Franchise Brands Regulatory News (FRAN)

7 October 2019

FRANCHISE BRANDS PLC

("Franchise Brands", the "Company" or the "Group") 

Acquisition of Willow Pumps - adding highly complementary services to Metro Rod

Group trading update for Q3

Change to total voting rights

Franchise Brands plc (AIM: FRAN), a multi-brand franchisor, is pleased to announce that it has acquired a leading water pump supply, installation and servicing business to complement and expand Metro Rod's drainage and plumbing businesses. The Company also provides an update on Group trading for the third quarter of the year.

Acquisition

Franchise Brands has acquired the entire issued share capital of WPL Group Holdings Limited and its subsidiaries, Willow Pumps Limited and Willow Drainage Limited (together, "Willow Pumps") for an initial consideration of £5.0 million (net of non-trading cash of £700,000 in WPL Group Holdings Limited) ("Initial Consideration") and a performance-based deferred consideration of up to £7.5 million ("Deferred Consideration") payable over the next five years (the "Acquisition").

The Initial Consideration has been paid as to £4.0 million in cash and £1.0 million through the issue of 1,212,121 new ordinary shares of 0.5p each in the Company ("Ordinary Shares") at 82.5 pence per share (the "Consideration Shares"). The cash element of the Initial Consideration has been satisfied from the Group's available cash resources and existing debt facilities. The Deferred Consideration will be payable in cash, subject to the Company having the right to settle 20 per cent. of the amount due in new Ordinary Shares at the then prevailing share price.

Acquisition Highlights

·; Willow Pumps, founded in 1992, is a leading water pump supply, installation and servicing business, with a below-ground (foul water) and above-ground (fresh water) capability.

·; Willow Pumps achieved revenue of £12.4 million, EBITDA of £1.6m and a profit before tax of £1.1 million in the year ended 31 December 2018 and has grown strongly in the first half to 30 June 2019, having achieved revenue of £8.4 million, EBITDA of £1.0 million and a profit before tax of £0.8 million.

·; The Board believes the Acquisition will be significantly earnings enhancing for the Group.

·; The Acquisition has a strong strategic rationale:

·; It is consistent with Metro Rod's Vision 2023 strategy of expanding its range of services to the commercial market.

·; The longer-term aim of the Group is to provide a "water in, waste out" range of drainage, pumps and plumbing-related services to commercial customers nationally.

·; Pumps are an engineered solution and the acquisition of this high quality, well-established business represents the optimum way to enter this specialist market.

·; Willow Pumps will benefit from a significantly expanded delivery capability through Metro Rod's national network of over 400 engineers working out of 43 depots across the UK.

·; Metro Rod will benefit from potential demand from its national account customers who are progressively tendering for combined drainage and pump services and from the opportunity to supply its wide range of drainage services to Willow Pumps' customers.

·; The above-ground pump capability of Willow Pumps also provides a new strategic opportunity to develop the Group's Metro Plumb and Kemac businesses.

·; The deal structure provides both a significant incentive for Willow Pumps to help upskill the Metro Rod franchise community and then subcontract pump work to them, and for Willow Pumps' management to continue to grow the existing business.

·; The principal vendor, Willow Pumps' founder and Managing Director Ian Lawrence, will continue to manage the business and becomes part of Franchise Brands' senior management team.

·; Willow Pumps will continue to operate as a direct labour organisation ("DLO") within Franchise Brands, working closely with Metro Rod and its franchisees and benefiting from the Group's management, resources, and commercial customer relationships.

Commenting on the Acquisition, Stephen Hemsley, Executive Chairman of Franchise Brands, said: "I am delighted to announce the acquisition of Willow Pumps, which represents an important step in expanding Metro Rod's scope of services to the commercial market, consistent with our Vision 2023 strategy. The longer-term aim of the Group is to be able to serve our valued commercial customers with a "water in, waste out" range of drainage, pumps and plumbing-related services on a national basis. The acquisition of Willow Pumps, a highly respected business and one of the leaders in the market, which Metro Rod has already worked alongside, provides the optimum way for Metro Rod to enter the specialist pump sector and develop this expertise across our franchise community.

