KAPE.L Regulatory News (KAPE)

19 November 2019

Kape Technologies plc

("Kape," the "Group" or the "Company")

Proposed acquisition of Private Internet Access

Acquisition creates a truly global privacy company and significantly accelerates earnings growth

Kape (AIM: KAPE), the consumer security software business, announces the proposed acquisition of LTMI Holdings ("LTMI"), for a total consideration of c. US$95.51 million and an enterprise value of c. US$127.6 million (the "Acquisition").

LTMI is the holding company for Private Internet Access ("PIA"), a leading US-based digital privacy company with a strong position in data privacy services and over 1 million paying customers. As part of the Acquisition, Kape will also acquire LTMI's suite of digital privacy products which are at the forefront of the privacy technology space.

About PIA

PIA was established in 2009 and is a security software business, based in Denver, Colorado, with a focus on the provision of virtual private network ("VPN") solutions. Since its inception, PIA has grown to become a leading VPN service provider focused on the consumer market and employing approximately 65 employees amongst them 35% are in an R&D capacity. PIA has over 1 million paying subscribers globally, with 48% of them based in the US.

Financial and Operational Highlights of the Acquisition

The Acquisition, which is expected to be immediately earnings enhancing, represents a significant step-change in the Group's development, delivering substantial operational and financial benefits, namely:

·; Customer reach: doubling Kape's existing customer base, with the enlarged group servicing over 2 million paying subscribers globally;

·; Earnings growth: the enlarged group is expected to generate consolidated proforma 2020 revenues of between US$120-123 million and Adjusted EBITDA2 of between US$35-38 million;

·; Earnings accretion: c. 90% earnings accretion anticipated in the year ending 31 December 2020;

·; Cash generation: LTMI is a highly cash generative business, generating c. US$16.3 million of adjusted operational cash flow in 2018 with cash conversion of over 100% with expectations of ongoing strong cash generation;

·; Brand awareness: uniquely positions Kape as a truly global leader within the fast-growing digital privacy sector and a strong presence in North America; Kape will adopt the Private Internet name following the Acquisition;

·; Product extension: enhances Kape's product stack with a suite of privacy-based software solutions focused on browsing, encryption and connectivity;

·; Technology platform: provides the opportunity to leverage Kape's proprietary technology platform to deliver continued strong organic growth; and

·; Cost synergies: immediate cost synergies of between US$3.5-4.5 million on an annual basis and are expected to be achieved within 12 months following completion, primarily across general operational costs and infrastructure.

Transaction summary

Kape will acquire LTMI from its co-founders and shareholders Andrew Lee and Steve DeProspero, for a total consideration of c.US$95.5 million to be satisfied by a combination of c. US$52.9 million cash and issuance of c. 42,701,548 new Kape ordinary shares ("Consideration Shares") to be paid in three phases:

·; A payment upon closing of c. US$32.9 million in cash and 11,648,059 Consideration Shares ("Initial Consideration");

·; A payment a year after closing of US$5 million in cash and 23,290,117 Consideration Shares; and

·; A final payment two years after closing of US$15 million in cash and 7,763,372 Consideration Shares.

On completion, Kape will also repay LTMI's existing debt of approximately US$32.1 million, resulting in a total enterprise value for LTMI of approximately US$127.6 million.

Kape proposes to fund the cash element of the Initial Consideration through a US$40 million short-term debt facility from Unikmind Holdings Limited ("Unikmind"), Kape's largest shareholder, as well as provide an additional debt facility of US$20 million, which the Company does not expect to draw, to satisfy the deferred cash consideration, on similar terms (together the "Term Loan"). Further details of the Term Loan, which is a related party transaction, are set out below. The balance will be satisfied by Kape's own cash resources. The Term Loan is intended to facilitate timely completion of the transaction. Following completion, Kape expects to put in place a debt facility from commercial banks which will replace the Term Loan.

LTMI's management will join Kape with Ted Kim, LTMI's CEO, joining the Kape board as a non-executive director and, in an executive capacity, leading Kape's enlarged North America operations.

