Proposed Disposal of Vigilant for £6.5 million

Croma Security Solutions Group PLC

06 June 2023

 

Croma Security Solutions Group Plc

("CSSG", "Croma", "the "Company" or the "Group")

Proposed Disposal of Vigilant for £6.5 million

Croma Security Solutions Group plc (AIM:CSSG) is pleased to announce it has entered into a conditional agreement to sell the entire issued share capital of its subsidiary Vigilant Security (Scotland) Limited ("Vigilant") to M&W Security Limited for a total consideration of £6.5 million plus inter-company balances of £1.07 million repayable to the Company.

Highlights

·      Sale of Vigilant follows the Company's strategy to focus on its higher margin Croma Locksmiths and Croma Security Systems businesses.

·      Proceeds from the sale will be used to support the successful nationwide roll-out of the Company's retail chain of modern security centres.

·      Vigilant is being acquired by two previous Directors of the Company, Sebastian Morley and Paul Williamson who stepped down from the Board in December 2022 to prepare a bid.

·      The Consideration to be received for the Disposal of £6.5 million represents approximately 91.8 per cent. of the Company's market capitalisation of £7.1 million as at the close of business on 2 June 2023. For the year ended 30 June 2022 Vigilant generated approximately 42 per cent. of the Croma Group's EBITDA and for the six months ended 31 December 2022 Vigilant generated approximately 29 per cent. of the Croma Group's EBITDA.

·      The Disposal is subject to shareholder approval and is expected to be completed on 30 June 2023.

Roberto Fiorentino, CEO of CSSG, said: 'We are delighted to be announcing the proposed sale of Vigilant which is a good business but no longer fits with the future of our Group. The funds from the sale will accelerate our ability to drive our Locks and Systems business through the roll out of our modern Security Centres. Separately, the Group has continued to trade well and we have had a strong second half to the year which ends in June 2023 and we expect to report overall trading comfortably ahead of last year. We look forward to completing the sale and demonstrating to existing and new shareholders the true value of our core businesses."

Background

On 6 December 2022, the Company announced its decision to sell Vigilant in order to re-focus the Group's future strategy around the development of Croma Locksmiths Limited and Croma Security Systems Limited to take advantage of higher margins, good cash generation and opportunities for future growth. Vigilant's management team, led by its Operations Director Paul Williamson and supported by its Managing Director, Sebastian Morley, indicated their desire to acquire Vigilant from the Group and stepped down from their respective Board roles in order to prepare a bid.

Overview

The Consideration will be satisfied as to (i) £1,073,314 payable in cash on Completion; (ii) £4,126,686  by the issue of the Loan Notes; and (iii) either (at the Buyer's sole discretion) the payment of an additional £1,300,000 in cash on Completion or the issue of the Redeemable Share on Completion. In addition, inter-company balances of £1,067,913 owed by Vigilant to the Company will be settled on Completion. Therefore on Completion the Company will receive in aggregate cash of either £2,141,227 if the Redeemable Share is issued or £3,441,227 if the Redeemable Share is not issued.

M&W Security Limited, is owned and controlled by Sebastian Morley and Paul Williamson, both former directors of the Company who stepped down from the Board at the annual general meeting held on 6 December 2022 to pursue a buy-out of Vigilant from the Company. In order to part fund the cash consideration, Messrs Morley and Williamson wish to sell all of the shares they hold in the Company, being in aggregate 798,422 Ordinary Shares. The Company has agreed to buy-back these shares at a price of 47.5 pence pursuant to the Buy-Back Agreement.

In view of the size of Vigilant relative to the existing size of the Croma Group, it is a requirement of the AIM Rules that the Disposal be approved by Shareholders at a general meeting of the Company. The Disposal is therefore conditional on, inter alia, shareholder approval at the General Meeting.

The Buy-Back represents a purchase of own shares by the Company in an off-market transaction pursuant to Section 694 of the Act. As a result, the Act requires that such a transaction be authorised by a special resolution and the Act also provides that the parties from which the shares are proposed to be purchased must not exercise the voting rights attached to those shares on that resolution. The Buy-Back is therefore conditional on shareholder approval at the General Meeting.

