Diploma Regulatory News (DPLM)

DIPLOMA PLC

12 CHARTERHOUSE SQUARE, LONDON EC1M 6AX

TELEPHONE: +44 (0)20 7549 5700

FACSIMILE: +44 (0)20 7549 5715

22 September 2020

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE UNITED STATES OR ANY OTHER JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 ("MAR").

For immediate release

DIPLOMA PLC

ACQUISITION OF WINDY CITY WIRE

Diploma PLC ("Diploma" or the "Company"), the international group supplying specialised technical products and services, is pleased to announce the proposed acquisition of Windy City Wire Cable & Technology Products, LLC ("Windy City Wire" or "WCW"), a leading value-add distributor of premium quality, low voltage wire and cable in the US for up to c. £357m ($465m) (the "Acquisition").

Diploma has also separately announced today a proposed equity fundraising of up to 10 per cent. of the issued share capital of the Company to part fund the Acquisition.

Strategic Highlights

· WCW is a highly attractive business in a core Diploma market

o Value-add distributor with strong customer proposition

o Differentiated product and service with a diversified end customer base

o Strong track record of performance

o Exciting organic growth potential: taking market share in structurally attractive end segments

o Established scalable platform with attractive margins

o Strong management team that will stay with the business

· Expands Diploma's presence in the US, a key industrials market

· Enhances Diploma's position in Controls with a core product we understand

· Provides strong financial returns, whilst maintaining a solid balance sheet

Financial highlights

· Track record of consistent and long term profit growth

· 10 year revenue and EBITDA CAGR of 12% and 13%, respectively

· Resilient performance through Covid-19 with WCW expecting to maintain revenues in FY20 of c.$192m in line with the prior year, and grow EBITDA by c.18% to c.$44.5m

· Acquisition multiple represents c.10.5x expected FY20 EBITDA

· From year 1, the Acquisition is expected to be both significantly earnings enhancing and cover Diploma's cost of capital

· Post Acquisition, Diploma ROATCE expected to be high teens

Transaction Structure

· Acquisition of WCW for initial cash consideration of c. £345m ($450m)1

· Additional deferred cash payment of up to c. £12m ($15m) payable to key members of the WCW management team after 3 years, subject to certain conditions1

· Funded through:

o An equity fundraising of up to 10 per cent. of the issued share capital comprising a placing to certain existing shareholders and new institutional investors, a subscription by all of the directors of the Company and a retail offer via the PrimaryBid platform announced separately today

o Balance funded through new debt facilities

· Completion of the Acquisition is expected to occur by mid-November 2020, subject to receipt by the Company of the equity placing proceeds and the continuing availability of the new debt facilities, and is conditional on a number of customary closing conditions

· Leverage of enlarged group expected to be c.1x by end of FY21

· Conservative approach to leverage remains unchanged with flexibility for dividends and future bolt-ons

· Board recommending a dividend of 30p for the year to September 2020, in line with Diploma's progressive dividend policy

Johnny Thomson, Diploma's Chief Executive Officer commented:

"The acquisition of WCW is an exceptional opportunity for Diploma. As a high-quality wire and cable distribution business with a strong management team and an impressive value-add customer proposition, WCW is a perfect fit with our business model. Furthermore, it accelerates our strategy of focussing our growth in our key markets in a product area we know well, providing a scalable platform for our Controls sector in the US. The business has an excellent performance track record and is positioned well in high structural growth end segments to deliver exciting growth in the future.

"In year one, the transaction is expected to be both significantly earnings enhancing and cover our cost of capital, while allowing us to maintain a conservative and flexible balance sheet to pay dividends and make further bolt-on acquisitions as opportunities arise. Recent months have confirmed the resilience of the Diploma model and validated our strategic focus on building value-add, scalable, well diversified businesses in core markets. I am confident in the future of our Group."