Strategic rationale

The Acquisition represents an acceleration in Kape's strategy to create a world-leader in digital privacy. It is anticipated that the Acquisition will bring a number of benefits to the Group, including:

·; Significantly earnings enhancing, with LTMI in the year ended 31 December 2018:

o servicing over 1 million paying subscribers

o generating revenues of US$47.42 million5 and cash of c. US$16.3 million5

o achieving adjusted EBITDA of US$14.69 million

o having net liabilities of US$(20.1) million5 as at 31 December 2018

·; Substantially increases the Group's recurring revenue base:

o PIA is focused solely on paid subscribers, offering monthly, annual and bi-annual subscriptions

·; Material annual cost synergies anticipated:

o Immediate annual cost synergies of US$3.5-4.5 million expected to be realised in the first 12 months following the acquisition

·; Broadening Kape's existing shareholder base:

o LTMI's co-founders and shareholders Andrew Lee and Steve DeProspero, in addition to a number of LTMI employees, will be issued with approximately 42,701,548 Consideration Shares, equivalent to c. 23.1% of Kape's anticipated enlarged share capital (assuming the issuance in full of all of the Consideration Shares and excluding treasury shares and shares held by the Kape EBT)

o Unikmind, Kape's largest shareholder, is to be diluted to a c. 55.9% holding post-completion (assuming the issuance in full of all the Consideration Shares and excluding treasury shares and shares held by the Kape EBT)

·; Combines PIA's strong brand equity and track-record of organic growth with Kape's user acquisition expertise and the potential for further improved profit margins

·; Adds additional privacy products at the forefront of the privacy technology space, which are3:

o Plus Ultra - a software that speeds up internet connections

o LibreBrowser - a completely private browser

o Private.sh - a private and encrypted search engine based on proprietary cryptography technology

Market drivers

·; The Acquisition will strengthen the Group's position within the fast-growing global digital privacy market:

o The privacy market is currently worth c. US$24 billion and expected to grow by 50% by 2022 at a CAGR of 15%4

o Regulation:

·; Customer and regulatory concern about how data is creating a climate for increased regulation as well as different regulation alignments in different countries

·; Consumers are reclaiming data ownership and having increased digital interactions make them more concerned than ever about data privacy and identity theft. As indicated in an increase of 18% in Google search queries for VPN in Q1 2019 year-on-year

o Data Breaches:

·; According to the Breach Level Index in the first half of 2018, more than 25 million records were compromised every day - which equates to 291 records every second8.

·; As more and more data is shared online the need to encrypt and protect personal data by the users themselves is increasing exponentially.

o Mobile Devices and IOT devices usage:

·; Research indicates that 48% of phishing attacks occur on mobile devices6. Using a trusted privacy solution like Kape's can prevent data breaches. Furthermore, mobile users are three times more likely to submit private information compared to desktop users7.

1 All US$ figures based on an assumed GBP/USD exchange rate of 1.281

2 Adjusted EBITDA is a non GAAP measure and a company specific measure which excludes other operating income and expenses which are considered to be one off and non-recurring in nature.

3 Kape will own a controlling 80% stake in Plus Ultra and a 25% in private.sh. These products will be fully managed by Kape

4 Source: Cybersecurity Market by Solution, Markets & Markets, September 2018, Start-Up Nation Central: Finder Insights Series The State of the Israeli Ecosystem in 2018, March 2019

5 Audited numbers for the year ended 31 December 2018

6 https://www.wandera.com/mobile-security/mobile-phishing-report-2018/

7 https://securityintelligence.com/mobile-users-3-times-more-vulnerable-to-phishing-attacks/

8 https://blog.gemalto.com/mobile/2019/02/11/top-6-trends-driving-trusted-digital-identities-in-2019/

Ido Erlichman, Chief Executive Officer of Kape, commented:

"This is a game changing moment in Kape's development and we are thrilled to announce the proposed acquisition of Private Internet Access, a pioneer in the provision of digital privacy. This transaction will be transformational for our business, enabling Kape to aggressively expand our footprint in North America, broaden our product offering, further strengthen our recurring revenue base and, gain access to an extremely rich pool of talent.

"This transaction makes our vision a reality by creating one of the most prominent privacy companies globally. In one acquisition, I believe we have positioned Kape to fast become one of the leading digital privacy service providers in the world, empowering consumers to manage their own data and digital security."

Ted Kim, Chief Executive Officer of LTMI, commented:

"We are excited to join forces with Kape, and this transaction is a truly monumental milestone in realising PIA's vision of creating a privacy company with a mission to improve our customers' digital privacy and security worldwide. Being part of a publicly listed company enables anyone that values digital privacy and security to be part of our future journey. I look forward to working with the Kape team to create one of the leading digital privacy players globally."

A further announcement providing an update on the Acquisition will be made in due course.

Enquiries:

About Kape

Kape is a leading 'privacy-first' digital security software provider to consumers. Through its range of privacy and security products, Kape focusses on protecting consumers and their personal data as they go about their daily digital lives.

