HYDG.L Regulatory News (HYDG)

9 May 2017

HYDROGEN GROUP PLC

("Hydrogen" or the "Company")

Proposed acquisition of the Argyll Scott Group, proposed Board appointment and Notice of General Meeting and Notice of AGM

Hydrogen (AIM: HYDG), the global specialist recruitment group, announces that it has entered into a conditional agreement to acquire the entire issued share capital of Argyll Scott (Holdings) Limited for £3.3 million through the issue of the 9,034,110 Consideration Shares representing approximately 27.4 per cent. of the Enlarged Share Capital. Hydrogen will subsequently acquire the Minority Interests in separate tranches up to April 2021 to be satisfied by payment in cash and/or through the issue of new Ordinary Shares. Further details are set out below.

The Argyll Scott Group was founded in 2009 and recruits for contract, interim and permanent middle management positions across key business functions including accounting & finance, business transformation, marketing, sales and technology across APAC and EMEA.

Terms used in this announcement shall have the meanings given to them in a shareholder circular dated 9 May 2016, which will today be posted to all shareholders and is available to download on the Company's website https://www.hydrogengroup.com/about-us/corporate-investors/.

Highlights

Argyll Scott

· Since its founding in 2009, the Argyll Scott Group has grown organically to 96 staff operating from offices in London, Dubai, Hong Kong, Singapore and Bangkok.

· In January 2017 the Argyll Scott Group acquired the Hong Kong, Singapore and Kuala Lumpur based operations of Reed Specialist Recruitment Group further broadening its footprint in the APAC market and increasing the group's headcount to 129.

· The Group was listed in The Sunday Times "100 Best Companies to Work for" in 2016 and 2017

· The Argyll Scott Group will continue to trade under its own brand

Rationale and benefits

· Accelerate the Company's growth through immediate expansion of its presence in APAC

· Generate increased economies of scale and realise synergies through the alignment of internal IT systems, procedures and processes

· Diversification of customer revenue concentration within the Enlarged Group and increase the proportion of NFI from outside the UK to greater than 50%

· Opportunity for further value creation:

o Leverage Hydrogen's investment in digital marketing and infrastructure

o Enlarged APAC presence will increase proximity to a broader candidate base to service clients

o Increase the complementary skills of Hydrogen and Argyll Scott and increased resources will enable the Enlarged Group to compete more effectively

Proposed Board appointment

Conditional on completion of the Acquisition, John Hunter (currently the CEO of Argyll Scott) will join the Board of the Enlarged Group as an Executive Director and will be responsible for further developing the Enlarged Group's businesses in APAC and the US. Ian Temple will continue in his capacity as Chief Executive Officer of the Enlarged Group and will retain primary responsibility for defining the Group's strategy.

Irrevocable undertakings to support the Acquisition

The Company has received irrevocable undertakings to vote in favour of the Resolution to be tabled at the General Meeting from Directors and certain Shareholders who hold, or are interested in, an aggregate of 14,645,510 Existing Ordinary Shares, representing approximately 61.2 per cent. of the Company's current issued share capital.

Notice of Annual General Meeting ("AGM") and General Meeting to approve the Acquisition

The Directors do not currently have the authority required under the Act in order for them to allot the Consideration Shares pursuant to the Acquisition Agreement. Accordingly, the Directors are seeking authority at the General Meeting to allot the Consideration Shares in order to implement the Acquisition. Set out at the end of this document is a notice convening the General Meeting to be held at the offices of Hydrogen Group plc, 30 Eastcheap, London, EC3M 1HD on 2 June 2017 at 8.05 a.m., at which the Resolution will be proposed.

In addition, the Company has today posted its notice of AGM to be held at the same address and immediately prior to the General Meeting on 2 June 2017 at 8.00 a.m.

Ian Temple, CEO of Hydrogen, commented:

"I look forward to welcoming the Argyll Scott Group to Hydrogen. This acquisition will rapidly expand Hydrogen's presence in Asia through broadening our contact base in order to leverage new and existing relationships to ensure the business continues to find the highest calibre candidates for our clients. In addition we expect the acquisition to provider a number of synergy benefits through the alignment of internal procedures and the dilution of central costs. I thank our existing shareholders for their support of the transaction. Over the course of the following months we will work hard to fully integrate the Argyll Scott Group to Hydrogen to ensure the full benefits of the acquisition are realised for our shareholders.

