Acquisition of Enterprise Ventures

RNS Number : 6507R

Mercia Technologies PLC

10 March 2016

 

For release at 7.00am

10 March 2016

Mercia Technologies PLC

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

Acquisition of Enterprise Ventures Group Limited

Appointment of Director

Continued expansion of the Mercia model, creating a leading provider of early stage and growth capital in the Midlands, the North of England and Scotland

Mercia is delighted to announce that it has acquired the entire issued share capital of Enterprise Ventures Group Limited ("Enterprise Ventures"), a leading provider of early stage and growth finance through third party managed funds in the North of England, for a total consideration of up to £11.0 million, plus net cash. The acquisition is expected to be immediately earnings enhancing. Enterprise Ventures has successfully built a portfolio of almost 150 equity investments, via its third party funds under management, in innovative companies spanning a range of sectors within Mercia's focus.

Mercia has developed a complete capital solution investment model of nurturing early stage businesses via its third party funds under management to create a funnel of future direct investment opportunities for Mercia (its "Emerging Stars"), by investing in, supporting and scaling innovative businesses in targeted technology sectors to deliver significant shareholder value. The Directors believe that the acquisition of Enterprise Ventures significantly accelerates Mercia's stated strategy of becoming a national technology investment business, with a local presence in the underserved regions of the Midlands, the North of England and Scotland, whilst greatly expanding Mercia's funnel of future Emerging Stars for direct investment.

This strategic acquisition is for an initial consideration of £9.0 million, comprising approximately £8.3 million satisfied in cash funded from existing resources and approximately £0.7 million to be satisfied by the issue of 1,645,711 new Mercia shares (the "Initial Consideration Shares"), and an amount equal to Enterprise Ventures' net cash position (subject to certain adjustments) at completion (estimated to be approximately £1.9 million). In addition, deferred consideration of up to £2.0 million, to be satisfied by the issue of new Mercia shares two years from completion at the then prevailing share price (the "Deferred Consideration Shares"), will be payable contingent upon future third party funds raised.

Enterprise Ventures was owned entirely by its senior management team, all of whom are remaining with the enlarged Group, including Chief Executive Jonathan Diggines, who joined the Board of Mercia as an Executive Director on completion. Further information on Mr. Diggines, as required by Schedule 2(g) and Schedule 4 of the AIM Rules for Companies is included within the appendix to this announcement.

Strategic Rationale

Mercia identified Enterprise Ventures as a highly complementary fit following a detailed review of possible acquisition opportunities across its key areas of focus.

The Directors believe that the acquisition of Enterprise Ventures offers a number of strategic benefits to the Group, including:

-      Significantly expands the funnel of future direct investment prospects across Mercia's key technology sectors. Central to Mercia's strategy to create shareholder value is the expansion of its direct investment portfolio of innovative businesses that have been nurtured from an early stage via its third party funds under management. As a result of Enterprise Ventures' existing portfolio of companies (funded through approximately £200.0 million of third party funds under management), there will be an immediate increase of over 250% in the pipeline of potential future Mercia direct investments, where the Group provides follow-on direct investment capital for Emerging Stars, with a goal of realising significant value for Mercia's shareholders over time. Mercia has previously worked with Enterprise Ventures on an investment that originated from Enterprise Ventures' third party funds and which has recently progressed into a current Emerging Star (Soccer Manager Ltd) and the Board anticipates further direct investment opportunities in the near term.

-      Strengthens Mercia's position in the North of England. The enlarged business is now well placed to become the "go-to" provider of finance for high growth, innovative technology businesses with a particular focus on the Midlands, the North of England and Scotland. With an established regional footprint serviced from four offices in the North of England, Enterprise Ventures' geographic reach complements Mercia's existing offices in the Midlands and its recently opened office in Scotland. In addition, it provides Mercia with investment professionals in close proximity to all of its 14 university partners (three in the North of England as well as nine in the Midlands and two in Scotland). The acquisition therefore considerably increases the Group's direct access to promising, early stage companies in the North of England, where Enterprise Ventures has built a recognised position as a market-leading investor.

-      Brings an established investment team with a demonstrable exit track record. Enterprise Ventures has built third party investment funds under management of approximately £200.0 million, supporting innovative companies across the North of England since 2002. During this time, Enterprise Ventures has assembled an impressive team of investment executives who have established a strong track record of developing winners and delivering exits, including eight IPOs completed under the guidance of Enterprise Ventures' Head of Technology Investments, Julian Viggars. Two IPO examples are Xeros Technology Group plc and OptiBiotix Health plc in which Enterprise Ventures was a founding investor. The senior management of Enterprise Ventures are remaining with the business to support the ongoing expansion of the enlarged Group, bringing a wealth of additional investment expertise. Jonathan Diggines, Chief Executive of Enterprise Ventures, joins the Board of Mercia as Executive Director - Funds, with responsibility for the loan funds under management and all new third party fund raisings. Jonathan has over 25 years' experience of private equity and venture capital investing and has been Chief Executive of Enterprise Ventures since 2005. In addition to his considerable track record of successful private equity investments, including 10 years with Murray Johnstone Private Equity, Jonathan sits on the Regional Council for the Confederation of British Industry.