Presentation

A presentation for analysts and investors will be held at 5:00pm this afternoon, available via https://webcasting.brrmedia.co.uk/broadcast/5f6261b783507b593b4697f1. Participants wishing to ask a question should join via the conference call facility, details as follows:

Dial-in Number: +44 (0) 330 336 9411 (UK / international) / +1 323-794-2093 (US)

Confirmation Code: 6201508

The audio webcast will be made available as a replay after the event at: https://www.diplomaplc.com/investors/financial-presentations/

For further information please contact:

Diploma +44 (0)20 7549 5700

Johnny Thomson

Barbara Gibbes

Barclays (Financial Adviser) +44 (0)20 7623 2323

Daniel Ross

Richard Probert

Darren Johnson

Barclays (Joint Corporate Broker)

Mark Astaire

Neal West

Philip Drake

Numis (Joint Corporate Broker) +44 (0)20 7260 1000

Garry Levin

Mark Lander

Julian Cater

Tulchan Communications +44 (0)20 7353 4200

Martin Robinson

Olivia Peters

Guy Bates

The person responsible for releasing this announcement is John Morrison, Company Secretary.

Diploma PLC LEI: 2138008OGI7VYG8FGR19 

Additional information

Windy City Wire Overview

Founded in 1994 and headquartered in Bolingbrook, Illinois, WCW is a leading value-add distributor of premium quality low-voltage wire and cable to a diverse range of end customers and segments. WCW has a suite of trademarked brands and patented products and provides the industry's most comprehensive cable management system, delivering a compelling customer proposition of speed, convenience and productivity at nearly every stage of the cable installation process.

WCW has a vertically integrated, high-service model with a well-invested national warehouse footprint and some in-house light manufacturing to ensure convenience and same day shipping, a key competitive advantage, creating strong customer loyalty and a platform for future growth.

WCW's innovative value-add customer proposition includes:

· SmartWire, WCW's flagship family of low voltage wire and cable products has clear length markings and differentiated colours for easy installation. The majority of Smartwire cables include WCW's Glide Technology, a lubricant coating which reduces pulling friction by up to 70% which in turn decreases labour cost by increasing cable pulling productivity and efficiency

· Rackpack Field Systems Solutions is WCW's patented reel in the box cable management system which allows for tangle-free pulling and is provided on a lightweight, custom dolly for enhanced transportation

· A smartphone enabled eCommerce site providing 24 hour a day real-time access to product information, driven by a state-of-the-art bar code inventory management system. This supports WCW's patented Smartwire System Design Tool software, giving customers the ability to design custom job plans and ultimately work more efficiently.

WCW operates across diverse end markets with significant structural growth and continued market share gain opportunities. These include:

· In building automation a c.$55bn market currently, growth in cloud-based services requiring increased networking infrastructure and an increased focus on energy efficient and eco-friendly smart buildings are expected to drive a market CAGR of c.9% between 2020 and 2024

· In audio-visual markets a c.$171bn market currently, increased technology required to support growing demands for video communication and the growing adoption of Pro AV for smart learning in the education sector are expected to drive a market CAGR of c.11% between 2020 and 2024

· In fire security a c.$68bn market currently, increased use of high cost, advanced electronics systems in buildings alongside the continuing adoption of wireless communication technology across multiple industries are expected to drive a market CAGR of c.7% between 2020 and 2024

· Growth in digital infrastructure, both to support the growing adoption of cloud-based services that require the establishment of data centres, and the increasing usage of smartphones and wireless data requiring additional distributed antenna systems, are expected to drive wiring demand

WCW has 9,300 active customers across 50 states in the US with no one account representing more than 2% of sales and in FY19 WCW processed 130k orders with the majority of customer's orders being less than $10k per order. Once a customer has experienced the cable management service, they remain on the platform with frequent ordering patterns. This high customer retention generates a platform for resilient growth.

