Acquisition of DQM Group Holdings Ltd & Placing

RNS Number : 5649P

GRC International Group PLC

11 February 2019

 

11 February 2019

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.

GRC International Group plc

("GRC International", the "Company" or the "Group")

Acquisition of DQM Group Holdings Limited

Placing to raise £5 million

GRC International Group plc (AIM:GRC), a leading supplier of IT governance, risk management and compliance products and services, is pleased to announce that it has conditionally agreed to acquire the entire issued share capital of DQM Group Holdings Limited ("DQM"), a provider of data consulting and technology solutions, and its subsidiaries (the "Acquisition"). The Acquisition is expected by the Board to be significantly earnings enhancing in FY 2020 and beyond and marks the completion of the majority of the Group's investment programme intended to position the Group to become cash generative.

In addition, and in connection with the Acquisition, the Company proposes to raise £5 million by way of a conditional placing of 5,000,000 new Ordinary Shares at 100 pence per Ordinary Share (the "Placing"). The Company intends to use the net proceeds of the Placing to finance primarily the initial cash element of the consideration for the Acquisition and to provide additional working capital for the enlarged business.

Acquisition highlights

·	Conditional agreement to acquire DQM, a provider of data consulting and technology solutions.  Key aspects of DQM include:
		-	Four main revenue streams: Managed Services, GDPR Consulting, Third Party Auditing and GDPR Technology Solutions
		-	Established earnings, with significant revenue for the year ended 28 February 2018 derived from clients using more than one product or service
		-	Revenues for the financial year to 28 February 2018 of approximately £2.9m, with an EBITDA of approximately £720k
		-	Organic revenue compound annual growth rate ("CAGR") of 26 per cent. over the two years to 28 February 2018
·	Initial Consideration for the Acquisition totaling £5,886,839 comprising a cash payment of £3,532,104 and the issue of 2,021,232 Ordinary Shares, worth £2,354,736 based on an issue price per Ordinary Share of 116.5 pence
·	Deferred Consideration calculated by reference to eight times DQM's adjusted EBITDA for the financial year ended 28 February 2019, less the Initial Consideration and certain other adjustments. The Deferred Consideration will be satisfied through a cash payment (as to 60 per cent.) and the issue of Ordinary Shares (as to 40 per cent.) and is currently anticipated to be in the range of approximately £2.5 million to £3.5 million, not exceeding £5 million
·	The Acquisition, the Board believes, will provide a number of earnings enhancing benefits to GRC International:
		-	Extend the Group's existing offering to include high margin, data governance services
		-	Add market share to the Group, by introducing additional household name clients with on-going contracts
		-	Provide cross-selling and upselling opportunities through the companies' complementary offerings
		-	Broaden and strengthen the Group's second tier management team, through the retention of existing DQM management
		-	Add customer account management capability
		-	Provide strategic opportunities, such as enabling the Group to gain Data Privacy Seal accreditation
		-	Provide sector crossover, such as an increased financial sector exposure
·	The Acquisition is expected to be significantly earnings enhancing in FY 2020 and beyond

Placing highlights

-	GRC International is proposing to raise £5 million (before expenses) through a placing of 5,000,000 Placing Shares at 100 pence per Ordinary Share (the "Placing Price")
-	The Placing Price represents a discount of approximately 9 per cent. to the closing bid price of 109 pence of the Ordinary Shares on 8 February 2019

Commenting on the proposed acquisition, Alan Calder, Chief Executive Officer of GRC International, said:

"This strategic acquisition is another step forward in the growth strategy of GRC International, enabling us to capitalise further on the significant opportunities within the IT governance, risk and compliance market and to extend GRC's existing capabilities and the range of products and services we offer to our customers.

"DQM boasts market-leading expertise in data consultancy, an impressive customer base and unique solutions, providing us clear opportunities for cross-selling and up-selling of our products and services. We look forward to welcoming DQM into the GRC International Group."

Peter Galdies, Founder and Director of DQM, also commented:

"We are looking forward to becoming part of the GRC International Group and working with Alan Calder and the team. Our existing offerings will complement GRC's products and services well and the opportunities for synergy creation and cross-selling, we believe, will significantly strengthen the future prospects for the Group."