As the Disposal and Buy-Back are transactions with former directors of the Company, they represent related party transactions in accordance with AIM Rule 13. The Directors, all of whom are independent, consider that, having consulted the Company's nominated adviser, that the terms of the Disposal and the Buy-Back are fair and reasonable in so far as Shareholders are concerned.

The Board is also taking this opportunity to ask Shareholders to approve the adoption by the Company of new articles of association primarily for the purposes of updating the Company's existing articles of association primarily to take account of changes in English company law brought about by the Act . The New Articles will be made available to view on the Company's website at www.cssgplc.com/investors.

Notice of General Meeting and posting of Circular

A circular, which contains the notice of General Meeting, in respect of the Disposal is expected to be posted to Shareholders later today and will also be available on the Company's website www.cssgplc.com/investors/. 

The General Meeting will take place at the offices of the Company, Unit 7 & 8 Fulcrum 4, Solent Way, Whiteley, Fareham, Hampshire PO15 7FT at 9.00 a.m. on 30 June 2023.

Capitalised terms have the meaning set out in Appendix I to this Announcement.

For further information visit www.cssgroupplc.com or contact:

Croma Security Solutions Group Plc                                                Tel: [phone]

Roberto Fiorentino, CEO

Teo Andreeva, CFO

WH Ireland Limited                                                                              Tel: [phone]

(Nominated Adviser and Broker)

Mike Coe

Sarah Mather

Novella                                                                                                 Tel: [phone]

Tim Robertson

Claire de Groot

Safia Colebrook

This announcement contains inside information for the purposes of Article 7 of the UK version of Regulation (EU) No 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018, as amended ("MAR"). Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

1.         Information on Vigilant

Vigilant provides manned guarding and reception services for property assets and individuals and employs over 900 security personnel throughout the UK.

For the year ended 30 June 2022, Vigilant generated sales of £29.3 million (2021: £27.4 million), and operating profit of £0.7 million (2021: £1.1 million), EBITDA 0.8 million (2021: 1.3 million). As at 30 June 2022 Vigilant had net assets of approximately £4 million, including Goodwill.

For the six months ended 31 December 2022 ("H1 2022") Vigilant recorded revenues up 7 per cent. to £15.92 million (H1 2021: £14.86 million). However, profit before tax reduced to £0.13 million (H1 2021: £0.36 million) as it was held back by a number of factors including non-recurring exceptional costs, up-front investment in staff costs ahead of the start of a substantial contract (that commenced successfully, as planned, in January 2023) as well as general wage inflation which has impacted staff retention and the ability to recruit.  The increased wage costs are beginning to be passed on in adjusted contract rates and will be reflected in all new contracts. EBITDA for H1 2022 was £0.28 million.

2.         Background and reasons for recommending the Disposal

On 6 December 2022, the Company announced that it had decided to divest the Croma Group's manned guarding business, Vigilant.

The Directors believe that the sale of Vigilant is in the best interests of Shareholders for the following reasons:

·       the strategy of combining Locks and Systems with Vigilant has not generated the opportunities for cross marketing and cross sales that had been expected;

·       it will enable the Continuing Group to focus its future strategy around the development of Locks and Systems where margins are high and cash generation remains strong and where the Board believes there are good opportunities for profitable growth; and

·       the cash to be received pursuant to the Disposal will enable the Company to pursue acquisition opportunities for both Croma Locks and Croma Systems.

The Directors consider that the Consideration to be received for the Disposal from M&W Security Limited, fairly reflects the value of Vigilant. In reaching this view, the Directors have taken into account, factors including:

·      their expectations of Vigilant's trading performance for 30 June 2023 and for 30 June 2024; and

·      the fact that the market has been aware of the Company's intention to dispose of Vigilant since 6 December 2022 and no other offers of equivalent value have been received from third parties.

The Consideration to be received for the Disposal of £6.5 million represents approximately 91.8 per cent. of the Company's market capitalisation of £7.1 million as at the close of business on 2 June 2023, being the latest practical date prior to this announcement. For the year ended 30 June 2022 Vigilant generated approximately 42 per cent. of the Croma Group's EBITDA and for the six months ended 31 December 2022 Vigilant generated approximately 29 per cent. of the Croma Group's EBITDA.

