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Fulcrum Utility Srvc (FCRM)

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Monday 23 December, 2019

Fulcrum Utility Srvc

Sale of domestic customer gas connection assets

RNS Number : 7440X
Fulcrum Utility Services Ltd
23 December 2019
 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION

EMBARGOED FOR RELEASE AT 7.00 AM

23 December 2019

Fulcrum Utility Services Limited

("Fulcrum", the "Group" or the "Company")

Proposed sale of domestic customer gas connection assets and order book

 

Fulcrum announces that it has entered into a conditional sale and purchase agreement to sell its domestic customer gas connection assets, including the order book and associated meters, to
E.S. Pipelines Limited ("ESP") (the "Sale").

 

Highlights

 

·      Sale of domestic customer gas connection assets, including the order book and associated meters (the "Assets"), for a net consideration of approximately £33 million in cash

 

·      Total gross consideration of approximately £46 million in cash; the net consideration approximately  of £33 million is stated after deducting future costs in relation to the build out of the external order book assets of £13 million, for which Fulcrum will remain liable

 

·      Initial cash consideration of approximately £17 million payable on Completion, with the balance relating to part-complete networks and the internal and external order books to be received over the next four years, as assets are built out and transferred to ESP

 

·      The Sale significantly strengthens Fulcrum's balance sheet. The Company will repay existing borrowings of approximately £12 million in full on Completion, and has started the process of exploring replacement facilities better suited to the requirements of the Group

 

·      The Company intends to commence a share buy-back programme anticipated to return approximately £4 million to shareholders over the next four years. The buy-back programme will track the expected build out and realisation profile of the balance of the Assets

 

·      The 2019/20 interim dividend will be deferred until Completion

 

·      Fulcrum will retain its Independent Gas Transporter ("IGT") and Independent Distribution Network Operator ("IDNO") licences. The Company will continue to grow its design and build activities in the industrial and commercial ("I&C") segment of the market, both working with ESP as an asset adopter under an arrangement entered into at the same time as the Sale and, where appropriate, continuing to independently design, build and add I&C assets to its own portfolio of assets

 

·      In the domestic segment of the utilities market, Fulcrum will continue to grow its gas and electrical connection design and build activities, but will not adopt assets once completed; ESP will be Fulcrum's preferred asset adopter

 

·      The Sale will also allow the Group to more actively pursue opportunities for growth in the multi-utility infrastructure market

 

·      The Sale is conditional on Ofgem approval and the Competition and Markets Authority ("CMA") indicating that it does not intend to launch a merger investigation in respect of the Sale (or if it does launch such an investigation, the CMA clearing the Sale without an in-depth (Phase 2) review)

 

Philip Holder, Fulcrum's Chairman, commented:

"This transaction realises substantial value for the Company's existing and contracted domestic gas assets. It significantly strengthens our balance sheet and will provide a basis for a  return of capital to shareholders. Fulcrum's core growth strategy will focus on its design and build activities, as well as on continuing to adopt assets in its traditional I&C market where appropriate. Our new relationship with ESP will enhance the Company's capabilities in the future in all segments of the market."

The preceding summary should be read in conjunction with the full text of this announcement.

 

MAR

 

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

 

Definitions

 

Unless otherwise defined, capitalised terms in this announcement shall have the meaning as set out in the 'definitions' section below.

 

Enquiries

 

Fulcrum

Philip Holder, Chairman / Daren Harris, Chief Financial Officer

 

Smith Square Partners LLP (Financial adviser)

Jonathan Coddington / Matt Alexander

 

Cenkos Securities plc (Nominated adviser and broker)

Max Hartley / Callum Davidson

 

Camarco (Financial PR adviser)

Ginny Pulbrook / Tom Huddart

 

 

+44 (0)114 280 4102

 

 

+44 (0)20 3696 7260

 

 

+44 (0)20 7397 8900

 

 

+44 (0)20 3757 4992

 



 

Notice to all investors

Smith Square Partners LLP ("Smith Square"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively as financial adviser to Fulcrum and no-one else in connection with the Sale and will not be responsible to anyone other than Fulcrum for providing the protections afforded to clients of Smith Square nor for providing advice in connection with the Sale or any matter referred to herein. Neither Smith Square nor any of its subsidiaries, branches or affiliates owes or accepts any duty, liability or responsibility whatsoever (whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Smith Square in connection with this announcement, any statement contained herein, the Sale or otherwise.

 

Cenkos Securities plc ("Cenkos") which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting solely for Fulcrum in relation to the Sale in its capacity as Nominated adviser and broker and no-one else and will not be responsible to anyone other than Fulcrum for providing the protections afforded to clients of Cenkos nor for providing advice in relation to Fulcrum or any other matter referred to in this announcement.

 

Forward-looking statements

This announcement contains "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "anticipates", "expects", "may", "will", "could", "would", "shall", "should" or similar expressions or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions.

