Proposed sale of assets of av

RNS Number : 6309Y

Gas Turbine Efficiency PLC

29 December 2010

 



29 December, 2010

Gas Turbine Efficiency PLC

Proposed sale of assets of the aviation business

Update on current trading and strategy

Transaction highlights

·      Asset Purchase Agreement signed with Pratt & Whitney covering sale of substantially all of GTE's technology and intellectual property for non-core aviation engine wash services business

·      Subject to shareholder approval, GTE will receive total consideration of US$17.1 million, with US$14.8 million payable on Completion and the US$2.3 million balance paid one half 12 months after Completion and the remainder 18 months after Completion, provided there has been no material breach of the Asset Purchase Agreement by GTE

·      Net sales of the aviation engine wash services business for financial year to 31 December 2010 expected to be approximately US$5.7 million (including royalty payment of US$3.0 million) with book value of assets of US$6.5 million

Current trading

·      Consolidated sales for nine months to 30 September 2010 were US$25.0 million, with a net loss of US$3.2 million, primarily due to exceptional costs as previously disclosed in the 30 June 2010 financial results

·      Full year sales expected to be in region of US$40.0 million (2009: US$37.1 million), due to an increase in sales in GTE's Energy Services segment, primarily Turbine Services and sales of Combustion parts being partly offset by a decline in sales of Auxiliaries (reflecting continued spending constraints among customers). Backlog in the Industrial Business Unit for 2011 approximately $9.0 million which is approximately 30% higher than the same period in 2010

Strategy update

·      Following the sale of the assets of the aviation business, GTE will continue to focus on investments and resources for the development and commercialisation of performance enhancing solutions for gas turbines in the power generation and oil & gas sectors

·      GTE's cost structure will be re-focused on sustainable profitable growth of these core product lines; an extensive cost reduction programme is underway to lower the cost base and eventually generate free cash flow

·      GTE will also continue to build its aftermarket service capability in the repairs and combustion tuning areas, where it has leveraged its technical depth - resulting in two major longer term service agreements with leading power generation companies

·      The outage service team which joined GTE in mid-2009 will leave GTE and return to its previous employer, where the core business focus is on-site labour/outage services as opposed to technology solutions at GTE. In 2010, this team generated approximately US$6.3 million in revenue and US$1.5 million in gross margin. GTE will continue to evaluate the most appropriate mix of aftermarket services and alliances in 2011, consistent with its focus on core growth

·      Effective 4 February 2011, Thomas Wagner, GTE's Chief Technology Officer will be retiring and will be offered the role as technology advisor to GTE's Board of Directors. We would like to thank Tom for his past contributions to the GTE team

·      GTE continues to explore options for new long term investment from existing or appropriate strategic investors, or through strategic partnerships

A circular will be posted to Shareholders on 31 December 2010 setting out the background to the transaction and the reasons why the Directors consider the transaction to be in the best interests of the Company and its Shareholders as a whole, and why they are unanimously recommending that Shareholders vote in favour of the resolutions to be proposed at that General Meeting of the Company, to be held on 17 January 2011. 

Included with the circular will be the Notice of General Meeting and a proxy form for use at the General Meeting. A copy of the circular will be available on the Company's website www.gtefficiency.com when published.

John Grant, Executive Chairman of GTE, commented:

"The sale of the aviation assets is a significant milestone towards a sustainable future for GTE. Having decided that our aviation business was no longer core to our strategy for growth, the sales of its assets, for a fair price, will help the Group focus on its primary business in providing performance enhancing solutions for gas turbines in the power generation and oil & gas sectors.  We are continuing to explore strategic options for the company and will update shareholders as appropriate."

For further information please contact:

Gas Turbine Efficiency plc

John Grant, Executive Chairman            Tel: [phone]

Matrix Corporate Capital LLP

Stephen Mischler                                  Tel: [phone]

Financial Dynamics

Jon Simmons, Nina Delangle                 Tel: [phone]

FURTHER INFORMATION ON THE SALE

The following will be included, without material adjustment, in the circular to be sent to shareholders on 31 December 2010.

INTRODUCTION

The Company has entered into the Asset Purchase Agreement with P&W in respect of the conditional sale of certain assets of its aviation business. Completion is conditional, inter alia, on the approval of the Shareholders being given in General Meeting pursuant to Rule 15 of the AIM Rules.

BACKGROUND TO AND REASONS FOR THE ASSET SALE

GTE announced in September this year that it had entered into discussions with a third party to sell substantially all of the assets of its aviation business. After reviewing the options open to it, and following discussions with its largest shareholders, the Board decided that the Asset Sale was in the best interests of its stakeholders.

