Eco Animal Regulatory News (EAH)

3 Nov 2006 07:30

Kiotech International plc03 November 2006 Date: 3 November, 2006On behalf of: Kiotech International PlcEmbargoed to 7.30am Kiotech International Plc ("Kiotech" or "the Company") Kiotech, the innovator of fish pheromone technology, announces the proposedacquisition of Agil, placing of new shares and re-admission to trading on AIM. HIGHLIGHTS • Reverse acquisition by Kiotech of Agil, the division of Lawrence plc operating in the animal feed additive market, conditional, inter alia, on shareholder approval (the "Acquisition") • Placing of 176,500,000 new Ordinary Shares to raise £5,295,000 to fund the Acquisition and for working capital • Admission Document posted today and Extraordinary General Meeting called for 10a.m. on 27 November 2006 • Richard Edwards to join the board of Kiotech as Chief Executive on completion of the Acquisition ('the Proposed Director') Enquiries:Richard Rose, Chairman Kiotech International Plc07836 250 474 Matthew Robinson/Charles Cunningham, J.M. Finn & Co Ltd ("JM Finn")0207 628 9688 INTRODUCTION The Company is pleased to announce that it has reached an agreement to purchasethe business and assets of Agil from Lawrence Plc ("Lawrence")(the "OptionAgreement"). The aggregate consideration for the Acquisition is £5.5 million, ofwhich £5.25 million is payable in cash and £0.25 million is to be satisfied bythe issue, credited as fully paid, of 8,333,334 Ordinary Shares at the PlacingPrice to Lawrence (the "Consideration Shares"). The Acquisition will be financedthrough a conditional placing undertaken by JM Finn, as agent for the Company,pursuant to which JM Finn has agreed to use its reasonable endeavours to procureplacees for 176,500,000 new Ordinary Shares at a price of 3 p per share to raisea total of £5,295,000 (before the deduction of any expenses and VAT). ThePlacing is not being underwritten and is conditional upon, inter alia, thepassing of the Resolutions and Admission. Due to the size and nature of Agil's business in relation to that of theCompany, the Acquisition constitutes a "reverse takeover" for the purpose of theAIM Rules and therefore requires Shareholder approval, which is being sought atthe Extraordinary General Meeting of the Company to be held on 27 November 2006. In addition Peter Lawrence, one of the Directors, is both a director of andshareholder in Lawrence. Accordingly, by virtue of section 320 of the CompaniesAct 1985, the Company cannot enter into a contract (conditional or otherwise) toacquire Agil without the prior approval of Shareholders. In such circumstances,and pursuant to the terms of the Option Agreement, Lawrence has granted to theCompany the option to enter into an agreed form acquisition agreement (the "Acquisition Agreement")once it has obtained Shareholder approval. BACKGROUND INFORMATION ON KIOTECH Introduction Kiotech is a British biotechnology company working in partnership with the UKGovernment agency CEFAS (the Centre for Environment, Fisheries & AquacultureScience). This partnership has developed innovative pheromone technology which,the Directors and the Proposed Director believe, can improve both the productionand sustainability of the worldwide commercial fishing and fish farming(aquaculture) markets. At present, the Company has one product in commercial production, Ultrabite, anattractant which is sold to the sports and leisure fishing markets. The Company, through its arrangements with CEFAS, is conducting tests to assessthe efficacy of other products it is developing for commercial fishing andaquaculture markets. History Kiotech was founded in 1996 and commenced trading on OFEX in December 1997. In 2002 Kiotech entered into a long term global licence agreement with CEFASgiving Kiotech the exclusive right to exploit commercially the results ofCEFAS's research and development into certain pheromone based formulationsdesigned to influence fish behaviour. It also affords Kiotech access to CEFAS'sresearch resources for product development programmes commissioned by theCompany. In June 2005 Kiotech moved from OFEX to AIM, at the same time raising £2.2million. Following the move to AIM, Kiotech reorganised its administration in order toreduce costs, including the appointment of Lawrence to handle all administrationon a subcontract basis. It is intended that these arrangements will remain inplace in relation to the Enlarged Group. In September 2005, Kiotech appointed Rapala VMC Corporation as Kiotech'sexclusive worldwide distributor of Ultrabite to the sports fishing market.Rapala, which has its headquarters in Finland, is a leading distributor ofsports fishing related products with a global network. Rapala is currentlydeveloping a range of Ultrabite bait products, in conjunction with the Kiotechtechnology which Rapala has confirmed will be test launched in selected regionsin late 2006 and early 2007. CEFAS Agreement CEFAS is a UK Government agency that specialises in sustainable management ofthe aquatic environment. CEFAS was established approximately 100 years ago andhas an international reputation for its expertise in fisheries management,aquaculture and environmental conservation. For the past 15 years CEFAS has beenat the international forefront in the development and application of fishpheromone science. On 15 October 2002, CEFAS granted Kiotech a global exclusive licence to exploitcommercially the results of CEFAS' research and development into certainpheromone-based formulations that influence fish behaviour. Further, the CEFASAgreement affords Kiotech access to CEFAS' research resources for theimplementation of the Company's product development