HYR.L Regulatory News (HYR)

17 April 2013

Hydrodec Group plc

("Hydrodec")

Strategic partnership established in North America to drive growth

Transformational deal will create a leading US re-refiner of used transformer oils and increase US production capacity by 140%

Hydrodec Group plc, the clean-tech industrial oil re-refining group (AIM: HYR), is pleased to announce a major expansion of its North American business through a strategic partnership with G&S Technologies Group ("G&S"), a leading New Jersey-based electricity transformer recovery services group with a 50-year track record of serving the industrial and utility industries throughout the US.

The deal involves the creation of a new entity, Hydrodec of North America LLC (the "Company"), in which Hydrodec will ultimately own 50.1 per cent and contribute its existing re-refining plant in Canton, Ohio. The Company will be one of the largest handlers and processors of waste and polychlorinated biphenyl ("PCB") contaminated transformer oil in North America. The partnership will also enable Hydrodec and G&S to accelerate their growth in the world's biggest energy market while sharing the risks and capital investment between strongly complementary businesses.

Ian Smale, Chief Executive of Hydrodec, commented: "This partnership enables Hydrodec to aggressively expand its successful North American business and is a major step on the path to profitability for the Hydrodec Group. The deal creates an extremely competitive and efficient oil re-refining business at scale, will increase Hydrodec's SUPERFINE™ penetration in our key US markets and de-risk our expansion through our association with G&S and their access to feedstock."

George Newmark, Vice President of G&S Technologies, commented: "The deal creates an alliance between the best asset recovery and service provider with the best oil re-refining technology, providing our electrical utility industry customers with a compelling one-stop sustainability offer."

Highlights and rationale

·; Delivers first step in Hydrodec's growth strategy to significantly scale up its profitable North American operations

·; Brings together Hydrodec's proven clean-tech waste oil re-refining process with G&S's leading customer service offer that will commit feedstock to the partnership and de-risk expansion

·; Hydrodec will receive cash consideration based on five times its 2012 North American EBITDA for the first of three payments that will result in G&S owning 49.9 per cent when the business is expanded, with an earn-out of 6.5 times the difference between 2012 and 2013 EBITDA

·; The total cash proceeds are expected to value Hydrodec's North American operations at or close to book value (US$14 million), subject to the performance of the business in 2013, and are anticipated to meet Hydrodec's call on capital for the expansion programme

·; The strategic partnership plans to expand its US re-refining capacity to approximately 65 million litres per annum, and from four trains (processing units) to a total of 10 trains, by 2015, an increase of 140%

·; Establishes a new recurring royalty stream for Hydrodec at five per cent of North American revenues through a technology licensing model, in addition to continued equity participation and share of profits in the enlarged business

·; Substantially de-risks and shares the cost of capital investment with an established industry partner

Under the deal, Hydrodec will contribute its existing re-refining plant in Canton, Ohio, with a current re-refining capacity of 27 million litres per annum. In addition, Hydrodec will license its patented clean-tech re-refining technology and process to the Company in return for ongoing five per cent royalties on total sales of its re-refined SUPERFINETM branded oil in North America.

G&S, a privately-owned conglomerate with revenues in excess of US$200 million in 2012, will commit used transformer oil associated with their utility asset recovery service sufficient to expand production capacity by up to a further six processing trains, increasing total re-refining capacity in North America up to c. 65 million litres per annum, representing 15% of annual US consumption of transformer oil.

Both parties have committed to invest equally in the expansion of the Company's re-refining capacity over the next two years. Importantly, the additional commitment of G&S feedstock to the Company will provide security of supply and will significantly de-risk the expansion of the business.

Terms of the partnership

·; G&S Oil Recycling Group LLC, part of the G&S Technologies Group, will acquire a stake in the Company through a series of staged payments initially priced at a 5x multiple of trailing 2012 EBITDA for Hydrodec's existing US operations, with an earn-out priced at a 6.5x multiple of 2013 EBITDA. The initial consideration for 25 per cent will be a cash payment of approximately US$1.7 million, with two further cash payments for 12.45 per cent and 12.45 per cent on completion of additional processing capacity. A final balancing payment based on 6.5x the amount by which 2013 EBITDA exceeds 2012 EBITDA will complete the total consideration which Hydrodec expects, subject to the performance of the business, will reflect a valuation at or close to the current Canton book value of US$14 million. Completion of the acquisition of the initial 25 per cent stake is expected on or around 30 April.

·; Hydrodec will licence its technology to the Company to manufacture and sell SUPERFINE™ transformer oil and SUPERFINE™ base oil in North America in return for a five per cent royalty on the revenues generated by this business. By way of illustration intra-group royalty revenue for 2012 on this basis was US$0.7 million. Given the outlook for 2013 Hydrodec anticipates a higher contribution from royalty going forward.

·; G&S will commit feedstock to meet existing requirements at Canton and as required to expand production capacity by up to a further six processing trains in North America. Hydrodec expects this will enable existing plant utilisation to increase significantly, compared with 72 per cent achieved by Canton in 2012. The Canton plant currently has four trains - the proposed expansion will increase total capacity in North America up to c. 65 million litres per annum by 2015 from 27 million litres per annum currently, a 140% increase.

·; Both parties will provide or procure the capital funding required to build out the additional trains in equal measure, irrespective of their ownership interests at the relevant time. The total cost of the additional capital investment is expected to be approximately US$15 million, subject to further detailed analysis. Hydrodec expects to fund its share from the proceeds of sale and its own funds. The location of the additional trains is to be determined between the parties following a detailed market review but will likely include a future expansion at Canton, and at least one new facility to widen geographic reach.

·; The parties shall agree a joint procurement strategy for feedstock; the Company will remain able to procure from other third parties. An arms' length pricing mechanism for feedstock procured from G&S has been agreed by reference to prevailing market pricing.

For further information please contact:

Notes to Editors:

Hydrodec

Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process initially targeted at the multi-billion US$ market for transformer oil used by the world's electricity industry. Spent oil is currently processed at two commercial plants with distinct competitive advantage delivered through very high recoveries (near 100%), producing 'as new' high quality oils at competitive cost and without environmentally harmful emissions. The process also completely eliminates PCBs, a toxic additive banned under international regulations.

Hydrodec's plants are located at Canton, Ohio, US and Young, New South Wales, Australia and its shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com 

G&S

G&S is a privately owned conglomerate based in New Jersey with a 50 year track record in the recovery and disposal of decommissioned transformers, treatment and handling of waste and/or contaminated transformer oils as well as associated asset recovery services. The group, which includes G&S Technologies and affiliation with TCI Alabama, Transformer Technologies (Oregon) and TCI of New York, serves the industrial and utility industries throughout the entire US offering its clients a wide range of services including: PCB sampling and testing, on-site dielectric fluid disposal and on-site, field dismantling for larger power transformers through its partnership with Northeast Transformer Services (Preble, NY). G&S also offers replacement and rebuilding services to meet its customers' specific needs.

US transformer oil market

The total US consumption of transformer oils is estimated at 400 million litres per annum (recently assessed to be growing at 6 per cent per annum), compared with Hydrodec's US SUPERFINETM sales volumes of 19 million litres in 2012. Hydrodec's existing US capacity is 27 million litres per annum and it is planned that this will increase to 65 million litres per annum under the strategic partnership representing a 15% share of annual US consumption.

Hydrodec estimates that 75 per cent of new transformer oil in the US is used to replace spent and/or contaminated transformer oil, suggesting a used oil market of c. 300 million litres per annum.

G&S handled approximately 26 million litres of waste transformer oil in 2012, of which approximately three million litres was procured for re-refining by Hydrodec.