John Hunter, CEO of the Argyll Scott Group, commented:

"I have known Ian for over 15 years and it has been a pleasure working with him to agree terms that will benefit both our businesses and our employees. By joining the Hydrogen Group, Argyll Scott will be able to accelerate its growth plans, access the fast growing APAC contract market and offer greater career opportunities for its people."

Enquiries:

Hydrogen Group plc 020 7090 7702

Ian Temple, CEO

Stephen Puckett, Chairman

Shore Capital (Financial Adviser, Nominated Adviser and Broker) 020 7408 4090

Bidhi Bhoma

Edward Mansfield

James Wolfe

Notes to Editors:

Hydrogen is a specialist recruitment business with a proven global platform with clients' in over 50 countries. Our mission is to empower the careers of our candidates whilst powering businesses by providing their key people. We deliver by building market leading specialist teams that develop a deep understanding of candidate and clients' needs and developing solutions.

http://www.hydrogengroup.com

About Argyll Scott

Argyll Scott recruits the very best talent for management positions across key business functions and sectors. With offices in London, Singapore, Hong Kong, Kuala Lumpur, Bangkok and Dubai, specialist recruitment teams work across the following specialisations; Accounting & Finance, Advanced Analytics & Data Science, Business Transformation, Executive Support, Financial Services, Human Resources, Insurance, Life Sciences, Procurement Retail, Sales & Marketing, Strategy, Supply Chain and Technology. Clients range from FTSE 100 multinationals to local SMEs.

www.argyllscott.com

1. Information on Hydrogen

Hydrogen was established in 2005 on the merger of Partners Group Limited and PRO Limited and was subsequently admitted to trading on AIM in September 2006. The Hydrogen Group provides recruitment services for permanent and contract mandates in respect of positions which are available primarily for mid to senior level staff members (typically earning between £70,000 and £150,000 per annum) across both types of role.

The Hydrogen Group's operating model is international and split by geography being EMEA (including USA) with a significant presence in APAC. Within each region are individual practices; technology, finance, energy, legal, life sciences and business transformation.

The Board is focused on building market leading specialist teams. This is achieved by setting up incubator practices that the Hydrogen Group seeks to grow to attain a market leading position. The focus on an ultra-niche model enables the Hydrogen Group to utilise digital marketing to build and maintain relationships and leverage off its global platform.

2. Current trading and prospects

The Company announced its final results for FY 2016 on 4 April 2017 and reported NFI of £17.7 million (FY 2015: £19.4 million), with Adjusted PBT of £0.8 million (FY 2015: £0.2 million). The make-up of the Company's NFI altered in line with its focus on developing its contractor base. Contract NFI grew 11% to £11.6 million (FY 2015: £10.5 million) and represented 65% of the Company's NFI, with the balance of 35% relating to permanent placements. NFI from EMEA (including the USA) was £14.4 million or 81% of total NFI (FY 2015: £15.7 million) with APAC generating £3.3 million (FY 2015: £3.7 million).

NFI since 1 January 2017 has continued broadly in line with management's expectations. The Board continues to be focused on growing and developing the Company's niche businesses by backing high performing individuals and by taking advantage of the its global digital marketing platform. Whilst mindful of the continued economic uncertainty in the UK, the Board believes the Company is well placed overall to continue to invest in both its international and UK businesses.

3. Information on the Argyll Scott Group

The Argyll Scott Group was initially launched as a division of Redgrave Partners LLP (now Redgrave Search Limited) in late 2009 in London. John Hunter and Shane Sibraa then founded Argyll Scott International (Hong Kong) Limited in early 2010 and launched the business in Asia. They were joined by Rodney Fraser in January 2011 when John and Rodney co-founded Argyll Scott Technology Limited in London. This team has been the principal driver of the Argyll Scott Group's strategy and growth since then.

The Argyll Scott Group recruits for contract, interim and permanent middle management positions across a range of key talent scarce business functions and industry sectors - primarily professional services related. It predominantly serves client enterprises that have not engaged an RPO partner and which therefore management believes are in general more reliant on agency based recruitment models.