programmes funded by theCompany. Kiotech has agreed to pay CEFAS a royalty of 6 per cent. of the Company's netsales of the Ultrabite product and all other products which are exclusivelylicensed to Kiotech. The licence arrangement is for a period of 20 years fromMay 2001. The Science of Pheromones Pheromones are chemical signals secreted or released by organisms which cause aspecific response when detected by organisms of the same, or a related, species.In the case of fish species, research has found that pheromones can triggerheightened responses relating to shoaling, feeding, reproduction and migrationbehaviour. CEFAS has developed and applied to patent a novel pheromone that increasesfeeding activity in a range of fish. This pheromone is the principal ingredientin Kiotech's first commercialised product, Ultrabite. CEFAS has also identifiedand isolated a series of other pheromone-based compounds, which have also provento attract a wide range of fish species. The Market Opportunity The Company's strategy is to develop pheromone based products for the commercialfishing and aquaculture markets. The Food and Agriculture Organisation of the United Nations ("FAO") reports thatthe world fisheries harvest has reached a plateau at about 90 million metrictonnes ("mmt") per annum with a further 40 mmt per annum being produced throughaquaculture. FAO projections show that there will be demand for a further 90 mmtper annum of edible seafood by 2040, a magnitude of change which would require adoubling of the current world's seafood supply of edible fish and shellfish. FAOestimate that world aquaculture production of fish and shellfish would need totriple by 2040 to satisfy this additional demand. Products in Development The development of the pheromone-based technology has two principal objectives: • firstly, the application of pheromone formulations will attempt to increasethe feeding activity of farmed fish with the aim of increasing yield, reducingthe amount of waste from uneaten feed and reducing time to market; • secondly, in the longer term, the pheromone-based technology will aim topermit the use of more sustainable forms of proteins used within feeds, whichare not based on fish oils or proteins, in order to protect wild fishpopulations from further depreciation and thus meet the demand of theaquaculture sector. Aquaculture Initial trials for aquaculture products have already been conducted inconjunction with CEFAS on a small scale in the laboratory to assess the visualresponse to the introduction of the pheromone products and subsequently in largetanks in respect of tilapia and prawn which have demonstrated an increase inyield. These initial trials included a cod trial last year in Norway, which gavefurther support to the Directors' and the Proposed Director's belief in thetechnology. It is from this research that the basis of a new range of pheromonestimulants has been developed to use in commercial scale pond trials. Kiotech in partnership with CEFAS and in collaboration with local aquacultureand fisheries institutes in China and Thailand have set up and are currentlyconducting a series of full scale commercial pond trials to assess the efficacyof its existing products on tilapia, carp, giant tiger prawns and whitelegshrimp species. The locations for the commercial pond trials have been selectedin countries that already have well developed aquaculture markets. Completion ofthe trials in both countries is expected towards the end of 2006. The earlyresults are promising and are being followed with interest by a number of fishfarming businesses, who are involved in the trials. If successful, the Companywill aim to bring a prawn, carp and tilapia aquaculture pheromone product to themarket by the middle of 2008. Additionally the Company intends to commence research into products for trout,sea bream, and sea bass, with the trials taking place in Japan during 2007. Commercial Fishing Trials for commercial fishing products (currently pheromone based baits andlong-line fishing) are underway with The Highland and Islands University, todetermine the efficacy of reconstituted baits incorporating pheromones. Kiotech has also recently signed an agreement with a leading Japanese baitmanufacturer to conduct long line commercial fishing trials for Bonito, Albacoreand Bigeye. These trials are due to start later in 2006. Intellectual Property Kiotech has patents granted in Europe and pending in the US and Japan for apheromone based composition for the attraction of fish. The CEFAS inventionregarding a pheromone which increases the feeding activity in a range of fish ("the CEFAS invention"), has resulted in an international patent application beingmade in the name of the UK's Minister of Agriculture, Fisheries and Food. Anexclusive licence in respect of the CEFAS invention is included in the CEFASAgreement. BACKGROUND ON AGIL Introduction Agil has been a trading division of Lawrence Plc since 1990. The Agil businessoperates in the animal feed additive market selling a number of natural feedadditives which target a range of infections. Agil also seeks to improvebiosecurity on farms by selling products which improve the quality of water andprolong the life of raw materials and finished feeds in bulk storage. Theseproducts are distributed through a worldwide international distributor network,with 94 per cent. of Agil's sales being exports to more than 40 countries. Thegeographical split by region is shown below: Regional Share of Turnover United Kingdom 6 per cent.Europe (excl. UK) 45 per cent.Asia 24 per cent.Middle East & Africa 8 per cent.Latin America 17 per cent. Agil generated a profit before interest