Last checked at 30 Jul 2010 07:00
Filtronic plc
("Filtronic" or the "Company")
Proposed acquisition of Wireless Infrastructure Business of Isotek
Filtronic, the designer and manufacturer of microwave electronics products for the wireless telecoms backhaul infrastructure market, is pleased to announce that it has today entered into an agreement ("Agreement") governing the terms of the proposed offer for the entire issued share capital of Isotek (Holdings) Limited ("Isotek")("Acquisition"). Isotek develops and markets leading-edge telecommunications products for a range of wireless infrastructure applications.
The Acquisition, which will be made by way of offer under Part 28 of the Companies Act 2006 ("Offer"), has highlights as follows:
Strategic
·; Furthers Filtronic's strategy to create a differentiated, high growth, wireless business through organic growth and selective acquisition
·; Provides entry to customised niche market for high added value base station filters
·; Offers identified growth potential to transform the scale of Filtronic's business
·; Acquires innovative new IP to capitalise on very strong growth of 3G/4G related mobile data traffic
·; Creates a combined business of attractive scale to key customers
Financial
·; Deal expected to be earnings enhancing in year to 31 May 2012 ("FY12")
·; Expected to increase FY12 turnover by circa £15m
·; Consideration of £4.35 million cash plus 18,550,000 new Filtronic shares (subject to working capital and other adjustments)
·; £10.7 million implied consideration based on closing price of 34.25p at 29 July 2010
·; Shares represent circa 20 per cent of enlarged share capital, and will be subject to lock-ins
Chairman Howard Ford said "This is a transformational deal for both companies which will be attractive to all stakeholders."
Enquiries:
| Filtronic plc | Tel. 01325 301111 |
| Howard Ford, Chairman |
|
| Hemant Mardia, CEO |
|
| Mike Brennan, CFO |
|
|
|
|
| Panmure Gordon (UK) Limited | Tel. 020 7459 3600 |
| Dominic Morley |
|
| Stuart Gledhill |
|
|
|
|
| Walbrook PR Ltd | Tel. 020 7933 8787 |
| Paul McManus | Mob. 07980 541 893 |
|
| paul.mcmanus@walbrookpr.com |
Background
On 16 October 2006, Filtronic announced that it had completed the disposal of the majority of its Wireless Infrastructure division business, comprising transmit /receive filters, integrated remote radio heads and power amplifier products, all for use in commercial wireless infrastructure base station equipment, for shares and cash then worth $298 million. The market for these products had at that time reached a stage of relative maturity driven by increasing commoditisation of product and margin pressure. As part of the disposal, Filtronic entered into covenants including one not to compete with the business sold for a 3 year period.
Following expiration of this restrictive covenant, Filtronic has evaluated opportunities to transform the range and size of its business by re-entering the base station market and, in so doing, to leverage its OEM position, established reputation and scale in the wireless telecoms market.
Isotek is a leading developer and marketer of wireless telecommunications products. It is run and owned primarily by members of Filtronic's former senior management, who had previously delivered the successful growth of Filtronic's world leading Wireless Infrastructure business from start up and through flotation. Alan Needle (formerly the CEO of Filtronic's wireless infrastructure business and formerly an executive director of Filtronic), and Dr Christopher Mobbs (former executive director and former CTO of Filtronic) will continue to run this business segment under the proposed acquisition. Professor David Rhodes (Filtronic's founder and a former CEO) will have an honorary position providing external technical consultancy to the business segment. Isotek has made significant investments in innovative new technology, resulting in the creation of new IP, which Filtronic believes provides Isotek with a significant competitive advantage.
Market
The mobile wireless network consists of a large number of base station sites throughout a given region. These base stations communicate with mobile phones, PDA's and portable computers connecting a subscriber into the system. For example, in the UK there are four major mobile operators, each of which may have tens of thousands of base stations with the majority located in the large urban areas and major trunk routes. Each operator has bought one or more licences to use a specific frequency band within which they are allowed to transmit and receive RF signals and are not allowed to cause interference outside the frequency band that they operate in.
The need to avoid interference requires a portion of the valuable licensed band to be consumed as a buffer against adjacent users. As use of spectrum intensifies, this is leading to demand for products improving spectrum utilisation. The move to rapidly overlay 3G and 4G data services with differing protocols onto existing 2G voice networks also sets new challenges for network upgrades by operators to be delivered without disruption. In order to speed the rollout of new services, whilst minimising costs, it is important to optimise spectrum utilisation across the network of existing base station sites. Furthermore, as additional frequency bands are released for mobile use, the proximity of existing systems such as high power digital TV broadcast will require increasingly technically complex combining and interference mitigation solutions.
Strong growth of data traffic globally presents mobile operators with a pressing need to address these challenging service issues, which in turn creates new opportunities for mobile infrastructure equipment providers such as Isotek and Filtronic.
Isotek's advanced filter solutions enable the use of existing mobile spectrum to be enhanced significantly whilst inserting new services and eliminating interference, offering more usable channels and extra capacity at an economic cost.
The Directors believe that there is a significant worldwide addressable market for base station filters, estimated (by a Filtronic commissioned external consultant's report) to total around £370 million in 2012 and that this market will show rapid growth over the next few years driven by the adoption of 4G services. This provides a long-term opportunity for continuing growth in this market, focused on the customisation of technically advanced products.