Enquiries

GRC International Group plc Alan Calder (CEO) Chris Hartshorne (Finance Director)	www.grci.group 033 3800 7000
Grant Thornton UK LLP (Nomad) Philip Secrett/ Jen Clarke	020 7383 5100
Dowgate Capital Stockbrokers Limited (Broker) James Serjeant	020 3903 7717
Citigate Dewe Rogerson (Financial PR) Nick Hayns / Lucy Eyles / Claire Dansie	020 7638 9571

1.         Introduction and summary

GRC International Group plc today announces that it has conditionally agreed to acquire the entire issued share capital of DQM, a provider of data consulting and technology solutions headquartered in High Wycombe (the "Acquisition").

Acquisition of DQM

The original business, Data2 Limited, was founded in 1996 by Peter Galdies and Lisa Bentall and focused on managed solutions, such as utilising technology to track data misuse. In 2003 Data2 Limited acquired DQM which allowed it to expand into data security, protection and consultancy services. The business has since grown organically and in FY18 reported revenues of approximately £2.9 million and generated an EBITDA of approximately £720,000. Following a broadening of the product range to include governance, risk and compliance products, DQM rebranded in 2015 to DQM GRC.

Initial consideration for the Acquisition will be £5,886,839, comprising a cash payment of £3,532,104 and the issue of 2,021,232 Initial Consideration Shares, worth £2,354,736 calculated on the basis of an issue price per Ordinary Share of 116.5 pence, equal to the average of the middle market quotations for the Ordinary Shares as shown by the AIM Appendix of the Daily Official List of the London Stock Exchange for the 10 business days prior to and including 7 February 2019 (the "Initial Consideration").

Deferred consideration will also be payable to the sellers (the "Deferred Consideration") which will be calculated by reference to eight times DQM's adjusted EBITDA for the financial year ending 28 February 2019, less the amount of the Initial Consideration and certain other adjustments. The Deferred Consideration will be satisfied through cash (as to 60 per cent. of the Deferred Consideration) and the issue of Ordinary Shares (as to 40 per cent. of the Deferred Consideration and based on an issue price per Ordinary Share of 116.5 pence) within five business days of completion of the audit of DQM's accounts for the financial year ending 28 February 2019. The Deferred Consideration is currently anticipated to be in the range of approximately £2.5 million to £3.5 million, not exceeding £5 million.

Placing

It is intended that the cash element of the consideration will be funded by way of the Placing. The Company has provisionally placed 5,000,000 new Ordinary Shares at the Placing Price of 100 pence per share and the Directors expect that the Placing will raise gross proceeds for the Company of £5 million. The Placing Price represents a discount of 9 per cent. to the closing bid price of 109 pence per share on 8 February 2019 (being the latest practicable date prior to the announcement of the Placing and Acquisition on 11 February 2019).

The net proceeds of the Placing are proposed to be used principally to finance the initial cash consideration due in respect of the Acquisition, together with associated transaction costs, with the balance providing additional working capital for the enlarged business.

General Meeting

The issue of the Placing Shares is conditional, inter alia, upon the approval by Shareholders of the Resolutions to be proposed at the General Meeting of the Company convened for 1 March 2019. The Placing Shares are not being offered on a pro rata basis to existing Shareholders and accordingly the Placing is conditional, inter alia, upon Shareholders resolving to disapply statutory pre-emption rights.

2.         Background to and rationale for the Placing and Acquisition

Background to the Company

GRC was admitted to trading on the London Stock Exchange's AIM market in March 2018. The Group provides a comprehensive suite of products and services to address the IT governance, risk management and compliance requirements of organisations seeking to comply with a wide range of data protection and cyber security regulation. The Company provides a range of services and products through three divisions: Training, Consultancy and Publishing & Distribution.

When GRC was admitted to trading on AIM, its stated intention was to raise new equity to accelerate organic growth and allow it to fund potential acquisitions, in addition to raising the profile of the Group with potential customers and help with the recruitment and retention of staff.

As announced in the Company's interim results released on 24 December 2018, the Directors viewed the first half of FY19 as a period of strategic development, as the Company used the proceeds raised as part of its admission to trading to accelerate the launch of product offerings and invest in people and infrastructure. The Directors stated that they expect to see opportunities to acquire other businesses and pursue a roll up strategy in a market which remains very fragmented. Following the smaller acquisition of the domain, web platform, customer list and goodwill of www.gdpr.co.uk during 2018, the Directors believe the Company is now well placed to proceed with a more substantial acquisition.

