Acquisition Update

RNS Number : 2018V

Filtronic PLC

28 October 2010

 



NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA, JAPAN OR SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL

This announcement does not constitute an offer to sell or issue, or the solicitation of an offer to buy or acquire, shares in the capital of the Company.

Filtronic plc ("Filtronic", the "Company")

Proposed acquisition of Wireless Telecoms Business of Isotek

Following the announcement on 30 July 2010 regarding a proposed offer for the entire issued share capital of Isotek (Holdings) Limited ("Isotek") (the "Offer"), Filtronic is pleased to announce the publication today of the formal offer document, prospectus and circular.

The prospectus and circular will be made available on the Company's website at http://www.filtronic.co.ukon 29 October 2010. The prospectus and circular have also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.

Highlights

Strategic

§ Acquisition is in line with Filtronic's strategy to create a differentiated, high growth, wireless telecoms business through organic growth and selective acquisitions

§ Provides entry to significant worldwide addressable market for base station filters

§ Combines Filtronic's resources, experience and operational expertise with Isotek's highly differentiated intellectual property, brand and products

§ Provides opportunity to transform the range and size of the Group's business

§ Improves Isotek's ability to take advantage of strong growth in 3G and 4G mobile data traffic

§ Creates an Enlarged Group with attractive scale to key customers

Financial

§ Consideration of £4.35 million cash (subject to adjustment) plus 18,550,000 new Ordinary Shares

§ £11.0 million implied consideration based on issue price of 35.75p

§ Acquisition expected to increase turnover in year to 31 May 2012 ("FY12") by around £15 million

§ Deal expected to be earnings enhancing in year to 31 May 2012 ("FY12") and significantly earnings enhancing in the second full year of ownership

§ Shares represent circa 20 per cent of enlarged share capital, and will be subject to lock-in and escrow arrangements

Chairman Howard Ford said "This is a transformational deal for both companies which will be attractive to all stakeholders."

Enquiries

Filtronic plc	01325 301111
Howard Ford, Chairman
Hemant Mardia, CEO
Mike Brennan, CFO
Panmure Gordon (UK) Limited	020 7459 3600
Dominic Morley
Stuart Gledhill
Walbrook PR Limited	020 7933 8787
Paul McManus

Panmure Gordon, which is regulated in the United Kingdom by the FSA, is acting exclusively for Filtronic in relation to the Acquisition and for no-one else, and will not be responsible to any other person for providing the protections afforded to clients of Panmure Gordon or for providing advice in connection with the Acquisition.

Expected Timetable of Principal Events

General Meeting to approve transaction - 10.00 a.m. on 15 November 2010

Admission of Consideration Shares to the Official List - 8.00 a.m. on 16 November 2010

Completion of the Acquisition - 16 November 2010

References to times in this announcement are to London time. Each of the times and dates in the above timetable is subject to change. If any of the above times and/or dates change, the revised times and/or dates will be notified to shareholders of Filtronic and Isotek by announcement on a Regulatory Information Service.

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA, JAPAN OR SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL

This announcement does not constitute an offer to sell or issue, or the solicitation of an offer to buy or acquire, shares in the capital of the Company.

Filtronic plc ("Filtronic", the "Company")

Proposed acquisition of Wireless Telecoms Business of Isotek

Introduction

The Board announced on 30 July 2010 that the Company had entered into an agreement governing the terms of a proposed offer for the entire issued share capital of Isotek. Filtronic is pleased to announce the publication today of the formal offer document, prospectus and circular in connection with the Acquisition. The consideration payable for the Acquisition comprises cash consideration of £4,350,000 (subject to adjustment) and the issue of 18.55 million new Ordinary Shares. Based on the closing mid-price per Ordinary Share of 35.75 pence as at 27 October 2010, this implies an aggregate consideration of approximately £11.0 million. Isotek develops and markets leading-edge telecoms products for a range of wireless telecoms applications.

In view of its relative size and as required by the Listing Rules, the Acquisition is conditional upon the approval of Filtronic shareholders, which approval is to be sought at a General Meeting of the Company at 10.00 a.m. on 15 November 2010.

Information on Isotek and its market

Isotek develops and markets leading-edge telecoms products for a range of wireless telecoms applications. These products, comprising innovative filters and combiners, enable operators to use their existing 2G infrastructure to deliver additional 3G and 4G services simultaneously, with a minimum of switch-over downtime. This can bring significant cost savings by eliminating the need to upgrade or replicate network infrastructure in some cases, as well as improving the use of the available spectrum.

