to the Group's direct sales capability and opening additional indirect sales channels through partnership arrangements; and

o balance sheet strength to capitalise on potential acquisition opportunities that not only broaden RedstoneConnect's suite of software products in the smart building and co-working space markets but that also expand the Company's geographical reach and/or bring with them a relevant established client base.

With the Continuing Group focused exclusively as a software business, it is the Board's aspiration that through the additional investment in the Group, complemented by value enhancing acquisitions, the Company will benefit from anticipated growth in the occupancy analytics sector and evolve into a leading international workspace management software company with high margin SaaS and licence based revenues.

Mark Braund, CEO of RedstoneConnect, commented:

"The proposed disposal of our Systems Integration and Managed Services divisions represents another exciting development in the evolution of our business. Since the acquisition of Connect IB in 2016, we have been developing our Smart Software solution capabilities with a particular focus on OneSpace, our occupancy management software solution.

Employee mobility and agile working is driving demand as commercial real estate becomes more of a user experience business. We firmly believe that the significant global demand for workspace management solutions coupled with the market leading suite of services already being deployed within our Software division, creates an ideal base from which to accelerate our growth.

Our strategic focus on creating greater levels of recurring, annuity based revenues, and improving the earnings visibility of the Group, underpins the Board's commitment to becoming a fast-growing workspace management software company delivering long term shareholder value."

Enquiries

 
 RedstoneConnect Plc                                 via Vigo Communications 
  Mark Braund (CEO) 
  Spencer Dredge (CFO) 
 Cantor Fitzgerald Europe (Nominated Adviser 
  & Joint Broker) 
  Marc Milmo/ Catherine Leftley                      [phone] 
 Whitman Howard Limited (Joint Broker) 
  Nick Lovering                                      [phone] 
 Vigo Communications (Financial Public Relations) 
  Jeremy Garcia / Ben Simons / Antonia Pollock 
  [e-mail]                                 [phone] 
 

RedstoneConnect Plc

("RedstoneConnect" or the "Company")

Proposed GBP21.6 million cash disposal of Comunica Holdings Limited and Commensus Limited

and

Notice of General Meeting

The Board of RedstoneConnect are delighted to announce that it has conditionally agreed to sell the entire issued share capital of Comunica Holdings Limited and Commensus Holdings Limited (which together comprise the Company's Systems Integration and Managed Services divisions) to Excel I.T Services Limited for GBP21.6 million, of which GBP19.6 million is payable in cash on Completion and up to a further GBP2 million will become payable on or before final completion of an already contracted project by Redstone Converged Solutions Ltd (a subsidiary of Comunica Holdings Limited), provided such project is carried out on a profitable basis. In addition, intercompany loans as at 31 January 2018 of, in aggregate, approximately GBP1.4 million owed by the Company to the Sale Group are being waived as part of the Disposal.

The Disposal is of sufficient size relative to that of the Existing Group to constitute a disposal resulting in a fundamental change of business pursuant to Rule 15 of the AIM Rules and Completion is, therefore, conditional upon the approval of Shareholders.

A circular to shareholders (the "Circular") containing a notice of General Meeting is being posted to shareholders today and will be available on the Company's website www.redstoneconnect.com. The General Meeting is to be held at 10.00 a.m. on 15 June 2018. The Company has received irrevocable undertakings from the Directors and certain other Shareholders and a letter of intent to vote in favour of the Resolution in respect of holdings totalling in aggregate 7,169,351 Ordinary Shares, representing approximately 34.5 per cent. of the Company's issued share capital.

Background to and reasons for the Disposal

RedstoneConnect is focused on technologies that make real estate more efficient and businesses more effective as a result. The Company provides the infrastructure capabilities and the software applications to deliver smart buildings and smart workspace solutions for commercial businesses, public sector organisations, real estate owners and managers.

RedstoneConnect currently has three business divisions:

-- Systems Integration - integrated and digital infrastructure for buildings and commercial spaces;

   --     Managed Services - IT support services and hosted cloud-based IT support services; and 

-- Software - software to improve building user experience, utilisation and efficiency with the Connect software platform and OneSpace occupancy management software solution.