Information on DQM

Data Quality Management Group Limited, trading as DQM GRC, is a provider of GDPR consulting and technology solutions. The original business, Data2 Limited, was founded in 1996 by Peter Galdies and Lisa Bentall and its initial product offering was data protection to commercial data owners, utilising its "watermarking" technology.

In 2003, Data2 Limited acquired DQM, which enabled the directors to expand into data security, protection and consultancy services. Following a broadening of the product range to include governance, risk and compliance products, DQM rebranded in 2015 to DQM GRC. The business now provides GDPR consulting, which has recorded strong growth since the introduction of GDPR legislation, which took effect in May 2018.

DQM has four main revenue streams:

·	Managed Services - constituting approximately 40 per cent. of revenue for the year to 28 February 2018. This was the original activity of DQM, and primarily helps clients track compliance with a range of data regulations, which can include the use of DQM's data watermarking application, a tool to help identify data loss, misuse and to prove ownership;
·	GDPR Consulting - constituting approximately 41 per cent. of revenue for the year to 28 February 2018. This includes GDPR Radar™ Compliance Risk Assessments, the tool DQM uses to determine where potential GDPR non-compliance issues are within a client's business, provide follow up work including writing policy documentation and process notes for clients, and additionally provide training and compliance testing for the implementation of GDPR. More recently DQM has also offered the services of a Data Protection Officer to a client. DQM utilises associated businesses and consultants to outsource work on most projects;
·	Third Party Auditing - constituting approximately 14 per cent. of revenue for the year to 28 February 2018. DQM carries out approximately 160 data audits for clients to help them to understand whether the level of royalty they receive for distribution of their data is in line with contracted terms. This helps ensure contract terms are being followed and can improve third party relationships. DQM are the exclusive audit partner of the DMA (Direct Marketing Association);
·	GDPR Technology Solutions - constituting approximately 5 per cent. of revenue for the year to 28 February 2018. This service helps clients manage data preferences. DQM acts as a distributor of the software. Also within this category is Secure Hub, a technology used to transfer data securely.

DQM has reported an organic revenue CAGR of 26 per cent. over the two years to 28 February 2018, with an EBITDA margin of 26 per cent. over the 10 months to 31 December 2018. DQM's revenue for the year to 28 February 2018 was approximately £2.9 million, EBITDA was approximately £720,000 and profit before tax for the year ended 28 February 2018 was approximately £500,000. DQM's net asset value as at 28 February 2018 was approximately £783,000. DQM has high margin revenue and a number of customers use more than one product or service. Its client base includes household name customers such as Royal Mail, Thames Water and the Telegraph Media Group. The Board believes that the acquisition will be significantly earnings enhancing in the first full year of ownership.

Rationale for the Acquisition

The Board believes that the Acquisition will provide a number of earnings enhancing benefits to GRC International and will also:

-	Extend the Group's existing offering to include high margin, data governance services;
-	Add market share to the Group, by introducing additional household name clients with on-going contracts;
-	Provide cross-selling and upselling opportunities through the companies' complementary offerings;
-	Provide additional second tier management support to the existing management structure;
-	Add customer account management capability;
-	Provide strategic opportunities, such as enabling the Group to gain Data Privacy Seal accreditation; and
-	Provide sector crossover, such as an increased financial sector exposure.

3.         The Placing

The Company proposes to raise approximately £5 million (before expenses) through the issue of the Placing Shares at the Placing Price to fund principally the initial cash consideration payable for the Acquisition, which represents a discount of 9 per cent. to the closing bid price of 109 pence per Ordinary Share on 8 February 2019, being the latest practicable date prior to the announcement of the Placing and Acquisition on 11 February 2019. The Placing Shares will represent 7.6 per cent. of the Company's Enlarged Share Capital.

The terms of the Placing

Dowgate Capital, as agent for the Company, has agreed to use its reasonable endeavours to procure subscribers for the Placing Shares. Dowgate Capital has conditionally placed the Placing Shares with certain existing and new institutional and other investors at the Placing Price. The Placing has not been underwritten by Dowgate Capital. Completion of the Placing is conditional upon, inter alia, the Resolutions being duly passed at the General Meeting and Admission becoming effective on or before 8.00 a.m. on 5 March 2019 (or such later time and/or date as the Company and Dowgate Capital may agree, but in any event by no later than 8.00 a.m. on 31 March 2019).

