Proposed Divestment of Interests in EAG

Scirocco Energy PLC

21 December 2023

 

21 December 2023

Scirocco Energy plc

("Scirocco Energy" or "the Company")

Proposed Divestment of Interests in Energy Acquisitions Group Limited

Scirocco Energy (AIM: SCIR), the AIM investing company targeting attractive assets within the European sustainable energy and circular economy markets, announces that it has conditionally agreed the sale of its interest and investment in Energy Acquisitions Group Limited ("EAG") for an enterprise value of £2.6 million before adjustments, plus contingent consideration of up to a further £150,000 to private equity firm OrbeNovo Capital (the "Proposed Transaction").

Principal Terms of the Proposed Transaction

·    Scirocco Energy has entered into a conditional Sale and Purchase Agreement ("SPA") to sell or procure the sale of the entire issued share capital of EAG to ONC Bidco 1 Limited ("ONC"), a newly incorporated company controlled by OrbeNovo Sponsor LLP and an affiliate of OrbeNovo Advisory LLP, for a firm net consideration of £702,267 payable to Scirocco Energy.

·    Contingent consideration of up to £150,000, payable in tranches, if and when EAG completes the acquisition of certain target anaerobic digestion sites which have been developed in EAG's deal pipeline within the last twelve months.

·    The SPA in respect of the Proposed Transaction was entered into between (1) the Company's wholly owned subsidiary, Scirocco Energy (UK) Limited; (2) Christopher James Kerr ("CK"); (3) Riada Partners Limited (a company owned and controlled by Neil Adair "Riada"); and (4) ONC on 19 December 2023.

·    Additionally, under the terms of the SPA, Scirocco Energy has agreed to assign of all of its rights and obligations under a shareholder loan agreement dated 24 August 2021 (as amended and restated on 22 February 2022) in respect of a loan granted by Scirocco Energy to EAG. As at 30 September 2023, the amount outstanding under such loan comprised a principal loan amount of £1,270,000 and accrued accumulated balance of £1,578,000.

·    The Proposed Transaction constitutes a fundamental change of business pursuant to AIM Rule 15 of the AIM Rules for Companies and therefore is conditional upon Shareholder approval to proceed.  The Proposed Transaction is also conditional upon the change of control consent approval of AIB pursuant to the AIB loan facility dated 3 May 2023 made between EAG's subsidiary and AIB.

·    In respect of the Shareholder approval, the Company intends to shortly post a Circular to Shareholders, along with accompanying Notice of General Meeting and Form of Proxy, calling for a General Meeting to be held in January 2024. Further announcements will be made as and when appropriate.

·    Following completion of the Proposed Transaction, the Company will remain an investing company and subject to the requirements of AIM Note 5.6 for Investing Companies.

Strategic Rational, use of Net Proceeds and Future Strategy

·    The Board of Directors have made the strategic decision to divest the Company's interest in EAG, a decision founded by the evaluation of key factors influencing the growth, development and future valuation of the Company's investment in EAG. This view has been informed by an independent valuation report prepared by Grant Thornton NI, which has significant experience in the anaerobic digestion asset market in Northern Ireland.

·    The growth of EAG is heavily dependent on the ability to invest more capital to establish a critical mass portfolio of cash generative assets within this sector. The EAG investment was made on the premise that further acquisitions, and investments in digestate processing equipment to manufacture biofertilizer, could be completed within the two year period since the original investment. Unfortunately, the inability of the Company to issue new equity to raise cash, despite requesting authority to do so from Shareholders several times, constrained Scirocco's capacity to fund this growth and pursue the strategy.

·    Further complicating matters is the uncertainty surrounding the first two contingent consideration payments tied to the Ruvuma development plan. Anticipated now in 2024, having earlier been expected in 2023, the ambiguity in the timing and receipt of these payments impedes the Company's ability to make definitive investment plans.

·    The value of capital assets has decreased across multiple sectors since the original investment in EAG was made as global interest rates have increased since early 2022. As the risk -free rate available to investors increases, the expected or target return on fixed assets increases, reducing the price investors will pay for a series of cashflows. When Scirocco Energy invested in EAG in order to acquire Greenan, UK interest rates were 0.25%. The Bank of England base rate is currently 5.25%. This has had a negative impact on the value of Greenan asset owned by EAG.

·    Coupled with the challenges of retaining EAG without predictable access to capital, and considering the decline in Greenan NIROC's remaining life, the Board therefore firmly believes that it is in the best interests of the shareholders to divest at this time as it provides the optimal window to receive the maximum consideration for the investment.

·    The net firm proceeds of the Proposed Transaction are expected to be received in early 2024 following completion of the General Meeting (assuming the necessary resolution is passed) and receipt of the change of control consent from AIB and such proceeds will be retained by the Company. The contingent consideration of up to £150,000 will be received if and when EAG completes the acquisition of the four targets in the twelve months following completion.

·    Following receipt of the first contingent payment of $3 million pursuant to the disposal of the Company's interest in the Ruvuma asset, which is expected later in Q1 2024, and following settlement of SILOF liabilities but prior to run-rate G&A costs, the Company expects to have a pro forma cash balance of c. £4 million.

o  The only other material legacy asset which the Company will hold following the completion of the Proposed Transaction, if approved, will be the 8.39% of Kiliwani North which is held on the Company's balance sheet as a contingent decommissioning liability of £160,000. 