-      Acquisition is immediately earnings enhancing and supports the strategy of covering Mercia's operating costs through recurring revenues¹. Enterprise Ventures is a profitable and cash generative business.  For the year to 31 March 2017, revenues from Enterprise Ventures are forecast to be £4.5 million and post-tax profits are forecast to be £0.8 million. Moreover, the critical mass achieved post-acquisition will support the Group's stated aim of generating sufficient income from fund management and direct investing related fees to cover its operating costs over the medium term, whilst enhancing its ability to deliver value to shareholders from de-risked direct investments nurtured initially through its greatly expanded funds under management.

¹ This statement is not intended to constitute a profit forecast for the current financial period or for any future period.  In addition, this statement should not be taken to mean that the earnings per share of Mercia will necessarily match or exceed the historic reported earnings per share of Mercia.

Mark Payton, Chief Executive Officer of Mercia, commented: 

"This strategically-focused acquisition further scales Mercia's differentiated complete capital solution into the North of England, positioning the Group as the leading go-to investor in and supporter of great technology success stories in the Midlands, the North of England and Scotland.

"Enterprise Ventures brings a number of strategic benefits, having built a substantial portfolio of early stage third party investments which expands Mercia's funnel of potential future direct investments, together with a track record of supporting these investments through to successful exits. This combination will significantly increase our pipeline of direct investment opportunities, by more than tripling the total number of investments held within our third party funds now under management, and supporting over time the creation of significant incremental value for our shareholders.

"With the scale, geographic reach, access to capital and investment expertise that the enlarged business offers, this represents a significant step towards Mercia becoming the market leader for the funding and development of high growth innovative businesses within our chosen sectors and geographies."

Jonathan Diggines, Chief Executive of Enterprise Ventures, added:

"It was the natural choice for Enterprise Ventures to join the Mercia team thereby creating a market-leading position in funding and developing innovative British businesses, particularly in the underserved regions of the Midlands, the North of England and Scotland.

"Mercia is already at the forefront of providing funding and support to high growth, innovative companies. In joining together, we will not only be able to offer our existing Enterprise Ventures portfolio companies access to additional expertise and follow-on capital, but we will also strengthen our combined ability to support new businesses and technologies on their journey to success."

For further information, please contact:

Mercia Technologies PLC Mark Payton, Chief Executive Officer Martin Glanfield, Chief Financial Officer www.merciatechnologies.com	[phone]
Cenkos Securities plc Ivonne Cantu / Mark Connelly (NOMAD)	[phone]
Buchanan Sophie McNulty, Victoria Watkins, Stephanie Watson www.buchanan.uk.com	[phone]

The Acquisition

Mercia has acquired Enterprise Ventures' entire issued share capital for up to £11.0 million and an amount equal to Enterprise Ventures' net cash position (subject to certain adjustments) at completion (estimated to be approximately £1.9 million). The initial consideration is £9.0 million (comprising approximately £8.3 million satisfied in cash on completion, which has been funded from the Group's existing cash resources, and approximately £0.7 million satisfied by the issue of 1,645,711 Initial Consideration Shares at a price of 42.0 pence (being the average of the daily closing mid-market price for an Ordinary share of Mercia (the "Ordinary Shares") for the five trading days immediately preceding completion) and an amount equal to Enterprise Ventures' net cash position (subject to certain adjustments). Application for admission of the Initial Consideration Shares has been made and trading is expected to commence on 16 March 2016.

Deferred consideration of up to £2.0 million will also be payable, contingent upon Enterprise Ventures raising at least £80.0 million of further third party funds. To the extent payable, the deferred consideration will be satisfied by the issue of Deferred Consideration Shares at a price which will be determined by the average of the daily closing mid-market price for an Ordinary Share for the five trading days immediately following the end of the two-year deferred share consideration period.

The Enterprise Ventures vendors have all agreed not to dispose of any of their Initial Consideration Shares for at least 18 months following issue, nor any of their Deferred Consideration Shares for a minimum period of 12 months following issue.

Additional Information on Enterprise Ventures

Enterprise Ventures is one of the leading providers of finance for small and medium-sized enterprises ("SMEs") in the North of England. It has 32 employees based at four offices located in Greater Manchester, Merseyside, Lancashire and Yorkshire.

Via its third party funds under management, Enterprise Ventures has successfully built a portfolio of almost 150 equity investments in innovative companies spanning a range of sectors within Mercia's focus. It invests capital on behalf of institutional investors and the public sector, with in excess of £200.0 million funds under management as at 31 December 2015. The business provides finance of up to £2.0 million in the form of venture capital, growth funding and business loans to high growth companies, to help grow and develop businesses. As at 31 December 2015, Enterprise Ventures had net assets of £1.6 million.

In the last five years, Enterprise Ventures has provided equity investments and loans totalling approximately £110.0 million. Recent data from Experian confirms Enterprise Ventures' market-leading position in early stage funding, particularly identifying it as the most active funding provider in the North West.