The Company has given limited warranties to Dowgate Capital in relation to, inter alia, the accuracy of the information in this document. In addition, the Company has agreed to indemnify Dowgate Capital in relation to certain liabilities it may incur in respect of the Placing. Dowgate Capital has the right to terminate its engagement (but not the Placing) in certain circumstances prior to Admission, in particular, in the event of a material breach of the warranties given to Dowgate Capital in its engagement letter, the failure of the Company to comply in any material respect with any of its obligations under the engagement letter or the occurrence of a force majeure event in respect of the Company.

The Directors believe that raising new funds by way of the Placing is the most appropriate method of funding the Company at the present time. The Board considers that a general offer to existing Shareholders by way of rights or other pre-emptive issue is not appropriate at this stage of the Company's development due to the significant additional costs that would be incurred and the delay that would be caused by the production and approval of a prospectus if required.

Settlement and dealings

Application will be made to the London Stock Exchange for the Placing Shares to be admitted to trading on AIM. It is expected that Admission of the Placing Shares will become effective at 8.00 a.m. on 5 March 2019. The Placing Shares will, when issued, rank pari passu in all respects with the Existing Ordinary Shares including the right to receive dividends and other distributions declared following Admission.

4.         Sale and Purchase Agreement

On 11 February 2019, the Company entered into the Sale and Purchase Agreement pursuant to which the Company agreed, conditionally, to purchase the entire issued share capital of DQM from its three shareholders. Completion of the Sale and Purchase Agreement is conditional, inter alia, upon the Resolutions being passed at the General Meeting and is expected to occur on the day of Admission. The Initial Consideration for the Acquisition will be £5,886,839, constituting a cash payment of £3,532,104 and the issue of the issue of 2,021,232 Initial Consideration Shares, worth £2,354,736 calculated on the basis of an issue price per share of 116.5 pence, equal to the average of the middle market quotations for the Ordinary Shares as shown by the AIM Appendix of the Daily Official List of the London Stock Exchange for the 10 business days prior to and including 7 February 2019. The Initial Consideration is to be satisfied on completion of the Acquisition.

Deferred Consideration will also be payable under the Sale and Purchase Agreement to the sellers, pursuant to the terms of an agreed earn-out which will be calculated by reference to eight times DQM's adjusted EBITDA for the financial year ended 28 February 2019, less the amount of the Initial Consideration and certain other adjustments. The Deferred Consideration will be satisfied in cash (as to 60 per cent. of the Deferred Consideration) and Ordinary Shares (as to 40 per cent. of the Deferred Consideration and based on an issue price per Ordinary Shares of 116.5 pence). The Deferred Consideration is currently anticipated to be in the range of approximately £2.5 million to £3.5 million, not exceeding £5 million.

The Sale and Purchase Agreement contains warranties and a tax covenant given by all the sellers in relation to DQM and its business, subject to certain customary limitations.

5.         Use of proceeds

 

The net proceeds of the Placing will be used by the Company principally to finance the cash element of the Initial Consideration and Deferred Consideration due in respect of the Acquisition, together with associated transaction costs, and to provide additional working capital for the enlarged business.

6.         Current trading and prospects

As announced in the Company's interim results to 30 September 2018, published on 24 December 2018, the Group demonstrated year-on-year organic revenue growth of 54 per cent. to £8.9 million (H1 2018: £5.8 million), with a particularly strong Q1 performance attributable to the General Data Protection Regulation ("GDPR") compliance deadline of 25 May 2018. Gross profit increased by 49 per cent. to £5.1 million (H1 2018: £3.4 million) with margins broadly stable at 57 per cent.

Underlying EBITDA declined to a £1.8 million loss (H1 2018: £0.8 million profit), following investment in new business lines, infrastructure and people as the Company built a platform for future growth.

Net cash at the period end was £1.7 million (FY2018: £5.6 million). Subsequent to the period end, the Group's investment policy continued which is reflected in further losses, and the Group secured a sterling overdraft facility and a loan facility agreement in order to ensure sufficient headroom for working capital requirements.