 

These forward-looking statements include all matters that are not historical facts and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, among other things, Fulcrum's results of operations, financial condition, prospects, growth, strategies and the industries in which Fulcrum operates.

 

Forward-looking statements speak only as of the date of such statements and, except as required by applicable law, Fulcrum undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The information contained in this announcement is subject to change without notice and Fulcrum, Smith Square and Cenkos do not assume any responsibility or obligation to update publicly or review any of the forward-looking statements contained herein, save as required by law, regulation or the AIM Rules.



 

Background to and reasons for the Sale

 

Fulcrum is a long-established provider of utility infrastructure services to the domestic, commercial and industrial markets throughout mainland UK. The Company's services range from the design, installation or alteration of utility services for single site properties to large, complex multi-site projects. It also owns and operates gas and electrical assets (under its IGT and IDNO licences) that connect properties to the main UK gas and electricity networks once they are completed.

ESP Utilities Group is one of the UK's largest and longest established IGTs and IDNOs. It owns and operates gas and electricity networks and gas smart meters all over the UK with over 650,000 customers connected on a variety of residential, industrial and commercial networks. ESP Utilities Group is owned by funds managed by 3i Infrastructure plc.

 

The market for the design, installation and ownership of these types of infrastructure assets has evolved significantly in the last few years. As the values being ascribed to domestic connection assets by participants in the market have increased materially, reflecting the attractions of the predictable, stable, long-term regulated cash flows associated with them, clients such as housebuilders have increasingly demanded that the value of the completed assets is reflected in the pricing structure agreed for undertaking these design and build projects. For larger domestic asset projects, this can result in all or a significant part of the effective profit margin on contracts being accounted for by the values ascribed to the completed assets, while the short-term net cash flows associated with larger domestic projects are often marginal or negative.

Fulcrum's main competitors in the gas and electrical utility connection ownership sector (being other IGT and/or IDNO licence holders) are significantly larger businesses, which are typically owned by large, private, infrastructure investment funds, and which may not face the same funding constraints that Fulcrum does as a smaller quoted business.

The Board believes that the Sale will put Fulcrum in a stronger position to pursue a strategy of winning design and build work across the IGT, IDNO and multi-utility infrastructure space, in partnership with asset owners, and will provide the opportunity for Fulcrum to generate substantial value for its shareholders.

Summary terms of the proposed sale of the Assets

 

The Company has entered into a conditional sale and purchase agreement with ESP for the sale of substantially all of its domestic customer gas connection assets, including order book assets and associated meters, for a net consideration of approximately £33 million payable in cash. The total gross consideration for the transaction is approximately £46 million; the expected net consideration of approximately £33 million is stated after deducting future costs in relation to the build out of the external order book assets of £13 million, for which Fulcrum will remain liable.

 

The Sale is conditional on Ofgem approval and the CMA indicating that it does not intend to launch a merger investigation in respect of the Sale (or if it does launch such an investigation, the CMA clearing the Sale without an in-depth (Phase 2) review). It is currently anticipated that completion will occur in Q1 2020.

 

Pursuant to the terms of the Sale, it is intended that the first tranche of assets relating to Fulcrum's existing asset estate will be hived down into a newly formed subsidiary and this subsidiary will then be transferred to ESP. This subsidiary, containing the first tranche of Assets, will be transferred at Completion and the cash consideration payable in respect of this initial tranche is expected to be
£17 million.

 

As the internal and external order books are built out, subsequent tranches of Assets will be hived down into newly created subsidiaries at approximately twelve month intervals (or when the value of the assets ready to be transferred exceeds £6.5 million), and these subsidiaries will then be transferred to ESP in return for the relevant portion of the consideration. The total annualised revenues associated with the Assets (including order book assets) once they are all complete and connected is expected to be approximately £3.6 million, including meter income. The build out and transfer of the Assets is expected to be substantially complete within four years with Fulcrum remaining liable for the associated build out costs. All income generated by connections and meters prior to their transfer to ESP will be retained by Fulcrum.

 

The Company intends to work with ESP as its preferred asset adopter to bid for domestic construction projects. The arrangements with ESP provide for the Group to receive certain enhanced payments from ESP over the next five years if certain milestones are achieved for new domestic connections. In relation to I&C assets, the Company has entered into an arrangement with ESP for a period of five years under which it has agreed to bid jointly in relation to a certain quantity of I&C assets on an annual basis, whilst also retaining the ability to adopt I&C assets itself (subject to certain asset size and annual value limits).

 

The consideration for the Sale is subject to certain clawback provisions over a three year period in the event of, inter alia, a change of control of the Company, of approximately 15 per cent. or 7.5 per cent. of the consideration if the change of control occurs within one year or between one and three years of Completion respectively.