"The deal structure also provides a significant incentive for Willow Pump's management team to continue to grow its existing business by developing the many national accounts where Metro Rod only provides drainage services at present. As such, the Board of Franchise Brands believes the Acquisition will be significantly earnings enhancing for the Group.

"I am really looking forward to working with Ian Lawrence and his high quality management team to create a national leader for drainage, pumps and plumbing services."

Ian Lawrence, the founder and Managing Director of Willow Pumps, commented: "I am very excited about building on our success to date as part of a larger, publicly quoted group with significant ambitions in the drainage, pumps and plumbing markets. The Group's management and wider resources will be of particular value as we continue to grow Willow Pumps under Franchise Brands' ownership.

"My team and I welcome the opportunity to work with Metro Rod franchisees all across the country and we look forward to working with Metro Rod to deliver first-class pump services and support to their national accounts."

Background to and rationale for the Acquisition

Willow Pumps is one of the UK's leading providers of water pumps and pump solutions, including supply, installation and servicing. It has a below-ground (foul water) capability as well as an above-ground (fresh water) capability. Since 2017, Willow Pumps has also developed a complementary drainage business which is engaged predominantly in tanker work to support the pump maintenance and emergency clearance side of the business.

The business is highly complementary to the Group's Metro Rod and Metro Plumb businesses and provides a strategic opportunity to expand the range of services that Metro Rod and Metro Plumb can offer, consistent with our Vision 2023 strategy. The longer-term objective is to be able to offer an end-to-end range of drainage, pumps and plumbing-related services to commercial customers that will extend from "water in" to "waste out" on a national basis.

Pumps are engineered solutions and incorporate an electrical, as well as a mechanical, component. As such, they have certain specialisations over and above drainage services. The Metro Rod franchisees currently have little or no pump capability because of the specialist nature of this work. However, given the linkage between pumps and drainage, such work is frequently encountered. Currently, Metro Rod franchisees subcontract the pump work which stems from their drainage jobs, and, since 2013, a proportion of this has been subcontracted to Willow Pumps. In addition, there is increasing demand for a pump servicing capability from Metro Rod's national account customers who are progressively tendering combined drainage and pump services. As Metro Rod has historically been unable to self-deliver this service, it has not competed in this area of the market.

The organic development of a complete range of market-leading pump services within a franchise business would take a considerable amount of time to achieve and national coverage would be patchy, as the pace at which franchisees would embrace the opportunity would vary across the network. The Board therefore concluded that the acquisition of Willow Pumps, one of the leading pump companies in the UK, and one which had a below-ground and above-ground capability, would be the optimum way to enter this specialist market. 

The above-ground capability of Willow Pumps, which includes cold water booster sets, storage tanks, and pressurisation units within its offering, also provides a new strategic opportunity to develop the Metro Plumb business. Currently, Metro Plumb is focused on lower-value insurance stabilisation work, but the expertise of Willow Pumps will provide the opportunity to enhance Metro Plumb's skill base and to undertake higher value work. Furthermore, an opportunity has been identified for Kemac, which carries out some high-end specialist plumbing work for water utilities, to work more closely with the above-ground team at Willow Pumps.

The Board of Franchise Brands believes that the Acquisition will be significantly earnings enhancing given the considerable growth opportunities that have been identified for the Group and Willow Pumps. The additional pump work undertaken by Metro Rod franchisees is expected to enhance their profitability and generate additional Management Service Fee income for the Group. Willow Pumps is also expected to continue to grow organically as a result of access to a wider customer base and the opportunity to service customers on a truly nationwide basis.

Structure of the Acquisition and integration with the Group

The structure of the Acquisition provides a significant incentive for Willow Pumps to provide the necessary specialist training and support to the Metro Rod franchise community to enable them to undertake pump work to the required standard. All Metro Rod franchisees will be given the opportunity to upskill, identify and self-deliver pump work utilising Willow Pumps' expertise. Growth incentives, similar to the incentive scheme that has successfully encouraged significant investment by franchisees in a tankering capability, will also be offered to the Metro Rod franchise community to encourage them to invest in a pump servicing capability. Over time, Willow Pumps will benefit from a significantly expanded delivery capability through Metro Rod's national network of over 400 engineers working out of 43 depots across the UK. Metro Rod will also benefit from the opportunity to supply its wide range of drainage services to Willow Pumps' customers.