3.         Principal terms of the Disposal

Under the terms of the Disposal Agreement, the Company has agreed to sell the entire issued share capital of Vigilant to M&W Security Limited for an aggregate consideration of £6.5 million. In addition, M&W Security Limited has agreed to procure that Vigilant repays the debt of £1,067,913 which Vigilant owes to the Company.

The Consideration will be satisfied as to (i) £1,073,314 payable in cash on Completion; (ii)  £4,126,686 by the issue of the Loan Notes; and (iii) either (at the Buyer's sole discretion) the payment of an additional £1,300,000 in cash on Completion or the issue of the Redeemable Share on Completion.

Warranties have only been given by the Company to the Buyer in respect of good title to the shares of Vigilant, subject to certain limitations on liability.

Completion of the Disposal is conditional upon of Resolutions to be proposed at the General Meeting, and the Buy-Back being completed in accordance with its terms.

4.         Terms of the Loan Notes

On Completion of the Disposal, and as part of the Consideration, the Company shall receive the Loan Notes pursuant to a loan note instrument executed by the Buyer, the principal terms of which are as follows:

·      the Loan Notes shall attract annual interest at a rate of 4.5 per cent. per annum;

·      the Loan Notes (being both capital amounts and accrued interest), shall be repaid as follows:

a)         the first payment shall be nine months following Completion;

b)         thereafter payments shall be made on each quarter date for a further nine payments;

·      the Loan Notes shall be secured over the assets of the Buyer, Vigilant and Vigilant's wholly-owned subsidiary, Croma Proception Limited (registered number: SC695543);

·      if the Buyer defaults on the payment of any principal or interest payable under the Loan Notes default interest will accrue at a rate of 4 per cent. above the base interest rate of 4.5 percent. Such interest would accrue from day to day and be compounded quarterly;

·      in the event that the Buyer defaults on any one payment due to the Company under the Loan Notes the Company shall have step-in rights to enable the Company to assume control of Vigilant at board and shareholder level.

5.         Terms of the Redeemable Share

On Completion of the Disposal, and as part of the Consideration, at the Buyer's sole discretion, the Company will either receive an additional payment of £1,300,000 in cash or the issue of the Redeemable Share on Completion. If the Redeemable Share is issued by the Buyer, then principal share rights will be as follows:

·      the date for the redemption of the Redeemable Share shall be the earlier of: (i) 1 July 2024; and (ii) any debt or equity raise by the Buyer. Upon such an event, the Redeemable Share shall immediately become due for redemption and the Buyer shall pay the Company £1,300,000 in cash;

·      after 1 July 2024, if the Redeemable Share has not yet been redeemed in full, a fixed preferential dividend shall accrue at a rate of 4.5 per cent.;

·      for so long as the Company holds the Redeemable Share and/or any sums remain outstanding under the Loan Notes, the Company shall have the right to appoint a director to the board of the Buyer (the "A Director") and its group companies, such A Director cannot be removed by the Buyer until such date as both the redemption of the Redeemable Share has occurred and the Loan Note has been repaid in full;

·      In the event that the Redeemable Share is not redeemed in full on the redemption date or any of the default events set out in condition 4.2 of the Loan Note have occurred the A Director may serve notice on the Buyer which will cause the Company to be able to take control at the board and shareholder level.

6.         Terms of the Buy-Back Agreement

Prior to Completion, the Company shall enter into a Buy-Back Agreement with Sebastian Morley and Paul Williamson to acquire in aggregate 798,422 Ordinary Shares held by Sebastian Morley and Paul Williamson at a price of 47.5 pence per Buy-Back Share, being the five day average mid-market price, to 2 June 2023, being the latest practical date prior to this announcement. The consideration payable under the Buy-Back Agreement will be paid in cash out of the Company's distributable reserves at Completion.  

The Buy-Back Agreement will be made available on the Company's website at www.cssgplc.com/investors.

7.         Effect of the Disposal and use of proceeds

Once the Buy-Back Shares have been purchased pursuant to the Buy-Back Agreement, the Company intends to hold the Buy-Back Shares in treasury.