Between 2009 and 2016 the Argyll Scott Group grew organically to approximately 96 staff based across offices in London, Dubai, Hong Kong, Singapore and Bangkok.

In January 2017 it acquired the Hong Kong, Singapore and Kuala Lumpur based operations of Reed Specialist Recruitment Group ('Reed") further broadening its footprint in the APAC market. Each of these businesses has now been fully integrated into Argyll Scott's existing operations with all staff operating under the Argyll Scott brand, on Argyll Scott's operating systems and from a single office in each geography.

The Argyll Scott Group currently has 129 staff, 35 of whom are based in its EMEA operations and 94 in APAC.

In FY 2016, approximately 80% of the Argyll Scott Group's revenues were derived from permanent recruitment and approximately 20% from contract and interim recruitment.

In both 2016 and 2017, the Argyll Scott Group was named in the Sunday Times "100 Best Companies to Work For" report.

3.1. Areas of expertise

The Argyll Scott Group has capability across the following sectors:

· Accounting and finance

· Advanced analytics and data science

· Business support

· Business transformation

· Digital & e-commerce

· Financial services

· Human resources

· Life sciences

· Manufacturing

· Procurement

· Real estate

· Retail

· Sales & marketing

· Strategy

· Supply chain

· Technology

3.2. Client base

The Argyll Scott Group's operating model affords it a very diverse client base. It is therefore not overly reliant on any one client or sector. Its largest client in 2016 accounted for approximately 2.3% of group NFI.

3.3. Property/leases

With the exception of its business in Dubai (see paragraph 4 below), the Argyll Scott Group leases its various offices in each of its geographies of operation. These leases are held on terms of up to three years and on commercial terms that management believes are typical in each geography. As a result of the acquisition of Reed's APAC businesses in January 2017, Argyll Scott Group currently has lease commitments in respect of vacant offices in Hong Kong and Singapore. However, the leases on these properties expire on 31 May 2017 and 1 September 201,7 respectively.

3.4. Management team

The Argyll Scott Group's management team includes the following individuals:

John Hunter, CEO

John is a Chartered Accountant. He joined the former AIM listed recruitment group Imprint plc on its inception in 2001 as Chief Financial Officer. At Imprint plc he also served as Chief Operating Officer and Chief Executive Asia Pacific & Middle East and was instrumental in the development of the business to a market capitalisation, at its peak, of some £100m. In early 2010, John co-founded Argyll Scott's Asian business with Shane Sibraa, and in 2012 he was appointed Group Chief Executive.

Shane Sibraa, MD APAC

Shane has lived and worked in Asia for over 20 years. He joined Robert Walters Tokyo in 1999, where he spent three years developing the business into a leading player in its market. In November 2002 Shane transferred to Hong Kong and was appointed Director of Robert Walters Hong Kong. In 2008 he was promoted to Managing Director Greater China and he was responsible for the execution of a joint venture between that business and a local Chinese partner. Shane left Robert Walters in 2009 and in 2010 co-founded Argyll Scott's Asian business.

Tom Swain, MD Singapore

Tom commenced his recruitment career when he joined Michael Page's London office in 2006. He was transferred to Michael Page's office in Sydney in 2009 and then to Singapore in 2013. Tom left Michael Page in the summer of 2014 to join Argyll Scott Singapore as head of its Commerce & Industry practice. In early 2015 he was promoted to Managing Director. Since then he has developed the team from a headcount of 14 to 33 staff.

Rodney Fraser, MD Argyll Scott Technology Limited

Rodney started his career in recruitment in London in 1998 with Computer Team Group Ltd. In 2000 he joined Nicoll Curtin and became a founder of Nicoll Curtin Technology in 2003, a boutique IT recruitment firm focusing on IT into the financial services sector. He built the business to an annual turnover of more than £15m. In 2011, Rodney co-founded Argyll Scott Technology Limited with John.

4. Enlarged Group structure

On completion of the Acquisition, Argyll Scott Holdings will acquire the sole economic interest in its Dubai operations with effect from 31 May 2017 through an asset purchase agreement with Redgrave Group Executive Search DMCC (a company ultimately owned by Brian Hamill, one of the Key Vendors) which has historically operated both its own and the Argyll Scott branded recruitment businesses in the Middle East. This agreement provides Argyll Scott Holdings with an option to acquire the entire legal interest in the assets, staff and contracts of the business for a nominal consideration at any time on or before 31 May 2021 pending the establishment by it of a duly-licensed, locally incorporated legal entity.