The deal structure also provides a significant incentive for Willow Pumps' management team to continue to grow its existing business. Willow Pumps will continue to operate as a DLO within Franchise Brands and will benefit from the Group's management, resources, and national account customer relationships. In particular, the business will benefit from Metro Rod's relationships with facilities management companies to win new contracts to deliver pump services.

Willow Pumps has a strong management team led by the founder, Ian Lawrence. Ian will continue to manage the business as Managing Director of Willow Pumps and has joined Franchise Brands' senior management team reporting to the Executive Chairman. Each area of the business is headed by an experienced manager who will be directly incentivised to assist the achievement of the Acquisition earn-out targets. This senior team of five individuals will be incentivised through the grant of EMI options over new Ordinary Shares to an aggregate value of £1.0 million and up to £500,000 of cash bonuses payable over five years on the same basis as the Deferred Consideration.

Details of Willow Pumps' business

Willow Pumps was founded by Ian Lawrence in 1992 and has been family owned until the acquisition by Franchise Brands. The scope of work involves the supply and installation of pumps, routine servicing work, the repair and maintenance of pumps and related drainage services that may be required. Pumps are supplied and installed for both below-ground and above-ground applications.

Supply and installation work involves the design and installation of below ground pumping stations, typically in new-build developments. These range from central pump stations on new housing estates to new-build commercial premises. These installations take place over a number of months, in discrete phases. At the end of the project a customer may sign up to a maintenance contract prior to the installation being adopted by a water authority. The design aspect of directly won work is either undertaken in house or subcontracted to a specialist consultancy firm. This firm also wins contracts directly, particularly from housebuilders, and then refers the installation work to Willow Pumps, which invoices the customer directly.

Servicing and maintenance work comprises the routine servicing of pump systems and equipment and reactive call outs for pump failures or blockages. The routine servicing work can be scheduled in advance, resulting in high levels of labour efficiency. The reactive work often involves a significant drainage or tanker element which is expected to give rise to additional subcontract work for Metro Rod. Willow Pumps has built up a high-quality service and maintenance client base, with customers in the hospitality, retail and housebuilding sectors.

Above-ground pump applications, which handle fresh water, require a separate means of service delivery in order to mitigate against the potential risk of cross-contamination with foul water. Willow Pumps, therefore, has a specialist team operating from dedicated vehicles and premises engaged in this activity. The Board believes that there is significant potential in the above-ground market, in particular to develop a national capability, and this potential will be further enhanced by the development of opportunities in association with Kemac and Metro Plumb.

Willow Pumps employs 74 people, including 35 engineers, and has support centre teams in sales, contracts, national account management, finance, servicing, operations and health and safety. The majority of these employees work out of the main premises in Aylesford, near Maidstone, Kent. In 2018, Willow Pumps established a depot in Wetherby, Yorkshire, to better service the below-ground pump market in the north of the country. In addition, the company has various satellite sales offices and workshops from which a number of engineers operate.

Financial information on Willow Pumps

Franchise Brands has acquired the entire issued share capital of WPL Group Holdings Limited and its subsidiaries, Willow Pumps Limited and Willow Drainage Limited. Consolidated accounts have not historically been prepared for the group as WPL Group Holdings Limited was, and remains, a non-trading holding company and Willow Drainage Limited, which was controlled by the Lawrence family, was acquired by WPL Group Holdings Limited shortly before completion of the Acquisition.

On a group pro-forma unaudited basis, for the financial year ended 31 December 2018, Willow Pumps achieved revenue of £12.4 million, EBITDA of £1.6 million and a profit before tax of £1.1 million. In the six months to 30 June 2019, pro-forma unaudited management accounts of Willow Pumps show revenue of £8.4 million, EBITDA of £1.0 million and a profit before tax of £0.8 million.

The net assets of Willow Pumps on a group pro-forma unaudited basis as at 30 June 2019 were £2.7million, including borrowing (substantially comprising leasing and hire purchase commitments) of £1.6 million and cash of £0.9 million, of which the £0.7 million of cash not required for trading has been netted off against the Initial Consideration.