Following the acquisition of Connect IB, a company that had developed and deployed solutions in the mapping and wayfinding of smart buildings, in March 2016, the Board has been focused on developing the Company's software offering. The Systems Integration and Managed Services divisions operate in more mature markets and therefore the Board believes that higher levels of growth are available to the Company's Software division. In addition, the Systems Integration division has high levels of project-related work and therefore less predictable revenues and, as has been evidenced in the year to 31 January 2018, demonstrates greater working capital requirements as projects commence. Therefore, the Board's view is that the Company's capital resources would be better utilised in growing the technology-led intellectual property part of the Company, focusing on evolving over the coming years into a higher value-added SaaS recurring income model. The Board sees significant opportunities for growth in the smart software and co-working office technology markets especially in the agile working and the connected office environment, a core target market for the Group's occupancy management software solution, OneSpace. In addition, the Board sees the potential to increase its geographic reach through international sales of its software solutions.

In May 2017, the Board acquired Anders and Kern U.K. Limited ("A+K") which not only brought with it an experienced sales and marketing team but also helped expand the Company's customer reach for its software offering. In conjunction with the acquisition of A+K, the Company raised funds which financed the acquisition and also provided additional working capital, part of which was used to accelerate the development and functionality of OneSpace, especially in improving the platform architecture and developing its meeting room management module functionality. The Software division has grown considerably over the past 12 months and in the interim results for the period ended 31 July 2017 and announced in October 2017, the Software division represented approximately 31% of the Group's adjusted EBITDA (before unallocated central costs). For the year ended 31 January 2018, the Software division represented approximately 37% of the Group's adjusted EBITDA (before unallocated central costs).

The Disposal will provide the Board with the opportunity to focus on continuing the excellent progress being made by the Company's Software division by:

-- providing a clear and focused platform to execute the Board's strategy of becoming a software company focused on the attractive smart buildings and co-working office technology markets;

-- providing funds for investment in the Company's technology through ongoing development of new modules and functionality;

-- providing the Continuing Group with the flexibility to take advantage of potential acquisition opportunities of complementary businesses that broaden its software suite of products and extend the Continuing Group's customer reach in the smart building and co-working space technology markets; and

   --     strengthening the Continuing Group's balance sheet, leaving it in a strong cash position. 

The Board believes that the terms of the Disposal represent good value for Shareholders and appropriately value the future growth potential of the Sale Companies against the risks associated with the nature and timing of delivering that growth. The Disposal also provides the Board with the opportunity to focus on accelerating the execution of its strategy for the Continuing Group.

Information on the Sale Companies

The Company's Systems Integration division operates under the "Redstone" brand. Its work is project based, lower margin than the Group's other divisions and involves design work for new builds as well as retro-fit projects. Services designed and installed range from bespoke solutions such as lighting projects through to much broader network, cabling and cellular based projects within office building developments. The delivery of its offering is typically achieved using multi-disciplined project and contract management teams.

The Managed Services division which also operates under the "Redstone" brand provides a range of desktop and data centre ICT support services through to network infrastructure and management (including move/add/change and break and fix services) and general support services either on premise or hosted as a cloud offering. In addition, the Managed Services division under the "Commensus" brand offers fully managed cloud hosted IT support services.

Combined, the two divisions have over 280 customers with approximately 120 using the combined managed services offering. The Managed Services division's largest customers operate in the financial services sector but the division also has long standing customers in the oil & gas and legal sectors.

For the year ended 31 January 2018, the Sale Group generated pro-forma revenue of approximately GBP41.6 million and an adjusted pro forma EBITDA (before central Group costs) of approximately GBP3.0 million. At 31 January 2018, the Sale Group had gross assets of approximately GBP15.9 million and net assets of approximately GBP8.8 million (excluding goodwill and intangible assets held in the consolidated accounts).

Principal terms of the Disposal

Pursuant to the terms of the Share Purchase Agreement, the Company has conditionally agreed to sell the entire issued share capital of each of the Sale Companies, comprising the Systems Integration and Managed Services divisions of the Existing Group, to the Purchaser for GBP21.6 million, of which GBP19.6 million is payable in cash on Completion and up to a further GBP2 million will become payable on or before final completion of an already contracted project by Redstone Converged Solutions Ltd, provided such project is carried out on a profitable basis. In addition, intercompany loans as at 31 January 2018 of, in aggregate, approximately GBP1.4 million owed by the Company to the Sale Group are being waived as part of the Disposal.