and tax of £755,000 on sales of£5,235,000 for the 12 months to 31 March 2006. Feed Additive Market Agil offers the feed manufacturer and food producer a range of natural drug-freeand safe-to-use feed additives which are capable of improving the health andperformance of production animals. Agil produces proprietary blends by premixingadditives, which are notified in the European Community Register of FeedAdditives, negating the requirement for a full "drug-type" registration inEurope. European approved additives fall into four main categories namely: • Technological additives (e.g. acidifiers, preservatives, antioxidants, emulsifiers, stabilizing agents, silage additives); • Sensory additives (e.g. flavours, colourants); • Nutritional additives (e.g. vitamins, minerals, amino acids, trace elements); and • Zootechnical additives (e.g. digestibility enhancers, gut flora stabilizers, enzymes). Agil's primary market is the acidifiers market to which it supplies productssuch as Salkil, Bactacid and Mycostat which account for approximately 70 percent. of Agil's business. Frost & Sullivan estimated the European acidifiermarket to be £235 million or 359,400mt in 2003, rising to £405 million or587,000mt by 2009. There are an estimated 70 to 120 manufacturers, traders andblenders in the European animal feed acid market. On the 1 January 2006, the EU banned the use of all antibiotics and relateddrugs for growth promotion purposes in an effort to address concerns aboutantibiotic resistance. Consequently, there has been an increase in interest inthe availability of natural and alternative animal health products, which hascreated commercial opportunities for businesses and companies such as Agil. Product Range Agil's products are specialised formulations of pre-mixed compounds which itblends. The most important animal markets to Agil are the poultry and pigmarkets and in particular the breeding pig, breeder hen and poultry layermarkets. Agil's product lines can be grouped under three categories: • Animal digestion: Accounting for almost 70 per cent. of Agil's sales, theseproducts aim to reduce infection in the digestive tract by complementing andboosting an animal's own immune system. This approach is different from thepharmaceutical solution, whereby antibiotics are used to combat the infectiondirectly. A key benefit to the customer of Agil's product is the mineral carrier technology used to prevent the early breakdown of acids in the gut, preventing diseases such as salmonella and E-coli. The mineral carrier is saturated with a blend of organic acids. With this carrier system, acids are retained through to the end of the digestion process, helping to support a healthy gut micro flora and a lower gut pH. • Pellet binding: Pellet binders are gum based products used to combine feedstuffs. Their benefits include increasing fat levels in pellets and improvingpellet integrity. • Mould control and disinfectants: Mould control inhibits moulds and yeast instored raw materials such as grain and finished feeds, and disinfectants areused to purify water and the living environment of production animals. The Company intends to commit more resources to product development and themarketing of new products such as Credence, a disinfectant, natural antioxidantsfor the pet food sector for which Agil is currently involved in trials with apet food manufacturer, and organic acids for use in aquaculture. Organisation Agil has 11 employees including an experienced management team, microbiologists,animal scientists, a marketing/sales team and buying/logistics team. Itsproduction activity is largely outsourced to a third party. Agil has Universal Feed Assurance Standard accreditation and has also satisfiedthe quality assurance procedures required by the Feed Materials AssuranceScheme. These accreditations give Agil a competitive advantage over non-approvedsuppliers as regulatory requirements increase in the feed additive industry. Distribution Network The majority of Agil's business is conducted through a network of distributors,except in the UK and France where sales are made direct to end users. Agil has appointed 46 distributors around the world covering approximately 50countries. In the year ended 31 March 2006 the most significant country wasSpain with sales accounting for 7.3 per cent. of Agil's turnover. The top 15distributors in the year ended 31 March 2006 represented 72 per cent. of totalsales. Distributors are trained by Agil's staff to ensure they are familiar with theproducts. This requires frequent visits to and from the UK to ensure thatrelationships and knowledge are developed throughout the network. REASONS FOR THE ACQUISITION The acquisition of Agil brings to Kiotech a number of benefits, which theDirectors and the Proposed Director believe will enable Kiotech to develop andexploit the pheromone opportunity more quickly. Agil can provide the EnlargedGroup an established route to market through its distribution network and hasexisting relationships within the aquaculture industry. The Directors and the Proposed Director believe that Kiotech can also benefitfrom Agil's technical expertise in chemical blending and its ability to developdifferent delivery mechanisms which can be applied to the pheromone stimulant.Furthermore, the Enlarged Group will be able to leverage Agil's extensiveknowledge and experience of getting feed additive products registered in both ECand non-EC countries. Agil is well established and cash generative and will be a central part ofKiotech's development strategy. The Directors and the Proposed Director believethat Agil can develop its business more aggressively by having more