The mobile wireless network consists of a large number of base station sites throughout a given region. These base stations may communicate with mobile phones, PDAs and portable computers, connecting a subscriber into the system. In many countries there are several major mobile operators, each of which may have several thousands of base stations with the majority located in large urban areas and major trunk routes. Each operator has bought one or more licences to use a specific frequency band within which they are allowed to transmit and receive RF signals and are not allowed to cause interference outside the frequency band within which they operate.

The need to avoid interference requires a portion of the valuable licensed band to be consumed as a buffer against the adjacent user spectrum. As use of spectrum intensifies, this is leading to demand for products improving spectrum utilisation. The move rapidly to overlay 3G and 4G data services with differing protocols onto existing 2G voice networks also sets new challenges for network upgrades by operators to be delivered without disruption. In order to speed the rollout of new services, whilst minimising costs, it is important to optimise spectrum utilisation across the network of existing base station sites. Furthermore, as additional frequency bands are released for mobile use, the proximity of existing systems such as high power digital TV broadcast will require increasingly technically complex combining and interference mitigation solutions.

Strong growth of data traffic globally presents mobile operators with a pressing need to address these challenging service issues, which in turn creates new opportunities for mobile telecoms equipment providers such as Filtronic and Isotek. The Directors believe that there is a significant worldwide addressable market for base station filters, estimated (by a Filtronic commissioned external consultant's report) to total around £370 million in 2012 and that this market will show rapid growth over the next few years driven by the adoption of 4G services. The Directors believe that this provides a long-term opportunity for continuing growth in this market, focused on the customisation of technically advanced products.

In the year ended 31 May 2010, Isotek made a pre-tax loss of £1.9 million on turnover of £0.8 million and had gross assets of £0.8 million at that date. The revenues, which all related to the same wireless telecoms activity, were split between two geographic segments: United Kingdom (£0.4 million) and United States (£0.4 million). The US segment was established towards the end of the financial year ended 31 May 2009 and accordingly the turnover for the financial year ended 31 May 2009 (£0.4 million) and the financial year ended 31 May 2008 (£0.1 million) were wholly related to the UK segment.

Over the last 3 years Isotek has invested more than £5 million in the development of its wireless telecoms business.

The Company's market position is expected to improve Isotek's ability to take advantage of the strong growth in 3G and 4G mobile data traffic with its new customised microwave filter solutions.

Reasons for the Offer

On 16 October 2006, Filtronic announced that it had completed the disposal of the majority of its wireless infrastructure division, comprising transmit/receive filters, integrated remote radio heads and power amplifier products, all for use in commercial wireless infrastructure base station equipment, for shares and cash then worth US$298 million. The market for these products had at that time reached a stage of relative maturity driven by increasing commoditisation of product and margin pressure.

Since that disposal Filtronic has watched the rapid development of the wireless telecoms market with interest (whilst continuing to develop and supply products into the wireless telecoms backhaul market) and has recently evaluated opportunities to transform the range and size of its business by acquiring a business operating in a different segment of the base station market.

Isotek is a developer and marketer of leading-edge wireless telecoms products. It is run and owned primarily by members of Filtronic's former senior management, who had previously delivered the successful growth of Filtronic from start up and through flotation. Isotek would be fully integrated as a separately-branded subsidiary of the Group, with its management team remaining in place. Isotek has developed an established reputation, and significant goodwill, in the wireless telecoms market and consequently the Isotek brand would be retained and used, at least in the short to medium term, to market and develop Isotek's wireless telecoms business.

Alan Needle (formerly an executive director of Filtronic), and Dr Christopher Mobbs (former executive director and former CTO of Filtronic) will continue to run this business segment following Completion. Professor David Rhodes (Filtronic's founder and a former CEO) will have an honorary position providing external technical consultancy to the business segment. Isotek has made significant investments in innovative new technology, resulting in the creation of new intellectual property, which the Directors believe provides Isotek with a significant competitive advantage. It is proposed that, on Completion, Alan Needle will be invited to join the board of Filtronic as an executive director.

The Acquisition is in line with Filtronic's strategy to create a differentiated, high growth wireless telecoms business through organic growth and selective acquisitions. The Directors believe that the Acquisition will deliver significant opportunities in the base station market, by combining the Group's resources, experience and operational expertise with Isotek's highly differentiated intellectual property, brand and products.

In the longer term the Directors believe that as a result of the Enlarged Group's greater critical mass, it will be well positioned to take advantage of further opportunities in future industry restructuring.