Enterprise Ventures also has an excellent track record of exiting its investments successfully. Of its investments to date, eight have floated on the London Stock Exchange's junior market, AIM, under the guidance of Head of Technology Investments Julian Viggars, including Xeros Technology Group plc and OptiBiotix Health plc. Moreover, its current portfolio contains a number of businesses which the Directors believe will offer the opportunity for incremental value creation for Mercia shareholders over time.

About Mercia

Mercia is a technology focused investment company which has developed its hybrid investment model to help fund, support and create value from some of the UK's most innovative technology ventures. Mercia invests across a range of sectors to which it can apply its deep expertise, with a particular emphasis on the Midlands, the North of England and Scotland. Across these regions, one important source of early stage deal flow for Mercia derives from its 14 university partners (www.merciatechnologies.com/university-partners/). Mercia Technologies PLC is quoted on AIM with the epic "MERC".

Mercia's "complete capital solution" investment model initially nurtures businesses via its FCA-authorised fund management business, Mercia Fund Management, using EIS and SEIS qualifying third party funds under management, coupled with its team of highly experienced sector specialists who provide hands-on support and guidance. As these early stage ventures develop into Emerging Stars, Mercia provides further funding thanks to its ability to deploy direct investment follow-on capital from its own balance sheet.

In a recent report (Source: Beauhurst, The Deal, 2015/16), Mercia was found to be the fifth most active investor in the UK and the fourth most active in technology. Since its IPO in December 2014, the Company has invested over £20.0 million directly across its portfolio of Emerging Stars and continues to seek both early stage investment opportunities (via Mercia Fund Management) as well as providing its Emerging Stars with the required capital and management support to build towards exits that will realise incremental value for Mercia shareholders.

Total Voting Rights

Following the issue of the Initial Consideration Shares (expected to take place on 16 March 2016), there will be a total of 213,645,711 Ordinary Shares in issue. This figure of 213,645,711 Ordinary Shares may be used by shareholders in the Company as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in, the share capital of the Company under the Financial Conduct Authority's Disclosure and Transparency Rules.

APPENDIX

Appointment of Director

Additional information in relation to Jonathan Brett Diggines (aged 63)

Jonathan is also a director/partner of:

Enterprise Ventures (Coalfields Founders) LLP

Enterprise Ventures (Coalfields Growth Founders) LLP

Enterprise Ventures Consultants Limited

Enterprise Ventures (EV Growth Founders) LLP

Enterprise Ventures (General Partner Coalfields Growth) Limited

Enterprise Ventures (General Partner Coalfields) Limited

Enterprise Ventures (General Partner EVF/LEV) Limited

Enterprise Ventures (General Partner EV Growth) Limited

Enterprise Ventures (General Partner FY Seedcorn) Limited

Enterprise Ventures (General Partner HSBC European Fund) Limited

Enterprise Ventures (General Partner HSBC UK Enterprise Fund) Limited

Enterprise Ventures (General Partner NW Development Capital) Limited

Enterprise Ventures (General Partner NW Mezzanine) Limited

Enterprise Ventures (General Partner NW Venture) Limited

Enterprise Ventures (General Partner Risingstars) Limited

Enterprise Ventures (General Partner Risingstars II) Limited

Enterprise Ventures (General Partner RSGF MPF) Limited

Enterprise Ventures Group Limited

Enterprise Ventures Limited

Enterprise Ventures (NW Mezzanine Founders) LLP

Enterprise Ventures (NW Venture Founders) LLP

Enterprise Ventures (Rising Stars Founders) LLP

Enterprise Ventures (Risingstars II Founders) LLP

Enterprise Ventures (RSGF MPF Founders) LLP

EVBL (General Partner EV SME Loans) Limited

EVBL (General Partner FY Small Loans) Limited

EVBL (General Partner SYIF SBF) Limited

EVBL SME Investment Limited

EV Business Loans Group Limited

EV Business Loans Limited

Le Founders II Limited

Le Founders III Limited

New Islington Free School

North West Enterprise Investment Limited

Secondary Partners LLP

The Manchester Grammar School Foundation Trustee Limited

W Willow Limited

He has also been a director/partner of the following companies/partnerships in the five years preceding this announcement:

Community Development Finance Association

RGF Project Vehicle C.I.C.

XEnterprise Ventures (General Partner FY Seedcorn) Limited

Following the issue of the Initial Consideration Shares (anticipated to be issued on 16 March 2016), Jonathan will hold 803,571 Ordinary Shares (representing 0.38% of the then issued share capital of the Company).

Jonathan Diggines has entered into a service agreement with the Company dated 9 March 2016 in respect of his role as an Executive Director of the Company, terminable upon six months' notice by either party. The agreement provides for an annual base salary of £187,191. Jonathan is also entitled to participate in an executive bonus scheme. The agreement contains a pay in lieu of notice clause. There are no provisions for benefits to be provided on termination.

There is no further information required to be disclosed in respect of the above appointment pursuant to Schedule 2(g) or Schedule 4 of the AIM Rules for Companies.

 

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