P&W currently enjoys exclusive use of GTE's proprietary technology for the manufacturing of engine wash systems to enhance performance of combustion turbine engines for aviation purposes and markets a closed loop engine wash service programme under the brand name "Pratt & Whitney EcoPower".  Under the terms of the BCA, P&W has the exclusive right to sell and market engine wash services to airlines in return for the payment to GTE of an annual royalty fee.  The Assets proposed to be sold to P&W are substantially all of GTE's technology and intellectual property for the manufacturing of those engine wash systems, which will enable P&W, independently of GTE, to manufacture and sell engine wash systems.  Accordingly the BCA will terminate on Completion and P&W will make a payment to GTE of US$2.1m on 3 January 2011,  in respect of 2010 fees due under the BCA.    

The Board views the aviation business as non-core to the strategic growth of GTE, which will focus on the design, manufacture and supply of proprietary cleantech energy-saving and performance-enhancing solutions for combustion turbine engines used in power generation and oil and gas industries.  Net sales of the aviation business of GTE in the financial year ended 31 December 2009 were US$5.5m with a gross profit of US$3.5m.  The Company expects that net sales for the financial year ending 31 December 2010 will be approximately US$5.7m and gross profits approximately US$2.9m. Total revenues from the aviation sector of the business are expected to represent approximately 14% of GTE's consolidated revenues for the year ending 31 December 2010. 

The book value of the Assets to be sold to P&W is approximately US$6.5m and the total consideration being paid for the Assets is US$16.7m plus approximately US$0.4m for additional services post Completion.  Accordingly, the Board is of the view that the Asset Sale is in the best interests of the Company. 

PRINCIPAL TERMS OF THE BUSINESS SALE

Purchase Price

Subject to shareholder approval, GTE will receive total consideration of US$17.1m, with US$14.8m payable on Completion and the US$2.3 million balance paid one half  12 months after Completion and the remainder 18 months after Completion, provided there has been no material breach of the Asset Purchase Agreement by GTE.

Representations, warranties and indemnities                                 

The Asset Purchase Agreement contains representations and warranties from the Sellers to P&W in relation to, inter alia, the Assets, taxes and intellectual property.  The Sellers are also providing indemnities to P&W, inter alia, for any breach of the representations and warranties, breach of covenants or any other agreements of the Sellers contained in the Asset Purchase Agreement.  The Asset Purchase Agreement provides for certain limitations on the Sellers' liability to indemnify P&W.     

Under the terms of the Asset Purchase Agreement, GTE is guaranteeing the performance of the Sellers' obligations.   Accordingly, GTE is purchasing warranty and indemnity liability insurance to provide protection against potential claims under the Asset Purchase Agreement.

Intellectual Property

The Assets include certain intellectual property rights, such rights: (i) are used to wash combustion turbine engines for aviation purposes (the "Aviation IP"); and (ii) are used to wash combustion turbine engines for aviation purposes and may also be used to wash combustion turbine engines used in the generation of electricity and compression of oil and gas in the oil and gas industries and in other industries (the "Dual Use IP"). 

Under the terms of the Asset Purchase Agreement, P&W will acquire the Aviation IP and the Dual Use IP.  Under the terms of the Asset Sale, GTE will receive a license permitting it to use the Dual Use IP for uses outside of aviation, subject to the Licence Agreement.  Pursuant to the License Agreement, P&W will grant GTE an exclusive licence to use the Dual Use IP in the generation of electricity and compression of oil and gas in the oil and gas industry and a non-exclusive licence to use the Dual Use IP outside the areas of aviation, generation of electricity and compression of oil and gas in the oil and gas industry. 

Restrictions on GTE

Under the terms of the Asset Purchase Agreement, GTE will be subject to certain restrictive covenants for a period of 7 years from the date of Completion, which will, inter alia, prevent it: (i) from competing with P&W anywhere in the world in respect of the business that is the subject of the Asset Sale; (ii) soliciting employees of P&W and its affiliates (including employees of the Sellers prior to Completion); or (iii) soliciting customers, suppliers or business relations of Sellers at anytime in the 7 years prior to the date of Completion, in respect of any competing business.

Under the Asset Purchase Agreement, Steven Zwolinski (Chief Executive Officer) and Thomas Wagner (Chief Technology Officer) will also be subject to similar restrictions as GTE for a period of 1 year from the date of Completion through separate agreements they will execute with P&W.  GTE will procure that these restrictions are observed by Mr Zwolinski and Mr Wagner and in the event of a breach under the terms of the Asset Purchase Agreement or their individual agreements the Sellers will be jointly and severally liable.  

Conditionality

Completion is conditional upon, inter alia, the approval of Shareholders at a General Meeting and the written consent of holders of the Loan Notes.  P&W also has a termination right under the Asset Purchase Agreement for certain events including a material breach of the Asset Purchase Agreement by the Sellers.