Principal terms of the Acquisition

Due to the size of Isotek's shareholder base the Acquisition is structured by way of the Offer and the Offer Document has today been posted to Isotek Shareholders.

The consideration payable under the Offer comprises cash consideration and the issue of the Consideration Shares. On 30 July 2010, being the date of the Warranty and Indemnity Deed, the cash consideration was agreed at £4,350,000 on the assumption of net debt in Isotek at Completion of £1,400,000.

Based on the closing mid-price per Ordinary Share of 35.75 pence as at 27 October 2010, this implies an aggregate consideration of approximately £11.0 million.

On this basis, and assuming a fully diluted share capital of Isotek of 14,889,114 ordinary shares of 1p each, the consideration payable on Completion will equate to £0.2921597 and 1.2458766 Ordinary Shares for each ordinary share of Isotek.

The Directors believe that the net debt in Isotek at Completion is likely to be approximately £1,520,000. Based on this assumption (and that there are no other adjustments as at Completion), the cash consideration would be £4,230,000 which will equate to £0.2841001 and 1.2458766 Ordinary Shares for each ordinary share of Isotek.

The Consideration Shares will, when issued, represent circa 20.0 per cent. of the enlarged share capital of the Company and will rank pari passu in all respects with the existing Ordinary Shares (but not for the avoidance of doubt for the final dividend of 1.0 pence per Ordinary Share payable on 5 November 2010). Applications will be made to the UKLA for the Consideration Shares to be admitted to the Official List and to the London Stock Exchange for the Consideration Shares to be admitted to trading on the London Stock Exchange's market for listed securities.

The consideration payable under the Offer will be subject to the adjustments set out in the Warranty and Indemnity Deed and the Offer Document.

The Offer is subject, inter alia, to acceptance by not less than 90 per cent. of the shares to which the Offer relates, the approval of Shareholders and admission of the Consideration Shares to the Official List. Filtronic has received irrevocable undertakings from over 90 per cent. of the Isotek Shareholders (on a fully diluted basis) to accept the Offer.

The key vendors of Isotek have given Filtronic customary warranties and indemnities and have entered into a restrictive covenant not to compete with the business of Isotek for a period of three years.

The Consideration Shares issued to accepting Isotek Shareholders on Completion will be subject to escrow arrangements in the event of any shortfall in the working capital or increase in net debt or claims under the acquisition documents. During the relevant escrow period, Filtronic shall be entitled to sell Escrow Shares to satisfy the relevant claim. Following the expiry of six months from Completion, 50 per cent. of such Escrow Shares (assuming no working capital or net debt adjustments or claims under the Acquisition documents) will be released from these arrangements; and the remaining Escrow Shares (assuming no claims under the Acquisition documents) will be released from these escrow arrangements following the expiry of 24 months from Completion.

In addition to the share escrow arrangement referred to above, certain of the Isotek Shareholders (holding in aggregate approximately 31.4 per cent. of Isotek's fully diluted share capital) have agreed that they shall not without the prior written consent of Filtronic transfer or otherwise dispose of any of the Consideration Shares or any shares derived from such shares during the first 12 months following Completion and for a further 12 months thereafter shall not transfer or dispose of such shares otherwise than with the Company's prior written consent and through such broker as shall be nominated by the Company. In addition, certain of Isotek's key employees (holding in aggregate approximately 32.6 per cent. of Isotek's fully diluted share capital) have agreed, pursuant to the terms of new service agreements which were entered into on 30 July 2010, that they shall not, for a period of two years following Completion, transfer or otherwise dispose of any of the Consideration Shares or any shares derived from such Consideration Shares (except, in respect of any transfer or disposal after the twelve months following Completion, where the Company gives its prior written consent).

Financial effects of the Acquisition on Filtronic

The Directors believe that the Acquisition is likely to increase the Group's turnover in the year ending 31 May 2012 ("FY12") by around £15 million. The deal is expected to be earnings enhancing in FY12 and significantly earnings enhancing in the second full year of ownership. Pro forma net assets would have increased by £6 million to £25.4 million had the transaction occurred on 31 May 2010, as set out in the unaudited pro forma statement of net assets of the Enlarged Group in the Circular.

Current trading and outlook

Filtronic

As expected, trading conditions for Filtronic's existing point-to-point business have remained difficult into this financial year. Trading in the first quarter has however improved from the weak final quarter of last year, with sales of around £1.0 million per month being in line with the monthly run rate in the second half of last year. Whilst revenues for September will show an improvement on this level, this does not affect the Directors' assessment of the likely result for the year as a whole.