Immediately following Completion, the Company will have 15,898,656 Ordinary Shares in issue of which 1,794,936 Ordinary Shares will be held in treasury. Therefore the number of voting shares will be 14,103,720 immediately following Completion.

If the Disposal and the Buy-Back are approved by Shareholders and completes in accordance with their terms, on Completion the Company will receive cash pursuant to the Disposal Agreement of either £2,141,227 if the Redeemable Share is issued or £3,441,227 if the Redeemable Share is not issued. The Directors estimate that following receipt of the cash pursuant to the Disposal Agreement and following the Buy-Back of £0.38 million, the Company will have cash balances of approximately £2.06 million or £3.36 million if the Redeemable Share is not issued, after paying certain expenses excluding any taxes relating to the Disposal (stamp duty taxes in respect of the Disposal shall be payable by the Buyer).

The Company intends to deploy these funds to advance the Company's strategy, as set out in paragraph 9 below.

8.         Current trading and prospects

On 14 March 2023, the Company announced its interim results to 31 December 2022. In those results, Locks and Systems were reported as the continuing group and Vigilant as an asset held for resale.

Trading across the Croma Group has been stronger so far in the second half of the year ending 30 June 2023 than it was in the first half of the year, being the six months ending 31 December 2022, and the Croma Group's overall trading performance is expected to be comfortably ahead of last year. Reported results will however be impacted by a number of one-off exceptional costs incurred in relation to Vigilant and the Disposal.

9.   Strategy and prospects

Following the Disposal the Continuing Group's business will comprise Croma Locks and Croma Systems where margins are high (relative to Vigilant) and cash generation remains strong and where the Board believes there are good opportunities for profitable growth.

The Board remains focused on creating a national chain of modern security centres and believes there are opportunities to expand further. The strategy is to be a leading British security brand and to that end for the Continuing Group will carefully extend its  footprint of security centres across the country.  The Continuing Group currently operates through 14 security centres and the objective is to acquire between three and five centres each year. The market can be very generally split into locksmith and security systems providers. Croma's strategy is to combine the traditional offerings of each under one roof, providing comprehensive security solutions in a broader security centre. To date these centres have started as locksmiths but could also be systems providers and have been relatively small acquisitions. The acquisition of large systems and solution providers will also be considered where they can complement and extend the Continuing Group's existing offerings.

To complement and improve its range of services, the Continuing Group will also consider engaging in strategic partnerships with providers of innovative security solutions, such as the partnership it currently has with its Scandinavian partner, iLOQ.

The cash proceeds of the Disposal will provide the Continuing Group with additional financial stability and cash resources to accelerate our development in line with the strategy for the benefit of our shareholders.

10.        New Articles

The Company's Current Articles were adopted in May 2000 and primarily to take into account the changes in English company law brought about by the Act, the Board are proposing the adoption of New Articles . The proposed New Articles will be made available on the Company's website at www.cssgplc.com/investors.

11.        Recommendation

The Directors, having consulted with the Company's nominated adviser, WH Ireland Limited, consider the terms of the Disposal and Buy-Back are fair and reasonable insofar as Shareholders are concerned and that the Disposal and Buy-Back are in the best interests of Shareholders as a whole. Accordingly, the Directors unanimously recommend Shareholders to vote in favour of the Resolutions to be proposed at the General Meeting, as they intend so to do in respect of their shareholdings amounting to 3,902,175 Ordinary shares representing 26.19 per cent. of the Company's total voting rights..

Appendix I

DEFINITIONS

The following definitions apply throughout this announcement, unless the context requires otherwise or unless it is otherwise specifically provided:

"Act"	the Companies Act 2006 (as amended)
"AIM''	the market of that name operated by the London Stock Exchange
"AIM Rules"	the AIM Rules for Companies published by the London Stock Exchange from time to time
"Announcement"	the announcement of the Disposal made by the Company on 6 June 2023
"Buy-Back"	the buy-back of the Buy-Back Shares from Sebastian Morley and Paul Williamson at a price of 47.5 pence which represents an off-market transaction pursuant to Section 694 of the Act.
"Buy-Back Agreement"	the agreement to be entered into on or around the date of the General meeting  between the Company, Sebastian Morley and Paul Williamson
"Buy-Back Shares"	798,422 Ordinary Shares  to be purchased by the Company pursuant to the Buy-Back
"Buyer"	M&W Security Limited a limited company number incorporated in Scotland with registered number SC753198 and with its registered office at 1st Floor Left, 161 Brooms Road, Dumfries, United Kingdom, DG1 2SH with  Sebastian Jake Finch Morley and  Paul Williamson as directors
"Company" or Croma"	Croma Security Solutions Group plc a public limited company incorporated in England and Wales with registered number 03184978 and with its registered office at Unit 7 & 8, Fulcrum 4 Solent Way, Whiteley, Fareham, England, PO15 7FT
"Completion"	completion of the Disposal on the terms set out in the Disposal Agreement
"Consideration"	the consideration payable by the Buyer to the Company for the Disposal amounting in total to £6.5 million comprised of the Initial Consideration and the Loan Note Consideration
"Continuing Group"	the Company together with its subsidiaries after completion of the proposed Buyback and Disposal, being Croma Locks and Croma Systems
"Croma Group"	the Company together with its subsidiaries which at the date of this announcement are Vigilant and Croma Locks and Croma Systems
"Croma Locks"	Croma Locksmiths and Security Solutions Limited, a limited company incorporated in England and Wales with registered number 03909669 and with its registered office at Unit 7 & 8, Fulcrum 4 Solent Way, Whiteley, Fareham, England, PO15 7FT
"Croma Systems"	CSS Total Security Limited, a limited company incorporated in England and Wales with registered number 02432869 and with its registered office at Unit 7 & 8, Fulcrum 4 Solent Way, Whiteley, Fareham, England, PO15 7FT
"Current Articles"	the articles of association of the Company at the date of this announcement
"Directors" or "Board"	the directors of the Company or any duly authorised committee thereof
"Disposal"	the proposed sale of the entire issued share capital of Vigilant (including Vigilant's wholly-owned subsidiary, Croma Proception Limited (registered number: SC695543) in accordance with the terms of the Disposal Agreement
"Disposal Agreement"	the agreement dated 5 June 2023 made between the Company and M&W Security Limited
"EBITDA"	Earnings Before Interest Tax and Depreciation
"Existing Share Capital"	15,898,656 Ordinary Shares, of which 996,514 Ordinary Shares are held in treasury
"Form of Proxy"	the form of proxy for use in connection with the General Meeting
"General Meeting"	the general meeting of the Company convened for 9.00 a.m. on 30 June 2023
"Initial Consideration"	£1,073,314 in cash on Completion and (at the sole discretion of the Buyer) the payment of a further £1,300,000 in cash on Completion or the issue of the Redeemable Share
"Loan Note Consideration"	the balance of the Consideration, being the Loan Notes
"Loan Notes"	consideration loan notes of £4,126,686 issued in the Buyer
"Locks and Systems"	Croma Locks and Croma Systems
"M&W Security Limited"	M&W Security Limited, a limited company registered in Scotland (No. SC753198) with its registered office at 1st Floor Left, 161 Brooms Road, Dumfries, United Kingdom, DG1 2SH
"New Articles"	the proposed new articles of association of the Company, which will be proposed for adoption by the Company at the General Meeting, in replacement of the Current Articles
"Notice"	the notice of the General Meeting of Shareholders
"Ordinary Shares"	ordinary shares of 5 pence each in the capital of the Company
"Redeemable Share"	£0.01 redeemable consideration A ordinary share issued in the capital of the Buyer, as further described in paragraph 6
"Resolutions"	the resolutions to be proposed to the Company's members at the General Meeting
"Shareholders"	the holders of Ordinary Shares
"Vigilant"	Vigilant Security (Scotland) Limited, a limited company number incorporated in Scotland with registered number SC212151 and with its registered office at 1st Floor Left, 161 Brooms Road, Dumfries, Scotland, DG1 2SH
"WH Ireland"	WH Ireland Limited, nominated adviser and sole broker to the Company
"£", "pounds sterling", "pence" or "p"	are references to the lawful currency of the United Kingdom

 

END