Shane Sibraa was a co-founder and initial investor in both Argyll Scott International (Hong Kong) Limited and Argyll Scott Singapore Pte Ltd. Similarly, Rodney Fraser was a co-founder and initial investor in Argyll Scott Technology Limited. Although both will, prior to completion of the Acquisition, exchange part of their shareholdings in those companies for shares in Argyll Scott Holdings which will be acquired by Hydrogen under the Acquisition Agreement, in order to optimise their future incentivisation they have both retained 30% direct shareholdings in their local businesses.

Andrew Dallas who joined the Argyll Scott Group as MD of Argyll Scott International Limited in June 2015 subscribed for 10% of its share capital in February 2016.

Under the terms of the Minority Interest Acquisition Agreement, Hydrogen has undertaken to acquire the remaining minority interests retained by Rodney Fraser, Andrew Dallas and Shane Sibraa. The consideration for the purchase of these minority interests may be settled either in new Ordinary Shares or in cash at Hydrogen's discretion. Further details of the terms of the Acquisition, its conditionality and the further acquisition of the remaining minority interests, are set out below under the headings "Principal terms of the Acquisition".

5. Pro-forma financial results of Argyll Scott Holdings for FY 2016

The unaudited summary consolidated pro forma income statement, statement of financial position and statement of cash flows (the "pro forma financial information") set out below for Argyll Scott Holdings for the FY 2016 have been prepared based on audited accounts, prepared under local GAAP, for itself and each of its subsidiaries and associated companies, together with the accounts of Argyll Scott Dubai which have been extracted from the audited accounts of Redgrave Group Executive Search DMCC. The Board is of the opinion that there are no material differences between local GAAP and IFRS and no material differences between the accounting policies of Argyll Scott Holdings and Hydrogen Group.

The unaudited pro forma financial information has been prepared to illustrate the effect on earnings, net assets and cash flows as if the financial statements of Argyll Scott Holdings and the relevant subsidiaries and associated companies were consolidated into a single group entity for the FY 2016 and has been based on the audited subsidiary accounts (together with the accounts of Argyll Scott Dubai which has been extracted from the audited accounts of Redgrave Group Executive Search DMCC) of Argyll Scott Holdings, together with appropriate consolidation adjustments. No material adjustments have been made to the audited accounts which form the basis of the unaudited pro forma financial information.

The unaudited consolidated pro forma financial information has been prepared for illustrative purposes only and, by its nature, addresses a hypothetical situation and, therefore does not represent Argyll Scott Holdings' actual financial position or results.

In January 2017 Argyll Scott International (Hong Kong) Limited, a subsidiary of Argyll Scott Holdings, purchased the entire issued share capital of Reed Personnel Services PTE Ltd, Reed Hong Kong Ltd and Reed Specialist Recruitment Malaysia Sdn. Bhd., together comprising the "Reed Group".

The last audited financial statements of these entities were prepared under local GAAP for each respective entity for the year ended 30 June 2016. On an unaudited pro-forma consolidated basis the Reed Group generated revenues of £4.4 million a loss of £0.3 million and had net liabilities of £2.5 million for the year ended 30 June 2016, using the prevailing exchange rate for each local currency on 30 June 2016. This information is for illustrative purposes and addresses a hypothetical situation as if the Reed Group was consolidated as at 30 June 2016.

6. Background and reasons for the Acquisition

6.1. Background, rationale and benefits

The Board implemented a turnaround plan for the Company in 2015, turning its focus to developing its contracting business and developing market leading ultra-niche businesses which are more relevant to today's business practices.