 

Use of proceeds

 

The net proceeds of the Sale, after the costs associated with the build out of the external order book, professional fees and other transaction costs, are expected to be approximately £32 million. Fulcrum will continue to incur construction costs in relation to the contracted internal order book assets included in the Sale. The Assets comprise, in total, approximately 76,000 domestic and mixed use customer gas connection pipelines and associated equipment.

 

As at 30 September 2019, the book value of the existing assets which form part of the Sale was
£19 million; the gain on disposal of those existing assets after fees and expenses is approximately
£5 million. In the twelve months ended 31 March 2019, the existing assets which form part of the Sale generated profit before tax of approximately £0.5 million.

 

The Group will use the initial tranche of consideration to, inter alia, repay in full existing borrowings on Completion of approximately £12 million. Sale proceeds will also be utilised to meet Fulcrum's working capital requirements, including in relation to the build out of order book assets. The Company intends to commence a share buy-back programme anticipated to return approximately £4 million to shareholders over the next four years. The buy-back programme will track the expected build out and realisation profile of the balance of the Assets.

 

The 2019/20 interim dividend will be deferred until Completion. Fulcrum has started the process of exploring new bank facilities which are more suited to the requirements of the Group moving forwards.

 



 

Strategy following Completion

 

The Board believes the Sale is in the best interest of shareholders as a whole, realises substantial value for its existing and order book domestic gas connection assets, and will provide a more flexible and stronger base from which to actively grow its construction business. The Board is committed to identifying a permanent Chief Executive Officer to lead this next phase of growth and a further announcement in this regard will be made in due course.

 

Following the Sale and excluding assets forming part of the Sale but yet to be transferred, Fulcrum retains a portfolio of approximately 6,500 I&C connection assets, a small number of domestic connections which form part of mixed networks and a small portfolio of electrical connections.

 

Fulcrum will retain its IGT and IDNO licences. The Company will continue to grow its design and build activities in the I&C segment of the market, both working with with ESP as an asset adopter under an arrangement entered into at the same time as the Sale and, where appropriate, continuing to independently design, build and add I&C assets to its own portfolio of assets. I&C work has always been a particular strength of Fulcrum's and the Group continues to win significant, attractively priced contracts for I&C projects and the Board sees this as key to Fulcrum's future growth.

 

In the domestic segment of the utilities market, Fulcrum will continue to grow its gas and electrical connection design and build activities, but will not adopt assets once completed; ESP will be Fulcrum's preferred asset adopter.

 

The Sale will also allow the Group to actively pursue opportunities for growth in the multi-utility infrastructure market.

 

A copy of this announcement will be available free of charge, subject to certain restrictions relating to persons in any jurisdiction where release, publication or distribution of this announcement would constitute a violation of the securities law of such jurisdiction, for inspection on Fulcrum's website (www.fulcrumutilityserviceslimited.co.uk).

 

 

 

 

 

 

 

 

 



 

Definitions

The following words and expressions shall have the following meanings in this announcement unless the context otherwise requires:

"AIM"

the market of that name, operated by the London Stock Exchange

"AIM Rules"

the rules for AIM companies as published by the London Stock Exchange from time to time

"Assets"

the approximately 76,000 existing and contracted domestic customer gas connection assets and associated meters, plus certain I&C assets being part of predominantly domestic, mixed-use networks, which are subject to the Sale

"Board"

the Board of Directors of the Company

"Cenkos"

"CMA"

Cenkos Securities plc

the Competition and Markets Authority

"Completion"

completion of the Sale

"Directors"

"ESP"

"Fulcrum", the "Group" or the "Company"

the directors of the Company

E.S. Pipelines Limited

Fulcrum Utility Services Limited

"I&C"

Industrial and Commercial

"IDNO"

"IGT"

"MAR"

"RIS"

Independent Distribution Network Operator

Independent Gas Transporter

Market Abuse Regulations (EU) No. 596/2014

Regulatory Information Service

"Sale"

the proposed sale of the Assets

 "Smith Square"

Smith Square Partners LLP

 



 

Information on Fulcrum

 

Fulcrum is a multi-utility infrastructure and services provider based in Sheffield, UK. The Company's primary business is the provision of utility infrastructure services to the domestic, commercial and industrial markets throughout the mainland UK. These range from the design, installation or alteration of utility services for single site properties to large complex multi-site projects.

 

Through its subsidiaries, Fulcrum Pipelines Limited and Fulcrum Electricity Assets Limited, Fulcrum is also licensed as an Independent Gas Transporter and Independent Distribution Network Operator, owning and operating gas and electrical assets that connect properties to the main UK gas and electricity networks. Fulcrum is also a meter asset manager, owning and operating meter assets across mainland UK. In 2018 Fulcrum acquired the Dunamis Group, an electrical infrastructure services company, creating one of the UK's leading gas and electrical infrastructure services groups.

 


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 [email protected] or visit www.rns.com.
 
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