USE OF PROCEEDS, CURRENT TRADING, STRATEGY AND PROSPECTS

Use of proceeds

Under the terms of the Loan Notes GTE is required to apply the proceeds from the Asset Sale in repayment of the Loan Notes.  GTE, however, is in discussions with Loan Notes Holders about retaining the proceeds from the sale of the Assets.

The Company expects to record a gross pre-tax gain on the sale of the Assets of US$7.9m of which US$2.3m will be deferred; this deferral will be paid one half 12 months and the remainder 18 months after Completion, provided there has been no material breach of the Asset Purchase Agreement by GTE.

Current trading, strategy and prospects

Sales for the first nine months of 2010 were US$25.0m including aviation revenues of US$3.9m.  Sales for the full year are expected to be in the region of US$40.0m, which would be an increase of 7.8% over 2009 due to an increase in sales in GTE's Energy Services segment, primarily Turbine Services and sales of Combustion parts being partly offset by a decline in sales of Auxiliaries (reflecting continued spending constraints among customers). The Company recorded a net loss for the first nine months of 2010 of US$3.2m; a substantial portion of this loss was exceptional costs associated with the potential investment in the Company by a strategic investor, which terminated at a late stage in negotiations.

The Company has been successful in achieving growth in revenues since formation in its Energy Services business despite global recessionary market pressures. The energy industry understands the need for equipment upgrades to meet new economic, environmental and operational challenges and the Company is well positioned to meet these needs. The Company will now focus on transforming past investment in energy services products such as compressor cleaning, replacement parts and combustion maintenance and upgrade activities, into a sustainable revenue stream.

The Company is also carrying out an extensive cost reduction programme to lower its base costs to ensure it generates free cash flow as soon as possible while it continues to invest in its key product development programmes.

The Company announced on 18 October 2010 that discussions with a strategic investor had concluded and that the strategic investor had decided not to make an investment in the Company at that time. The Company is continuing to explore appropriate strategic investors or partnerships with those industrial groups which can, through their existing operations, provide a platform for faster sales growth. There can be no certainty that appropriate strategic investors can be found or partnerships established.

The Company also intends to seek further funding and in this regard will explore all available options including, without limitation, equity investment, further debt financing or a sale of the Company.  There can be no certainty that any further financing or a sale will be achieved.

GENERAL MEETING

The Company will issue a notice convening a General Meeting on 31 December 2010.  The General Meeting will be held at the offices of Bird & Bird LLP, 90 Fetter Lane, London EC4A 1PT at 11.00 am on 17 January 2011 for the purpose of, inter alia, considering, and if thought fit, passing a resolution to approve the Asset Sale.

"Assets"	certain assets of the Sellers related to the development, manufacture, use or service of water wash systems for washing combustion turbine engines or related to the use of such water wash systems for washing combustion turbine engines to enhance their performance for aviation purposes, which include, inter alia, tangible and intangible property owned by the Sellers, inventories, governmental authorisations, related patents (including pending patent applications), proprietary technology and know-how and claims of the Sellers against third parties for warranty obligations
"Asset Purchase Agreement"	the conditional agreement dated 27 December 2010 entered into between the Sellers, GTE and P&W, relating to the sale of the Assets
"Asset Sale"	the sale of the Assets on the terms set forth in the Asset Purchase Agreement
"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
"BCA"	the business collaboration agreement dated 17 December 2004 (as amended on 28 December 2005 and further on 15 December 2008) between GTE and P&W
"Board"	the board of directors of the Company from time to time
"Company" or "GTE"	Gas Turbine Efficiency plc
"Completion"	completion of the Asset Sale
"Directors"	the directors of the Company as at the date of this press release
"General Meeting"	the general meeting of the Company, to be held at the offices of Bird & Bird LLP, 90 Fetter Lane, London EC4A 1TP at 11.00 am on 17 January 2011
"Group"	together the Company and its subsidiary undertakings
"Licence Agreement"	the conditional agreement dated 27 December 2010 entered into between GTE and P&W, relating to the licence of intellectual property
"Loan Notes"	the US$18,125,000 principal amount of loan notes of the Company outstanding at the date of this document
"Loan Note Holder"	holders for the time being of Loan Notes
"London Stock Exchange"	London Stock Exchange plc
"Ordinary Shares"	the ordinary shares of 0.2 pence each in the share capital of the Company
"P&W"	Pratt & Whitney Line Maintenance Services, Inc.
"Sellers"	Gas Turbine Efficiency AB and Gas Turbine Efficiency Sweden AB
"Shareholders"	holders of Ordinary Shares from time to time

 

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