The Board believes the Acquisition will provide a number of benefits to the Company:

6.2. Accelerate the Hydrogen Group's growth:

• build on Hydrogen's return to underlying growth and accelerate the growth path;

• rapidly expand the Hydrogen Group's presence in APAC - enhance its contact base in order to leverage new and existing relationships to ensure the business continues to find the highest calibre candidates for clients;

• generate increased economies of scale and further dilute central costs; and

• realise synergies through the alignment of internal IT systems, procedures, processes and head office costs;

6.3. Diversification

• diversify customer revenue concentration within the Enlarged Group; and

• increase the proportion of NFI originating from outside the UK to greater than 50%;

6.4. Opportunity for further value creation

• leverage the Hydrogen Group's investment in digital marketing and infrastructure;

• accelerate implementation of the Enlarged Group's business plan;

• improve the ability to meet clients' needs in a more timely fashion due to increased proximity to a broader candidate base;

• increase the complementary skills of Hydrogen and Argyll Scott; and

• increased resources should allow the Enlarged Group to compete more effectively for prominent on-going relationships with clients.

6.5. Strategy for the Enlarged Group

The Board have the following strategy and outlook for the Enlarged Group:

· multi-brand with a focus on growing incubators and fast growth businesses to market leaders;

· focus on improving the Company's profit conversion in its market leading businesses;

· integrate back office and leverage global platform. and

· explore further mergers and acquisition opportunities.

6.6. Summary of objectives

The Board have the following objectives for the Enlarged Group:

· to grow NFI organically by over 10% per annum;

· to grow PBT organically by at least 20% per annum; and

· to increase underlying PBT to NFI conversion to greater than 10%.

7. Principal terms of the Acquisition

7.1. Acquisition Agreement

Under the terms of the Acquisition Agreement, Hydrogen has agreed with the Key Vendors that it will, subject to Shareholder approval, acquire Argyll Scott Holdings from the Vendors through the issue of 9,034,110 new Ordinary Shares representing 27.4 per cent. of the Enlarged Share Capital. The Minority Vendors will retain minority interests in certain subsidiary companies as described further in paragraph 7.2 below.

The Key Vendors have given customary warranties and indemnities and will be subject to restrictions against competing with the Hydrogen Group for two years from completion of the Acquisition. These restrictions will not, however, prevent, one vendor, Brian Hamill from continuing to operate the executive search firm business carried on by the Redgrave group of companies.

Completion of the Acquisition Agreement is conditional on the passing of the Resolution.

7.2. Minority Interest Acquisition Agreement

The Minority Vendors will retain minority interests in four Argyll Scott Holdings subsidiary companies and associated companies. These retained minority interests are as follows:

· Andrew Dallas: 10% of Argyll Scott International Limited

· Rodney Fraser: 30% of Argyll Scott Technology Limited

· Shane Sibraa: 30% of the two companies comprising Argyll Scott Asia

Argyll Scott Technology and Argyll Scott Asia

Under the terms of the Minority Interest Acquisition Agreement, Hydrogen will agree to acquire the remaining minority interests in Argyll Scott Technology and Argyll Scott Asia in four share purchases of 7.5% of the outstanding share capital within 15 Business Days of each of 30 April 2018, 30 April 2019, 30 April 2020 and 30 April 2021.

The consideration for each share purchase will be calculated as a multiple of the prior financial year's audited profit after tax of the company in question. The multiple will be equal to Hydrogen's historic P/E ratio on that date (30 April) subject to a discount of 25% provided that the multiple shall not be less than 5 times or greater than 7.5 times. Hydrogen's historic P/E ratio for this purpose will be equal to its market capitalisation on each 30 April divided by its prior financial year reported statutory profit after tax, excluding any material non-trading foreign exchange derived gains or losses.

Argyll Scott International

Under the terms of the Minority Interest Acquisition Agreement, Hydrogen will also agree to acquire the 10% minority interest in Argyll Scott International within 15 Business Days of 30 April 2021.

The consideration for this share purchase will be calculated as a multiple of Argyll Scott International's average audited profit after tax for the two financial years ending 31 December 2019 and 31 December 2020. The multiple will be equal to Hydrogen's historic P/E ratio on 30 April 2021 subject to a discount of 25% provided that the multiple shall not be less than 5 or greater than 7.5 times. Hydrogen's historic P/E ratio for this purpose will be equal to its market capitalisation on 30 April 2021 divided by its prior financial year reported statutory profit after tax, excluding any material non-trading foreign exchange derived gains or losses.

Form of consideration

The consideration for the minority interests may be settled either in new Ordinary Shares ("Deferred Consideration Shares") or in cash at Hydrogen's sole discretion, save that each Minority Vendor may choose to receive up to £75,000 of the consideration due to him in cash in any year where consideration is payable.