·    At this point, the Board intends to finalise its review of a range of potential alternative options available to it by which it is able to deliver value to Shareholders, which may include the distribution of available cash, further investments in line with its investing policy and/or the deployment of the proceeds in pursuit of a reverse takeover transaction.

Further Information on the Proposed Transaction

Conditions

Completion of the SPA is conditional upon, inter alia, the following conditions being satisfied (the "Conditions"):

·    a shareholder resolution being passed by the requisite majority of Scirocco Energy's shareholders at the General Meeting; and

·    the receipt of a waiver by Allied Irish Banks PLC, as EAG's primary lender, of any change of control provisions, or equivalent mechanisms, which may apply to the Proposed Transaction under the existing loan facility dated 3 May 2023 made between EAG and AIB.

The Conditions must be satisfied or waived by 31 January 2024 (the "Longstop Date") (unless such date is extended by agreement between the parties to the SPA), otherwise the SPA automatically terminates.

Consideration and Leakage

The consideration payable under the SPA comprises:

·    £3.00 to be split equally between Scirocco Energy, CK and Riada as sellers in respect of each of their shares in EAG; and

·    £702,266.74 to be paid to Scirocco Energy in respect of the existing shareholder loan, less any leakage that is not permitted leakage under the SPA,

(together the "Consideration").

The firm net consideration is calculated as enterprise value of £2.6 million, minus the outstanding AIB bank debt of c. £1.8m, plus/minus certain other adjustments, so that the acquisiton occurs on an effective cash/debt free basis.

The Consideration is to be subject to reduction on a pound for pound basis should any leakage of Company funds have occurred between 30 September 2023 and the date of the SPA (being [19] December 2023) (both dates inclusive), save in respect of any leakage of Company funds which have been agreed in advance by the parties to the SPA as being permitted leakage. The maximum aggregate liability of each of the Sellers under the leakage provisions is not to exceed the amount of any such leakage actually received by that Seller and his or its connected persons or in respect of which that Sellers and his or its connected persons have actually benefitted.

Sellers' Warranties

The SPA contains customary warranties for a transaction of this nature given by the Scirocco Energy, CK and Riada in favour of ONC, in relation to, inter alia, their capacity to enter into and sign the documents relating to the Proposed Transaction (including the SPA), their title to the shares of which they are legal and/or beneficial owner (as applicable) and there having been no insolvency type event in relation to the Company nor any of its subsidiaries as at 30 September 2023.

The EAG management team, CK and RIada, will work with the Buyer or the Buyer's group going forward.

The maximum aggregate liability of each Seller in respect of any claims under the SPA shall not exceed the Consideration actually received by that Seller.

ONC's Warranties

The SPA contains customary warranties given by ONC in favour of Scirocco Energy, CK and Riada in relation to, inter alia, its capacity to enter into and sign the documents relating to the Proposed Transaction (including the SPA), that its entry into such documents would not require ONC to obtain any consent or approval and that it shall have immediately available on an unconditional basis the necessary cash resources to meet its obligations under the documents relating to the Proposed Transaction and any other documents which are to be executed by ONC at Completion.

Governing Law

The SPA is governed by the laws of England and Wales.

Schedule Four disclosure

As at 30 June 2023, being the most recent published balance sheet date position of Scirocco, the value of the loan receivable from EAG was noted as £1,522,000.This represented the entire carrying value of Scirocco's investment in EAG and was based on the Board's judgement that the loan would be repaid in full, given the expectation, at the time, of further investment being available to deploy into the EAG business, either from Ruvuma sale proceeds and/or raising capital. Due to the factors listed above, the Company was not in a position to be able to negotiate a consideration that reflected this carrying value. The Company, however, reminds shareholders its initial investment was a lower amount of £1.27 million. During its ownership of EAG, Scirocco did not receive any dividends and recorded a £40,000 share of profits for the year ended 2022 and a £42,000 loss for the six months ended 30 June 2023.

Commenting on the Proposed Transaction, Tom Reynolds, Scirocco's CEO stated:

"I am pleased to announce a strategic decision regarding the proposed divestment of our interests in EAG. This move is grounded in a thorough evaluation of key factors influencing the growth and development of our investments.

The combination of the challenges of retaining EAG without predictable access to capital, and considering the decline in Greenan's remaining life, the Board is convinced that the opportunity to sell now on the terms described here provides the optimal window for divestment. While the consideration payable to the Company falls short of the total investment made into EAG, it's important to underscore that the valuation of EAG mirrors the fair market value of the business in its current form. The Board will continue its review of the range of alternative opportunities and next steps for the Company."

For further information:

Scirocco Energy plc Tom Reynolds, CEO	[phone]
Strand Hanson Limited, Nominated Adviser Ritchie Balmer / James Spinney / Robert Collins	[phone]
WH Ireland Limited, Broker Harry Ansell / Katy Mitchell	[phone]
Buchanan, Financial PR Ben Romney / Barry Archer / George Pope	[phone]

 

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