Strategically Attractive Acquisitions and Placing

RNS Number : 1976I

Electrocomponents PLC

10 December 2020

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Electrocomponents   plc

10 December 2020

ACCELERATING GROWTH: STRATEGICALLY ATTRACTIVE ACQUISITIONS AND PLACING

· Acquisition of Synovos for US$145 million (c.£110 million), accelerating delivery of our global integrated supply proposition in value-added solutions

· Acquisition of Needlers for £40 million, expanding products and solutions in the safety, hygiene and personal protective equipment (PPE) product category

· Proposed £180 million placing of ordinary shares, c.5% of the issued share capital

Electrocomponents plc (Electrocomponents, the Company or the Group) announces that it has reached an agreement to acquire Synovos (the Synovos acquisition), a leading player in integrated supply solutions in the Americas, and has acquired Needlers (the Needlers acquisition), a leading UK provider of safety products and PPE (together the Acquisitions), for a total consideration of c.£150 million on a debt-free, cash-free basis.

Accelerating our growth strategy from strong foundations

The building blocks are in place and we are accelerating the execution of our growth strategy

Continued momentum across our business as customer and industry trends fast track towards our proposition

Synovos accelerates delivery of a global integrated supply proposition and significantly strengthens our Americas business

· Synovos and IESA create a global integrated supply proposition in the growing market for value-added solutions

· Synovos is a leading player in integrated supply solutions: managing procurement spend, inventory, strategic sourcing

· Strong position in North America with blue-chip customers in resilient sectors e.g. pharmaceuticals, consumer health

· Targeting revenue synergies from enhanced Americas customer proposition of RS PRO, Allied and Synovos

· Consideration represents an acquisition multiple of c.9.5x forecast 2020 underlying EBITDA[1]

Needlers will expand our products and solutions in safety, hygiene and PPE product category

· Leading presence in PPE for UK food manufacturing with an established private label business

· Strong sourcing capability and differentiated service proposition enhancing our existing capabilities

· Value-added consultancy services based on high levels of specialist technical expertise and industry experience

· Revenue synergies as our platform accelerates Needlers' growth in private label, digital and beyond the UK

· Consideration represents an acquisition multiple of c.8.0x forecast 2020 underlying EBITDA2

£180 million equity raise to fund acquisitions and retain financial flexibility, enabling continued investment in growth

Acquisitions comfortably exceed our cost of capital by year 3 and are accretive to adjusted earnings in the first full year

Proposed placing of ordinary shares

Electrocomponents has separately announced a proposed equity fundraising of £180 million, equal to c.5% of the issued share capital of the Company. The proceeds of the equity raise will fund the acquisitions whilst targeting pro-forma net debt to adjusted EBITDA of below 1x for the year ending 31 March 2021. This will preserve the Group's financial strength and flexibility to invest in working capital to drive organic growth and execute on a growing pipeline of attractive bolt-ons.

Current Trading

Over the first 10 weeks of H2 we have seen continued momentum across our business, with all regions in growth reflecting continued market share gains led by RS PRO, value-added solutions, our omni-channel offer and strong product availability and breadth. As indicated at the H1 results, COVID-19 related costs, predominantly freight, remain elevated. As we continue to navigate through the lockdowns of this global pandemic we remain cautious about the economic backdrop and short-term uncertainties such as Brexit, but we are encouraged by the strength of our business performance.

Lindsley Ruth, Electrocomponents' Chief Executive Officer, commented:

"Both Synovos and Needlers are very good businesses, aligned to our strategy of selectively adding high-quality, value-creating bolt-on acquisitions to the Group. Synovos enables us to expand our value-added solutions offer in the Americas, significantly enhancing our proposition for corporate customers. It is an excellent fit with our existing IESA business and will increase our ability to support clients in managing their procurement, inventory and maintenance needs globally. Needlers is a very high-quality business that we have been following for a long time and significantly enhances our safety, hygiene and PPE offering which is a critical capability in today's world.

In the past five years we have transformed Electrocomponents into a strong, focused, customer-centric organisation on a clear growth trajectory. We are now taking the business to the next level. Whilst driving organic growth will always be our primary focus, Synovos and Needlers demonstrate how our disciplined approach to acquisitions can bring valuable capabilities and products into the Group. The placing will allow us to maintain a strong financial position to support continued investment in our organic growth strategy, while retaining flexibility to make further bolt-on acquisitions from the attractive pipeline that we have established over recent years."