autonomy andgiving it the necessary resources. GROUP STRATEGY The strategy of the Board following the Acquisition will be: • to continue to develop the global sports and leisure fishing market by supporting the sales and marketing efforts of its worldwide distributor Rapala; • to continue to develop its pheromone based products for the aquaculture and commercial fishing markets using Agil's technical expertise and distribution network once it has commercialised products; • to use legislative developments (including the EU ban on the use of antibiotics and related drugs for growth promotion purposes which came into force on 1st January 2006 and current EU proposals to place upper limits on salmonella levels in production animals) to drive the use of its natural feed additives products and in particular its acidifier products; • to use its strong market position in the poultry and pig acidifiers market, and its worldwide distribution network, to investigate the opportunities for consolidation in the market. The Directors and the Proposed Director believe that there is considerable opportunity to build a coherent organisation focusing on organic acid derivatives through acquisition of: • companies that have similar products to Agil but different customers/ distributors and geographic locations; and • companies with unique products, but which could benefit from being marketed and distributed through the Agil distribution network; • to further expand Agil's distribution network to countries or regions which are becoming exporters of product to regions such as the EU or which offer significant growth opportunities such as China, Russia, Eastern Europe and Latin America. CURRENT TRADING OF THE COMPANY AND AGIL AND PROSPECTS FOR THE ENLARGED GROUP Kiotech continues to progress with its aquaculture development programme in afinancially efficient way. Key commercial pond trials in China and Thailand areshowing promising results. It is not anticipated that it will have developedproducts for commercialisation before March 2008. Rapala, Kiotech's distributorfor Ultrabite, is currently developing a range of bait products, which will betest launched in late 2006 and early 2007. Agil's turnover in the year ended 30 March 2006 was £5,235,000. The Directorsand the Proposed Director believe that there are a number of encouragingdevelopments in the markets in which Agil operates. In particular, the poultrysector has started to recover from avian influenza and Agil has seen improvedsales of its products from countries where the EU ban on antibiotic growthpromoters has impacted. PRINCIPAL TERMS OF THE ACQUISITION Under the terms of the Acquisition Agreement, the Company will acquire thebusiness and assets of Agil, a trading division of Lawrence Plc for an aggregateconsideration of £5,500,000 of which £5,250,000 will be payable in cash (the "Cash Consideration") and £250,000 of which will be satisfied by the issue of the Consideration Shares. Of the Cash Consideration approximately £555,000 will beretained by the Company in respect of certain book debts which are due to Agil,until such time as these sums are received. No payment of these sums received inrespect of the relevant book debts shall be made until the expiry of 18 monthsfrom the date of Admission. As Peter Lawrence is both a director and substantial shareholder of Lawrence,the Acquisition Agreement cannot be entered into without the prior approval ofShareholders and therefore under the terms of the Option Agreement Lawrence hasagreed, conditional, inter alia, on the passing of the Resolutions at the EGM,to sell the business and assets of Agil on the terms of the AcquisitionAgreement. DETAILS OF THE PLACING The Placing comprises the issue by the Company of the 176,500,000 PlacingShares, and will raise approximately £5,295,000 at the Placing Price (£4,695,000net of commission and expenses). Under the placing agreement dated today between Kiotech and JM Finn, JM Finn hasconditionally agreed, as agent for the Company, to use its reasonable endeavoursto procure placees for the Placing Shares at the 3p per share. The Placing hasnot been underwritten by JM Finn. The Placing Shares will rank pari passu in all respects with the ExistingOrdinary Shares and the Consideration Shares. The Placing Agreement is conditional upon, inter alia, the passing of theResolutions, the Acquisition Agreement being entered into and having beencompleted and Admission. In addition the Placing Agreement contains provisionsentitling JM Finn to terminate the Placing Agreement prior to the completion ofthe Placing in certain circumstances. If this right is exercised the Placingwill lapse. USE OF PROCEEDS The Directors and the Proposed Director intend to use the £4,695,000 anticipatednet proceeds of the Placing to meet the Cash Consideration element of theAcquisition. APPOINTMENT OF A DIRECTOR Richard Edwards will, with effect from Admission, be appointed a director of theCompany. Richard Edwards has extensive general management and corporate strategyexperience gained in the sales and distribution sector both in the UK andInternationally. Mr Edwards was Director and General Manager of WF Electrical, a£140 million turnover division of Dutch multinational Hagemeyer, and gained significant experience in corporate development at Saint Gobain's UK buildingmaterials business. Richard will assume the role of Chief Executive oncompletion of the Acquisition. Copies of the Admission Document are available from the offices of J.M. Finn &Co. Ltd at Salisbury House, London Wall, London. EC2M 5TA. This information is provided by RNS The company news service from the London Stock Exchange