Isotek business
Isotek develops and markets leading-edge telecommunications products for a range of wireless infrastructure applications. These products, comprising innovative filters and combiners, enable operators to use their existing 2G infrastructure also to deliver 3G and 4G services simultaneously, with a minimum of switch-over downtime. This can bring significant cost savings by eliminating the need to upgrade or replicate network infrastructure in some cases, as well as improving the use of the available spectrum. These products are typically highly customised by Isotek's engineering teams according to the local requirements of specific OEMs or operators, and offer significant cost and performance advantages over alternative products. Isotek has developed proprietary software to design and model the performance of its products.
The Directors believe that Isotek is strongly positioned to take advantage of opportunities requiring such technical sophistication.
Isotek currently has 28 employees, including a 16 strong engineering team, based in the UK, in the United States, and in China. Products are being manufactured by a subcontract manufacturer in China at competitive cost and on favourable credit terms.
Over the last three years, Isotek has made a series of patent applications covering the filter and combiner technology used in its products.
Based on discussions with customers with major potential, the Directors believe that Isotek's products solve key technical challenges and offer significant benefits over alternatives. Traction is now being achieved with key customers with the potential for an early step change in business revenues. Products have been developed, manufactured and now qualified in customer trials in both the US and Europe and have led to initial production orders from tier one OEMs and operator customers. New prospects at major operators with products in trial phase provide a platform for potential rapid revenue growth.
In the year ended 31 May 2010 Isotek made an unaudited pre-tax loss of £1.9 million on turnover of £0.8 million and had gross assets of £0.6 million at that date. Over the last 3 years Isotek has invested more than £5 million in the development of its wireless infrastructure business.
Filtronic's market position is expected to improve Isotek's ability to take advantage of the strong growth in 4G mobile data traffic with its new customized microwave filter solutions.
Acquisition
Due to the size of Isotek's shareholder base the Acquisition will be made by way of offer under Part 28 of the Companies Act 2006 ("Offer"). Under the Agreement, Filtronic has agreed to use its best endeavours to make the Offer no later than 1pm on 30 November 2010 subject to the satisfaction of certain conditions including regulatory approval of the documentation required to give effect to the Acquisition (including a prospectus in relation to the enlarged Filtronic group) and the board of Filtronic continuing to be satisfied that it can recommend the Offer to its shareholders. Filtronic shall not be obliged to make the Offer in the event that the conditions have become incapable of being satisfied, or if (at any time before the Offer is made) Filtronic becomes aware of the occurrence of any event that constitutes, or is likely to constitute, a material adverse change regarding the business of Isotek or a material breach of the warranties given by certain members of Isotek's senior management team.
The consideration payable under the Offer will be £4.35 million in cash and the issue of 18,550,000 new Filtronic shares on completion which, based on the closing mid price per Filtronic share of 34.25 pence per share as at 29 July 2010, implies a consideration of £10.7 million. The Consideration Shares will, when issued, represent circa 20.0 per cent. of the enlarged share capital of the Company.
The Offer, when made, will be subject, inter alia, to acceptance by not less than 90 per cent. of the shares to which the Offer relates, the approval of Filtronic's shareholders (as a Class 1 acquisition) and admission of the new Filtronic shares to the Official List of the UK Listing Authority. Filtronic has received irrevocable undertakings from over 90 per cent. of the shareholders of Isotek (on a fully diluted basis) to accept the Offer when it is made.
Isotek will be fully integrated as a separately branded subsidiary of Filtronic's business, with its management team remaining in place, and with Alan Needle as the subsidiary's MD and Dr Chris Mobbs as its CTO. It is proposed that, on completion of the Acquisition, Alan Needle will be invited to join the board of Filtronic as an executive director. The Isotek subsidiary will enter into a consultancy contract with Professor David Rhodes to support continued product innovation.
The key vendors of Isotek have given Filtronic customary warranties and indemnities and have entered into a restrictive covenant not to compete with the business of Isotek for a period of three years.
On completion the vast majority of the consideration shares will be subject to sale arrangements (for Filtronic's benefit) in the event of any shortfall in the working capital or claims under the acquisition documents. Following the expiry of six months from Completion, 50% of the consideration shares (assuming no working capital adjustments or claims under the acquisition documents) will be released from these arrangements; and the remaining consideration shares (assuming no claims under the acquisition documents) will be released from these arrangements following the expiry of 24 months from Completion. Certain key vendors, who directly hold in aggregate circa 66 per cent. of the fully diluted share capital of Isotek, have agreed to enter into lock-in arrangements for the period of 12 months from the date of the completion of the Agreement, with half of these shares being locked in for a further 12 months.
Benefits of the Acquisition
The Acquisition is in line with Filtronic's strategy to create a differentiated, high growth wireless business through organic growth and selective acquisitions.
The Acquisition will deliver rapid entry into the base station market sector, by combining Filtronic's reputation, resources and market access with Isotek's highly differentiated intellectual property and products. Filtronic's background and point to point market position is expected to be attractive to operators and OEMs looking for a stable supplier of scale as well as new and customised solutions to new problems.
The Directors believe that the Acquisition is likely to increase Filtronic's turnover in the year ending 31 May 2012 ("FY12") by around £15m. The deal is expected to be earnings enhancing in FY12 and significantly earnings enhancing in the second full year of ownership.
As at 31 May 2010 Filtronic had £16.2m in available funds; cash remaining following the payment of the cash consideration is expected to adequately provide for the working capital requirements of both the existing point to point and the acquired businesses.
In the longer term the Directors believe that as a result of the combined business's greater critical mass, the enlarged Filtronic would be well positioned to take advantage of further opportunities in future industry restructuring.
Further announcements will be made as appropriate.
END