Should Andrew Dallas cease to be engaged (other than in certain circumstances) in a full time capacity by a member of the Enlarged Group prior to 30 April 2021, the multiple described above which applies in respect of the consideration due to him on that date will be reduced on a proportionate basis.

Should Rodney Fraser or Shane Sibraa cease to be engaged (other than in certain circumstances) in a full time capacity by a member of the Enlarged Group prior to the date on which any consideration is due to be paid to him, the multiple described above which applies in respect of the consideration due on that date and in the future will be reduced by 50 per cent.

Entry into the Minority Interest Acquisition Agreement is conditional upon completion of the Acquisition Agreement itself.

8. Working capital

The Directors are of the opinion, having made due and careful enquiry, that, on the basis that the Enlarged Group's existing bank facilities remain available to it and taking into account the existing cash resources available to the Enlarged Group, the Enlarged Group will have sufficient working capital for its present requirements, that is for at least 12 months from the date of Admission. 

9. Lock in and orderly market arrangements

The Vendors will each give an irrevocable undertaking not to dispose (save in certain specified circumstances) of any interest in their Consideration Shares for a period of one year from Admission. The Vendors will also undertake that they will not dispose of any interest in Consideration Shares for a period of 12 months following the first anniversary of Admission unless such disposal is effected through, and agreed by, Shore Capital.

The Minority Vendors will each give an irrevocable undertaking not to dispose (save in certain specified circumstances) of any interest in their Deferred Consideration Shares for a period of one year from issue. The Minority Vendors will also undertake that they will not dispose of any interest in Deferred Consideration Shares for a period of 12 months following the first anniversary of issue unless such disposal is effected through, and agreed by, Shore Capital.

The Directors will also each enter into an irrevocable undertaking not to dispose (save in certain specified circumstances) of any interest in their Ordinary Shares for a period of one year from Admission. The Directors will also undertake that they will not dispose of any interest in Ordinary Shares for a period of 12 months following the first anniversary of Admission unless such disposal is effected through, and agreed by, Shore Capital.

10. Board

Conditional on completion of the Acquisition, John Hunter will join the Board of the Enlarged Group as Executive Director and will be responsible for further developing the Enlarged Group's businesses in APAC and the US. Ian Temple will continue in his capacity as Chief Executive Officer of the Enlarged Group and will retain primary responsibility for defining the Group's strategy.

Service agreement

John Hunter has entered into a service agreement conditional upon completion of the Acquisition Agreement, pursuant to which Mr Hunter will be appointed as Executive Director of Hydrogen and will receive an annual salary of £168,000. The appointment will be terminable on six months' notice on either side. Mr Hunter will be entitled to an annual car allowance of £12,000 per annum, private medical insurance and a pension contribution of £10,000 per annum.. Mr Hunter will be eligible to receive an annual bonus at the discretion of the Board and he is eligible to participate in the Company's executive share scheme.

11. Relationship Agreement

The Company and SCC will enter into the Relationship Agreement with the Key Vendors to regulate their on-going relationship with the Company, so as to ensure that the Enlarged Group is capable of carrying on its businesses independently of the Key Vendors and that any transactions and relationships between the Hydrogen Group and the Key Vendors are at arms' length and on a normal commercial basis and do not affect the Enlarged Group's continuing appropriateness as a company whose Ordinary Shares are traded on AIM.

The Relationship Agreement will apply for as long as the Ordinary Shares are admitted to trading on AIM and the Key Vendors and any persons connected with them are able to exercise control including holding, in aggregate, an interest in 15 per cent. or more of the Ordinary Shares.

Under the Relationship Agreement the Key Vendors will undertake to each of the Company and SCC to exercise their voting rights and to procure that any person connected with them will exercise their voting rights over Ordinary Shares such that, amongst other things:

a) the Enlarged Group will be managed independently of the Key Vendor Group; and

b) any transactions, agreements or arrangements between any member of the Enlarged Group and the Key Vendor Group are made at arm's length and on normal commercial terms and with the prior approval of the Independent Directors (with the Key Vendors and any connected persons who are directors of the Company abstaining from any such resolution).