Following the Q1 surge in GDPR-related billings, as companies looked to make themselves compliant ahead of the 25 May 2018 deadline, there was a slowdown in Q2 as expected. By 30 September 2018, revenues from GDPR had reached more normalised levels of growth. The impact of the reduction in GDPR revenues was in part counteracted by strong growth from cyber security products and services during the period.

Good progress was made during the first half of FY2019 with the strategic development of the Group, with net proceeds of £4 million raised through the Group's admission to trading on AIM in March 2018 used to progress the launch of new products and services and invest in people and infrastructure.

In August 2018, the Group acquired the domain, web platform, customer list and goodwill of www.gdpr.co.uk. The Group has enhanced the platform by offering relevant books, e-learning and Data Protection Officer services through the website. The acquisition is fully integrated and trading in line with expectations. In addition, operations were established in Europe (Drogheda, Eire), the United States (New York) and the Gulf, with all businesses performing well, including significant contract wins with Kubota and Microsoft.

The Directors are confident that the investments made in new business areas and geographies following the Group's admission to trading on AIM will provide momentum to deliver revenue growth across FY2019 as a whole and underpin the Group's long-term growth into FY2020 and beyond.

7.         Posting of circular

A circular seeking the approval of Shareholders to issue and allot the Placing Shares and Consideration Shares will today be sent to shareholders convening a General Meeting of the Company to be held at the offices of Citigate Dewe Rogerson, 3 London Wall Buildings, London Wall, London, EC2M 5SY on 1 March 2019 at 11.00 a.m. 

Expected timetable

	2019
Publication of this shareholder circular	11 February
Latest time and date for receipt of Forms of Proxy and CREST voting instructions	11.00 a.m. on 27 February
General Meeting	11.00 a.m. on 1 March
Admission and dealings in the New Ordinary Shares expected to commence on AIM	8.00 a.m. on 5 March
Expected date for CREST accounts to be credited in respect of the New Ordinary Shares in uncertificated form	5 March
Completion of the Acquisition	5 March
Where applicable, expected date for despatch of definitive share certificates for New Ordinary Shares in certificated form	by 19 March

This Announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014 ("MAR"). In addition, market soundings (as defined in MAR) were taken in respect of the Placing with the result that certain persons became aware of inside information (as defined in MAR), as permitted by MAR. This inside information is set out in this Announcement. Therefore, those persons that recei'ved inside information in a market sounding are no longer in possession of such inside information relating to the Company and its securities.

Information to Distributors

Solely for the purposes of the product governance requirements contained within: (a) EU Directive 2014/65/EU on markets in financial instruments, as amended ("MiFID II"); (b) Articles 9 and 10 of Commission Delegated Directive (EU) 2017/593 supplementing MiFID II; and (c) local implementing measures (together, the "MiFID II Product Governance Requirements"), and disclaiming all and any liability, whether arising in tort, contract or otherwise, which any "manufacturer" (for the purposes of the MiFID II Product Governance Requirements) may otherwise have with respect thereto, the Placing Shares have been subject to a product approval process, which has determined that the Placing Shares are: (i) compatible with an end target market of retail investors and investors who meet the criteria of professional clients and eligible counterparties, each as defined in MiFID II; and (ii) eligible for distribution through all distribution channels as are permitted by MiFID II (the "Target Market Assessment"). Notwithstanding the Target Market Assessment, distributors should note that: the price of the Placing Shares may decline and investors could lose all or part of their investment; the Placing Shares offer no guaranteed income and no capital protection; and an investment in the Placing Shares is compatible only with investors who do not need a guaranteed income or capital protection, who (either alone or in conjunction with an appropriate financial or other adviser) are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear any losses that may result therefrom. The Target Market Assessment is without prejudice to the requirements of any contractual, legal or regulatory selling restrictions in relation to the Placing.

For the avoidance of doubt, the Target Market Assessment does not constitute: (a) an assessment of suitability or appropriateness for the purposes of MiFID II; or (b) a recommendation to any investor or group of investors to invest in, or purchase, or take any other action whatsoever with respect to the Placing Shares.

Each distributor is responsible for undertaking its own target market assessment in respect of the Placing Shares and determining appropriate distribution channels.

End.

 

END

 

 

ACQDGGDDIDBBGCG