Terms of the Acquisition

Franchise Brands has acquired the entire issued share capital of Willow Pumps for an initial consideration of £5.0 million (net of non-trading cash of £700,000) and a potential deferred consideration of up to £7.5 million. Of the Initial Consideration, £4.0 million has been paid in cash and £1.0 million was satisfied by the issue of 1,212,121 new Ordinary Shares of 0.5p each in the Company at 82.5 pence per share (being the latest closing middle market price of an Ordinary Share on the last day of trading prior to this announcement). The Consideration Shares rank pari passu in all respects with the existing Ordinary Shares.

As a result of the issue of the Consideration Shares, the vendors of Willow Pumps (Ian Lawrence and his wife) now have an aggregate beneficial interest in 1.55 per cent. of the issued share capital and voting rights of the Company. It has been agreed that the vendors will hold the Consideration Shares for three years and then be subject to an orderly market arrangement for a further two years thereafter.

The Deferred Consideration of up to £7.5 million will be paid based on business generated for the Group and profits of Willow Pumps over the next five years as follows:

I. Up to £3.75 million will be paid at the rate of up to £750,000 per annum on a pro-rata basis for every £3.0 million per annum of additional pump and related drainage business that Willow Pumps generates for Metro Rod for each of the five financial years ending 31 December 2020 to 2024 (inclusive) ("Further Consideration"). Therefore, to achieve payment in full, subcontracted work to Metro Rod would need to have grown by £3.0 million per annum and be £15.0 million or more in the year ending 31 December 2024. The Further Consideration will be calculated and will be payable annually. The Further Consideration is capped at £750,000 per annum and £3.75 million in total.

II. Up to £3.75 million will be paid at the rate of up to £750,000 per annum on a pro-rata basis for every £250,000 by which additional maintainable profits after tax ("PAT") of Willow Pumps exceed £1.0 million in each of the five financial years ending 31 December 2020 to 2024 (inclusive) ("Additional Consideration"). Therefore, to achieve payment in full, PAT will have to grow to £2.25 million by the year ending 31 December 2024. For this purpose, maintainable PAT is the PAT excluding items of income or expenditure of a non-recurring, unusual, exceptional or one-off nature. The Additional Consideration will be calculated and agreed annually based on the actual growth in maintainable PAT in each year and will be payable on finalisation of the consolidated accounts of Willow Pumps for the year ending 31 December 2022 in respect of the first three years (capped at £2.25 million) and on the finalisation of those accounts for the year ending 31 December 2024 in respect of the fourth and fifth years (capped at £1.5 million).

III. The Further Consideration and Additional Consideration will be payable in cash, subject to the Company having the right to settle 20 per cent. of the amount due in new Ordinary Shares at the then prevailing share price.

Group trading update

The second half of the financial year ending 31 December 2019 has started encouragingly, with momentum being maintained in Metro Rod's Systems Sales growth with an increase year-to-date of 15 per cent. (2018: 6 per cent.). Metro Rod franchisees continue to invest in their businesses, including the continued expansion of the tanker fleet. The first of our new Vision 2023 depots is also due to open shortly in Lincoln. As a result of the growing pipeline of candidates we have developed, the number of Metro Rod franchise businesses (or territories) being purchased by ambitious new owners is accelerating. We are particularly pleased to welcome the first ever Metro Rod franchisee in Northern Ireland, who began trading on 1 October 2019.

Across our B2C brands, we continue to see an improvement in franchise recruitment. Year-to-date we have recruited 54 new franchisees (2018: 49) at ChipsAway, Ovenclean and Barking Mad. Barking Mad experienced a particularly strong third quarter following the management change in June.

This good trading performance together with strong momentum across the Group means that the Board looks forward to the remainder of the year with confidence.

Issue of equity and change to Total Voting Rights

Application will be made to the London Stock Exchange for the Consideration Shares to be admitted to trading on AIM ("Admission"). It is expected that Admission will take place on or around 10 October 2019.

With the issue of the Consideration Shares, the total number of Ordinary Shares of 0.5p each in the Company in issue is now 79,339,544. There are 25,000 Ordinary Shares held in treasury and so the total number of voting rights in the Company is 79,314,544. This figure may be used by shareholders as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in, the Company under the FCA's Disclosure Guidance and Transparency Rules.

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