Isotek

Prior to 31 May 2010 Isotek sales were of prototype units and small trial runs (tens rather than hundreds of units). Since 31 May 2010 such sales have continued but have also progressed to area trials involving sales with 2 significant customers in the hundreds of units. As a result the sales, margin and profitability of the business have increased significantly. Whilst sales have increased they remain consistent with Filtronic's previously disclosed expectation of £5 million for the post completion period to 31 May 2011.

Service contract of proposed director

The Company has entered into an agreement with Alan Needle, conditional on and subject to Completion, pursuant to which Alan Needle has agreed, subject to Completion, to serve as a director of the Company and as Managing Director of the wireless telecoms business of Isotek Electronics Limited. Under the agreement, Alan Needle shall be entitled to £100,000 per annum (inclusive of any remuneration received or receivable by him in respect of any other office or employment with the Group) and certain other benefits. The agreement will be terminable by the Company or Alan Needle by (a) prior to the second anniversary of Completion (the "Two Year Term"), 12 months' written notice to expire on or at any time after the Two Year Term and (b) after the Two Year Term, on 6 months' written notice. The Company will have the right to terminate Alan Needle's employment forthwith on payment to Alan Needle (in lieu of all or any part of the notice period) a sum equal to his basic salary. The agreement will entitle Alan Needle to join the Isotek Group Private Pension (defined contributions) Scheme and the Company will contribute an amount equivalent to 10 per cent. of Alan Needle's gross salary per annum. In certain circumstances (for example in the event of material breach, gross misconduct, disqualification, criminal conviction, bankruptcy, drug addiction or mental illness) the Company would have the right to terminate his employment via summary dismissal. The agreement also includes an express duty of confidence and restrictive covenants following termination including, a prohibition for a period of twelve months following termination on working for a competitor of the Company (or its subsidiaries).

Definitions

"Acquisition"	the proposed acquisition of the entire issued and to be issued share capital of Isotek pursuant to the Offer
"Board" or "Directors"	the directors of the Company and the Proposed Director
"Business"	the business as carried on by the Group as at 28 October 2010
"Companies Act"	the United Kingdom Companies Act 2006, as amended
"Completion"	the Offer becoming or being declared unconditional in all respects
"Consideration Shares" or "new Ordinary Shares"	18,550,000 Ordinary Shares to be issued and allotted subject to the terms of the Offer
"Enlarged Group"	the Group immediately following the Acquisition
"Escrow Shares"	such number of Consideration Shares issued to those Isotek Shareholders who have accepted the Offer
"Filtronic" or "Company"	Filtronic plc
"General Meeting"	the general meeting of Filtronic to be held on 15 November 2010 (or any reconvened meeting following any adjournment thereof)
"Group"	Filtronic and its subsidiaries and subsidiary undertakings and, where the context requires, its associated undertakings
"Isotek"	Isotek (Holdings) Limited, a company registered in England and Wales under company number 03398090 or, where the context admits, the relevant company within the Isotek Group
"Isotek Group"	Isotek and its subsidiaries and subsidiary undertakings
"Isotek Shareholders"	the holders of ordinary shares of 1 pence each in the capital of Isotek
"Issue"	the issue of the Consideration Shares in connection with the Acquisition
"Listing Rules"	the listing rules of the UK Listing Authority
"London Stock Exchange"	London Stock Exchange plc
"OEM"	original equipment manufacturer
"Offer"	the offer made by Filtronic to acquire the entire issued and to be issued share capital of Isotek on and subject to the terms and conditions set out in the Offer Document and the form of acceptance and (where the context permits) any subsequent revision, variation, extension or renewal thereof
"Offer Document"	the offer document pursuant to which Filtronic makes the Offer together with the accompanying form of acceptance
"Official List"	the official list of the UK Listing Authority
"Ordinary Shares"	ordinary shares of 10 pence each in the share capital of the Company
"Panmure Gordon"	Panmure Gordon (UK) Limited
"Proposed Director"	Alan Needle
"Prospectus"	the prospectus issued by the Company on 28 October 2010 in respect of the Issue, together with any supplements or amendments thereto
"RF"	radio frequency
"Shareholders"	holders of Ordinary Shares
"Warrantors"	David Rhodes, Alan Needle and Christopher Mobbs
"Warranty and Indemnity Deed"	the deed dated 30 July 2010 between the (1) Warrantors (2) the Company and (3) Isotek relating to the implementation of the Offer
"Wireless Telecoms Business"	the wireless telecoms business carried on by Isotek

 

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