To date, Kape has over 1 million paying subscribers, supported by a team of over 300 people across eight locations worldwide. Kape has a proven track record of revenue and EBITDA growth, underpinned by a strong business model which leverages our digital marketing expertise.

Through our subscription-based platform, Kape has fast established a highly scalable SaaS-based operating model, geared towards capitalising on the vast global consumer digital privacy market.

www.kape.com 

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FURTHER DETAILS REGARDING THE ACQUISTION

Structure of the Acquisition

The Acquisition is structured as a forward merger of LTMI into a merger subsidiary created by Kape, with the merger subsidiary remaining. The effect of the merger is that LTMI, as the holder of the PIA business, will become an indirect wholly-owned subsidiary of Kape. LTMI will be renamed Private Internet Access Inc. on or before the merger becomes effective.

Details regarding payment of consideration

The consideration is payable in three stages. On completion, Kape will pay approximately US$32.9 million in cash (subject to adjustment to account for the exact amount at Closing of certain debt and debt-like items of LTMI), issue 11,648,059 Consideration Shares and also repay LTMI's existing debt of approximately US$32.1 million. On the first anniversary of completion, Kape will pay US$5 million in cash (subject to adjustment to account for any variances at completion in LTMI deferred revenues against those estimated prior to completion) and issue 23,290,117 Consideration Shares (subject to the escrow and set-off arrangements described below). On the second anniversary of completion, Kape will pay US$15 million in cash and issue 7,763,372 Consideration Shares (subject to the escrow and set-off arrangements described below).

Andrew Lee and Steve DeProspero will each be entitled to be issued 19,247,723 Consideration Shares (subject to the escrow and set-off arrangements described below) representing approximately 10.4% of the enlarged issued share capital of Kape (assuming the issuance in full of all deferred Consideration Shares on the 2nd anniversary following completion and excluding treasury shares and shares held by the Kape EBT), of which 5,250,363 will be issued on completion, 10,498,020 will be issued on the first anniversary of completion and 3,499,340 will be issued on the second anniversary of completion. The balance of the Consideration Shares, being 4,206,102 in aggregate, are issuable on completion to 4 senior executives of LTMI who are also Vendors (the "Senior Executives"). All other Vendors will receive only cash.

The merger agreement contains certain customary representations and the Vendors have agreed to indemnify Kape for any breach of such representations and, in addition, have agreed to indemnify Kape in respect of certain other matters, subject to certain limits. The number of Consideration Shares issuable to the Founders and Senior Executives and the amount of cash consideration payable to the Vendors on the first and second anniversaries of completion may be reduced in order to satisfy indemnification claims against the Vendors which are agreed or determined before such anniversaries.

Lock-in arrangements applicable to Consideration Shares

The Founders' Consideration Shares will be subject to a graduated lock-in, whereby the Consideration Shares to be issued on completion will be subject to a 12 month lock-in and the Consideration Shares issuable on the first anniversary of completion will be subject to a lock-in which is released as to 25% of such Consideration Shares each quarter thereafter. Following the expiry of their respective lock-in periods, the Consideration Shares to be issued to the Founders on completion and on the first anniversary of completion will be subject to a 12-month orderly market period. The Consideration Shares issuable to the Founders on the second anniversary of completion will not be subject to a lock-in period but will be subject to a 12-month orderly market period from the time of their issue.

All of the lock-in arrangements will be subject to customary exclusions. In addition, if Unikmind or any of its concert parties disposes of the beneficial interest in any Kape ordinary shares during the lock-in period to a person other than another concert party of Unikmind, the same proportion of the Founders' then locked-in Consideration Shares (ignoring any shares held in escrow) will be released from the lock-in but will remain subject to the orderly market arrangements for 12 months after such release.

Founders' future involvement in the enlarged group

Andrew Lee has agreed to provide consulting services to Kape for a period of three years following completion through a separate services company. Steve DeProspero is not involved in the day-to-day operations of PIA and therefore will not have an ongoing role in the business following completion. Several of the Senior Executives have also agreed to ongoing employment agreements with PIA to ensure continuity of management.

Ted Kim, LTMI's CEO, will, on completion, join the board of Kape as a non-executive director and as a representative of the Founders. Further details of the appointment, including any disclosures under Schedule 2(g) of the AIM Rules for Companies are set out below.

Financing the Acquisition

Kape proposes to fund the cash consideration and the repayment of LTMI's existing debt through a combination of its own cash resources and drawing down under the Term Loan of up to US$60 million.