The additional GBP2 million will be retained by the Purchaser for working capital purposes relating to the project, the contract for which is currently due to complete by 31 December 2018, with the settlement process to follow thereafter. In the event that this GBP2 million is not sufficient to cover the ongoing working capital relating to the project, the Company may be required to provide additional working capital equal to any such deficit, subject to the terms of the Share Purchase Agreement. In the event that the work carried out by Redstone Converged Solutions Ltd in connection with the project is not profitable in the period beginning on 1 February 2018 and ending on the date of final settlement, the Company has agreed to indemnify the Purchaser in respect of an amount equal to the total loss in that period.

As the equity value for the Sale Group has been determined by reference to the Locked Box Accounts, the Share Purchase Agreement contains a "locked box" mechanism whereby it has been agreed that only certain categories of leakage from the Sale Group to the Company are permitted to take place from 31 January 2018 to Completion. If there is any leakage, the Company will be required to pay an amount necessary to put the relevant member of the Sale Group into the position it would have been in if there had not been any leakage (including, without limitation, the costs and expenses reasonably incurred).

Completion is conditional upon the approval of the Disposal by Shareholders and none of the Sale Companies nor the Company having suffered an insolvency event

Information on Excel I.T. Services Limited

With 25 years' experience, Excel I.T. Services Limited has grown into a leading IT infrastructure company and support partner to global corporations. Working with clients across Europe, the Middle East and Africa, Excel I.T. Services Limited has developed a range of services in the delivery of IT infrastructure and infrastructure support services. They deliver new-build, refurbishment, upgrade and renewal projects of all sizes as well as providing clients with technology and strategic support for building network automation and optimisation.

For the year ended 31 March 2017, Excel I.T. Services Limited had revenues of approximately GBP23.4 million and operating profit of approximately GBP2.5 million.

Financial effects of the Disposal and use of proceeds

As at 31 January 2018, the Consolidated Net Assets of the Group were approximately GBP22.4 million. The value of the Sale Group's audited net assets, including goodwill and intangible assets held in the consolidated accounts, as at the Locked Box Accounts Date, being the date used as the reference point to agree with the Purchaser the value of net assets that will be transferred on Completion, was approximately GBP20.2 million.

It is expected that the net proceeds of the Disposal on Completion (and excluding the GBP2 million that will become payable on or before 30 November 2018 subject to the completion of an already contracted project by Redstone Converged Solutions Ltd), after payment of transaction costs, will be approximately GBP19.2 million. In addition, upon Completion the Board will repay all of its outstanding debt and overdrafts save for a mortgage of approximately GBP450,000 (amounting to approximately GBP4.3 million as at 23 May 2018) so that the Continuing Group will be debt free. As at 23 May 2018, the Company (excluding the Sale Group) had cash and cash equivalents of approximately GBP0.4 million.

As set out below in the strategy for the Continuing Group, the Board believes that there are excellent growth opportunities for the Software division. The balance sheet strength afforded to the Group from the net proceeds of the Disposal will enable the Continuing Group to develop its software offering in the occupancy management space by adding new functionality and modules as well as complementing this development with strategic acquisitions. Part of the cash will therefore be applied for additional investment into the continued development of the software offering as well as seeking to expand its sales and marketing capability, both through adding to the Group's direct sales capability but also opening additional indirect sales channels through partnership arrangements.

Importantly, the Directors believe that the occupancy management software sector remains very fragmented and therefore there are good opportunities to accelerate the Continuing Group's growth by applying part of the cash proceeds to capitalise on acquisition opportunities and conclude transactions in an expeditious manner. In the event that the Company is unable to conclude suitable acquisitions or that some or all of the cash received from the Disposal has not been deployed and is still left in the business after 2 years, the Board will consider returning funds to Shareholders.

Strategy for the Continuing Group

The Board believes that the Disposal will provide it with an excellent opportunity to focus exclusively on capturing the opportunity it believes exists for a software offering targeting the smart building and co-working space markets. This opportunity is not just in the UK but also in international markets such as the USA and Europe.

