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Castleton Technology Plc

("Castleton" or "the Company")

Acquisition of Montal for £3.83m

Castleton is pleased to announce that it has acquired the entire issued share capital of Montal Holdings Limited ("Montal"), a specialist outsourced IT managed services business focused on the provision of tailored solutions to the public sector, for a total consideration of £3.83 million (the "Acquisition").

Acquisition Highlights:

· Montal is a specialist in providing outsourced IT services to the public sector

· Provides a full suite of outsourced services including support, hosting, business solutions and consultancy

· Consideration of £3.83 million, payable £3.04m in cash and £0.79m in loan notes

o Represents an enterprise value of approximately £3.6m

o Acquisition enterprise value multiple of 6.0 x current run-rate EBITDA

· Year-on-year organic growth delivered over past three years

· Management of Montal retained

Ian Smith, CEO, commented, "We are delighted to announce the acquisition of Montal which is the beginning of a new phase of exciting growth for the Company. I, in conjunction with MXC, have a track record of developing growth strategies in AIM technology businesses and generating value for shareholders; recent examples include Redcentric and Accumuli. Today we are starting a journey with Montal to build a public sector-focused managed services business."

Information on Montal

Montal has a track record of delivering IT solutions dating back to 1985 and the business has good penetration in the public and not-for-profit sectors, particularly within social housing and care providers. In the six months ended 31 March 2014 the business generated turnover of £3.2m and EBITDA of £299,000, having delivered turnover of £5.7m, EBITDA of £481,000 and PBT of £395,000 in the year ended 30 September 2013. Gross assets as at 30 September 2013 were £1.5m. The existing management team led a management buyout in 2008 and will remain with the business post Acquisition. Customer retention in recent years has been in excess of 90 per cent., and Montal offers a broad suite of expertise and competencies across Microsoft, Citrix, Cisco, VMware, and CmpTIA. The Board believes there is a considerable opportunity for further organic and acquisitive growth in what is a highly fragmented market and the acquisition of Montal will provide the platform to do this.

Strategy of the Company

The Company's strategy remains to seek further acquisitions in the technology sector. Clear opportunities exist to build a scale managed services business given the fragmented nature of the sector and MXC Capital Limited's ("MXC Capital") access to suitable targets and the Board will focus on exploring these opportunities. Castleton also retains ownership of MIG, a software business focused on supporting a range of its own developed and proprietary ERP, reservation and ticketing and payroll software products.

The Company has invested the majority of its own cash resources to finance the Acquisition, however the Company is due to receive £1.1m in November 2014 as deferred consideration in relation to the sale of Comunica Holdings Limited for £9.5m in November 2013 and a further £300k deferred consideration from other recent disposals. As the financing of the Acquisition is substantially in cash, the Company has successfully sought bank support for a £0.5m facility in the event it is required.

Details of the Acquisition

Total consideration for the transaction is £3.83m, of which £3.04m will be payable in cash and £0.79m will be satisfied by loan notes. The loan notes are repayable in 12 months and carry a coupon of 8 per cent. per annum, which will be rolled up and repaid when they are settled or become due ("Loan Notes"). MXC Capital owns 18 per cent. of the share capital of Montal and will receive its share of the consideration (being £0.59m) in the form of Loan Notes to help to facilitate the transaction and leave the Company with sufficient working capital following completion of the Acquisition. The Company is currently in a close period, pending publication of its results for the year ended 31 March 2014. The transaction will not result in any changes being made to the composition of the Company's Board, though the existing management team of Montal will continue to manage that business on a day-to-day basis.

Summary of the Share Purchase Agreement

The Acquisition has been effected under the terms of an unconditional share sale and purchase agreement entered into by the Company and the Montal shareholders (the "SPA") and agreements with certain holders of options over shares in Montal which were exercised immediately prior to completion. The SPA contains warranties, indemnities and restrictive covenants given by the sellers, and caps on their respective liabilities arising under it, which the independent directors (being David Payne and Richard Ramsay, Chairman and Non-Executive Director respectively) believe to be appropriate to a transaction of this nature and size.

Related party transaction

The Acquisition is considered a related party transaction under the AIM Rules for Companies on the basis that MXC Capital, a substantial shareholder in the Company representing the interests of Ian Smith, CEO of the Company, and Tony Weaver, Non-Executive Director, holds 18 per cent. of the ordinary share capital of Montal, being a portfolio investment made 12 months ago. The independent directors consider, having consulted with finnCap Limited, that the terms of the transaction are fair and reasonable insofar as shareholders of the Company are concerned. MXC Capital Advisory LLP has not been paid a fee by the Company in relation to the Acquisition. Montal engaged MXC Capital Advisory LLP to advise on its strategic options and has paid it a success fee of £120,000 in relation to the Acquisition. 

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