If Kape does not within 45 days of signing the merger agreement receive cash proceeds from the Term Loan or another source sufficient to allow it to pay the cash consideration due on completion, the Founders may terminate the merger agreement and require Kape to pay a reverse termination fee of US$4,950,000.

Stakeholder Agreements

Both the Founders and the Senior Executives will enter into stakeholder agreements with Kape at completion to provide for individual representations and certain restrictive covenants in favour of Kape. The Founder stakeholder agreements will also contain certain voting agreement provisions and, in the case of Andrew Lee only, a provision permitting Andrew Lee to appoint one Non-Executive Director to the Board of Kape (which right will continue for so long as Mr Lee holds at least 9,559,731 ordinary shares).

Unikmind New Term Loan Facility - Related party transaction

The Company has entered into a binding commitment letter with Unikmind under which Unikmind has committed, subject to certain limited conditions, to provide to a wholly owned subsidiary of Kape and the holding company of LTMI (the "Borrower") a term loan of up to US$60 million in aggregate, to be made available in 3 tranches of: US$40 million on completion, US$5 million on the first anniversary of completion and US$15 million on the second anniversary of completion (the "Term Loan").

The Term Loan will have a fixed interest rate of 5% above Libor. Each tranche of the Term Loan is repayable on the earlier of a third-party refinancing of the Term Loan and 6 months after its utilisation unless such tranche's maturity is extended by a further 6 months with the consent of Unikmind. The Term Loan can be repaid early in whole or part by the Borrower free of any penalty. The Term Loan will also include a commitment fee on undrawn amounts only from the moment they become available in accordance to the payment schedule. and certain other customary obligations on the Borrower in relation to the lender's costs and expenses and in relation to taxes.

Borrowings under the Term Loan will be guaranteed by Kape and secured by a share charge granted by Kape in respect of its shares in the Borrower.

Kape intends to re-finance the Term Loan with third party facilities as soon as practicable.

The directors of Kape consider, having consulted with the Company's nominated adviser, that the terms of the Term Loan and related security are fair and reasonable insofar as the Company's shareholders are concerned.

Completion of the Acquisition

It is anticipated that completion of the Acquisition will occur early 2020. Completion of the Acquisition is conditional upon, inter alia, certain merger control consents having been received or relevant waiting periods expired, the representations in the merger agreement remaining true and accurate in all material respects, no event that would have a material adverse effect having occurred, and certain other conditions which are customary for an acquisition of this nature.

Following completion of the Acquisition and the full issuance of the Consideration Shares, assuming no other new Kape ordinary shares are issued and Unikmind do not acquire or dispose of any interests in the Company during the period, it is expected that Unikmind's interest in the entire issued share capital of the Company will fall to approximately 55.9 per cent.

Appointment of Theodore Kim to the board of Kape

Mr Kim, 52, is CEO of LTMI and prior to that was the CEO of MNET America, and before that Head of America at the Korean conglomerate CJ E&M.

Mr Kim has entered into a letter of appointment to the board of Kape.

The directorships / partnerships held by Ted Kim in the previous five years are:

There are no other disclosures required relating to Mr Kim's appointment in accordance with Schedule 2(g) of the AIM Rules.

Presentation of Information

Forward-looking information

This Announcement may contain and the Company may make verbal statements containing "forward-looking statements" with respect to certain of the Company's plans and its current goals and expectations relating to its future financial condition, performance, strategic initiatives, objectives and results. Forward-looking statements sometimes use words such as "aim", "anticipate", "target", "expect", "estimate", "intend", "plan", "goal", "believe", "seek", "may", "could", "outlook" or other words of similar meaning. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the control of the Company, including amongst other things, United Kingdom domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of governmental and regulatory authorities, the effect of competition, inflation, deflation, the timing effect and other uncertainties of future acquisitions or combinations within relevant industries, the effect of tax and other legislation and other regulations in the jurisdictions in which the Company and its respective affiliates operate, the effect of volatility in the equity, capital and credit markets on the Company's profitability and ability to access capital and credit, a decline in the Company's credit ratings; the effect of operational risks; and the loss of key personnel. As a result, the actual future financial condition, performance and results of the Company may differ materially from the plans, goals and expectations set forth in any forward-looking statements. Any forward-looking statements made in this Announcement by or on behalf of the Company speak only as of the date they are made. Except as required by applicable law or regulation, the Company expressly disclaims any obligation or undertaking to publish any updates or revisions to any forward-looking statements contained in this Announcement to reflect any changes in the Company's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

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