The Board believes that there is a change in the business environment where employee mobility and agile working is challenging modern organisations to adapt their approach to effective and efficient use of the work space. This is driving demand for workspace management solutions. In 2017, the global market for occupancy analytics based software services was estimated to be worth $1.5 billion with the market size forecast to grow by a compound annual growth rate of approximately 25% to over $4.60 billion by 2022. The Company believes that its existing OneSpace software solution is well positioned to address this market opportunity.

Through its OneSpace software solution and the Connect software platform, the Company can already deliver software solutions for utilisation and efficiency, occupancy management, access control, location-based services, wayfinding and meeting room management and the Company is working to develop an advanced suite of other resource management functionality. The software suite is built to an open-architecture standard, can be deployed either on-premise or in the cloud and has a secure API layer that permits easy integration with third party applications. The data gathering, analytics and dashboard functionality provide clients with the information required to deploy mobile and agile working strategies and configure space to achieve increased engagement with the workforce whilst making the most efficient use of the workspace. In addition, the Board believes that it can complement the existing application of its OneSpace software solution by targeting additional market segments such as the fast-growing co-working space sector.

To date, the Software division has already won blue chip customers such as UBS and UBM on multi-year contracts and other clients include GlaxoSmithKline, the Rugby Football Union and the Munich Smart City project. Contracts have been both license sales and SaaS based per user contracts and whilst the ambition is to increase the proportion of revenues from SaaS recurring revenue contracts, in the near term, the Board believes that there are still strong opportunities to deliver licence-based sales aligned to the buying requirements of its target audience.

As noted above, the Directors intend to deploy part of the proceeds from the Disposal in ongoing investment in the software to continue to add to its functionality and modular offering thereby increasing the market opportunity from the multi-national enterprises it is currently engaged with and increasing its reach into the mid-market. Furthermore, the Company will look to accelerate its routes to market by investment in sales, both direct and through indirect sales/partnership channels.

In addition to utilising the proceeds of the disposal to deliver continued organic growth, the Company will seek opportunities to grow through acquisition that will enhance the Continuing Group's software proposition and its suite of products. In addition, acquisitions that broaden the Continuing Group's accessible markets (such as into the co-working space sector) will provide increased opportunities to promote its complete solutions concept. The Company will be looking at acquisition opportunities that not only provide technology in adjacent and/or complementary areas to the Continuing Group but also ones which bring with them an existing and established client base as well as broadening the Continuing Group's geographical reach. The Board's acquisition strategy will therefore principally focus on further developing the Continuing Group's strategy of software sales into the smart building and co-working space markets.

With the Continuing Group focused exclusively as a software business, it is the Board's aspiration that through the additional investment in the Group, complemented by value enhancing acquisitions, the Company will benefit from anticipated growth in the smart buildings and occupancy analytics sector and evolve into a leading international workspace management software company with high margin SaaS and licence based revenues.

Irrevocable undertakings

The Directors and Keith Jump (the Company's chief technology officer) have given irrevocable undertakings to the Company to vote in favour of the Resolution (and, where relevant, to procure that such action is taken by the relevant registered holders if that is not them), in respect of their entire beneficial holdings totalling, in aggregate, 491,204 Ordinary Shares, representing approximately 2.3 per cent. of the Company's issued share capital.

In addition, certain other Shareholders, being JO Hambro Capital Management Ltd and Canaccord Genuity Wealth Limited, have given irrevocable undertakings to the Company to vote in favour of the Resolution to be proposed at the General Meeting (and, where relevant, to procure that such action is taken by the relevant registered holders if that is not one of them) in respect of their beneficial holdings totalling, in aggregate, 5,066,160 Ordinary Shares, representing approximately 24.3 per cent. of the Company's existing issued share capital. A letter of intent to vote in favour of the Resolution has also been obtained from Herald Investment Management Limited in respect of 1,611,987 Ordinary Shares representing approximately 7.8 per cent. of the Company's issued share capital.

In total, therefore, the Company has received irrevocable undertakings and a letter of intent to vote in favour of the Resolution in respect of holdings totalling in aggregate 7,169,351 Ordinary Shares, representing approximately 34.5 per cent. of the Company's issued share capital.

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