WCW has a strong track record of growth, with a 10 year revenue and EBITDA CAGR of 12 and 13 per cent., respectively, and an EBITDA margin of c.20 per cent. The business has strong cash generation and reported ROATCE of c.21 per cent. in FY19. WCW's trading through Covid-19 has been very resilient with expected revenues for FY20 of c.$192m in line with the prior year, and EBITDA of c.$44.5m up c.18% on the prior year. WCW reported gross assets as at 31 December 2019 of $173.5m (c. £131.4m) and profit before tax for the year ended 31 December 2019 of $22.5m (£17.1m).

WCW is majority owned by its co-founder, Rich Galgano. As part of the Acquisition, the wider WCW management team, which has an average tenure of 15 years, includes Dave De Neve (Chief Financial Officer) and Dan Hughes (Chief Sales Officer) and is led by Rich Galgano, will remain with the business and bring to Diploma its deep industry experience and strong customer and performance culture.

Transaction Structure

The initial cash consideration of c. £345m ($450m) is being funded by way of an equity fundraising of up to 10 per cent. of the Company's issued share capital, announced separately today, with the balance funded through new debt facilities including a $170m term loan and a £135m multicurrency RCF with an initial blended interest cost of c.2.2%. The existing Diploma debt of £36m will be refinanced as part of the transaction. An additional deferred cash payment of up to c. £12m ($15m) is payable to key members of the WCW management team after 3 years, subject to certain conditions9.

Completion of the Acquisition is expected to occur by mid-November 2020 and is subject to receipt by the Company of the equity placing proceeds and the continuing availability of the new debt facilities and is conditional on a number of customary closing conditions, including the expiry or termination of the applicable waiting period (and any extension thereof) under the HSR Act. In the event that Diploma is unable to perform certain of its obligations to complete the Acquisition, a break fee of $18m (c. £14m) is payable by Diploma to the sellers9.

From Year 1, the Acquisition is expected to be both significantly earnings enhancing and cover the Company's cost of capital. Post the Acquisition, Diploma ROATCE is expected to be in the high teens. The Board is focused on maintaining a conservative balance sheet to provide flexibility for dividends and future bolt-ons. The Board is recommending a dividend of 30p for the year to September 2020, in line with Diploma's progressive dividend policy. Leverage of the enlarged group is expected to be c.1x by the end of FY21.

The Board believes the Acquisition is consistent with Diploma's value-add business model and strategy and offers a compelling opportunity to accelerate its presence in the US, a key industrials market, as well as providing a scalable value-add focused platform built for growth.

IMPORTANT INFORMATION

This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities, or the solicitation of any vote or approval in any jurisdiction, pursuant to this announcement or otherwise. Any offer, if made, will be made solely by certain offer documentation which will contain the full terms and conditions of any offer, including details of how it may be accepted.

The distribution of this announcement in jurisdictions other than the United Kingdom and the availability of any offer to shareholders of Diploma who are not resident in the United Kingdom may be affected by the laws of relevant jurisdictions. Therefore, any persons who are subject to the laws of any jurisdiction other than the United Kingdom or shareholders of Diploma who are not resident in the United Kingdom will need to inform themselves about, and observe, any applicable requirements.

This announcement does not contain or constitute an offer for sale or the solicitation of an offer to purchase securities in the United States. The securities referred to in this announcement have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act") or under any securities laws of any state or other jurisdiction of the United States and may not be offered, sold, pledged, taken up, exercised, resold, renounced, transferred or delivered, directly or indirectly, in or into the United States except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States or other jurisdiction. There will be no public offer of the securities referred to in this announcement in the United States.

Barclays Bank PLC, acting through its Investment Bank ("Barclays"), which is authorised by the Prudential Regulation Authority and regulated in the United Kingdom by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority, and Numis Securities Limited ("Numis"), which is authorised and regulated in the United Kingdom by the FCA, are each acting exclusively for the Company and no one else in connection with the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients nor for providing advice in relation to the Acquisition or any other matter referred to in this announcement.