Conference call:

8:00am GMT - 10 December 2020

Participant dial-in:

UK dial-in number - 020 3936 2999

All other locations - [phone]

Access code - 904708 (participants will be greeted by an operator who will register their details)

A replay will be available on demand after the event at:

UK dial-in number - 020 3936 3001

All other locations - [phone]

Access code - 002669

Slides will be available on the Company website.

Enquiries:

Electrocomponents      [phone]

Lindsley Ruth, Chief Executive Officer

David Egan, Chief Financial Officer

Lucy Sharma, VP Investor Relations

Tulchan Communications LLP        [phone]

Martin Robinson

Olivia Peters

Toby Zeal

UBS (Corporate Broker, Sponsor and Joint Bookrunner)    [phone]

John Woolland

David Roberts

Meera Sheth

Numis Securities (Corporate Broker and Joint Bookrunner)    [phone]

Mark Lander

Julian Cater

George Price

Additional information

Strategic and financial rationale

The building blocks are in place and we are accelerating the execution of our growth strategy

Electrocomponents has performed well through the COVID-19 pandemic, delivering significant market share gains and robust cash generation, as industry and customer trends fast track towards our proposition in this fast changing world. There is good momentum across all regions, and we continue to improve our operations with the RISE initiative allowing us to be more agile in pursuing our growth strategy.

Our strength and the current economic backdrop present a significant opportunity to accelerate our strategy, through both investment in working capital to drive organic growth as well as executing on a pipeline of attractive bolt-on acquisitions focused on three areas - value-added solutions, product adjacencies and building geographic strength.

Synovos accelerates delivery of our global integrated supply solutions proposition and strengthens our Americas business

Electrocomponents has reached an agreement to acquire Synovos from Geocapital Partners and others for US$145 million on a debt-free, cash-free basis.

Synovos is a leading corporate maintenance repair and operations (MRO) marketplace provider of integrated supply solutions based in Pennsylvania, employing c.600 employees who are predominantly located at 215 client locations across North America. Synovos manages around US$500 million of MRO procurement spend and c.3 million SKUs for over 80 corporate customers, which are primarily in the pharmaceutical, consumer health, chemicals and food & beverage industries.

Synovos has a technology-driven integrated supply model which consolidates indirect procurement spend for a blue-chip customer base. Its key focus is strategic sourcing and procurement; transactional processing; and inventory and stores management. 90% of Synovos revenue is in the US with a strong competitive position underpinned by a lean, automated, proprietary technology platform, SYNC, that provides a cost and differentiation advantage.

The market opportunity for value-added solutions is large, profitable, growing and one we understand well. We see many opportunities to drive significant growth globally by incorporating Synovos within the Electrocomponents Group.

Synovos' integrated supply solutions model is similar to our existing IESA business in the UK and Europe, allowing us to offer a comparable integrated supply model to customers for their operations in the Americas. This will allow us to deliver value-added solutions to customers with global operations.

Needlers adds an attractive product adjacency focused on food safety and hygiene products

Electrocomponents has acquired Needlers from the Needler family for £40 million on a debt-free, cash-free basis.

Needlers is a leading UK supplier of PPE, safety and hygiene products and solutions, a product category which is expected to remain important in a post-pandemic world and is purchased by all our existing customers. The business has a strong market position in food hygiene, with an established customer base among the UK's leading food manufacturers, as the first PPE supplier certified under BRC Global Standard for Storage and Distribution. Needlers brings a strong sourcing capability, two well established private label brands, Reldeen and Pro-Fit, that represent c.40% of revenue and a highly focused customer culture which mirrors our Electrocomponents model.

Electrocomponents provides Needlers with a new platform for growth, with the Electrocomponents distribution network presenting significant new opportunities for Needlers' products both in the UK and internationally. Our digital capabilities and experience in developing private label brands globally present further significant value creation opportunities.

The Acquisitions are expected to deliver attractive financial returns

Synovos is forecast to deliver revenue of US$90 million in the year ending 31 December 2020 and to make a strong contribution to Group revenue growth in our year ending 31 March 2022. Electrocomponents is targeting sizeable revenue synergies from the enhanced customer proposition for Americas' customers from the combination of RS PRO, Allied and Synovos supplier bases. Year ending 31 December 2020 EBITDA is forecast to be US$15 million with adjusted operating profit margin expected to be broadly in line with Group in the first full year of ownership with moderate procurement and other cost synergies. Consideration of US$145 million (c.£110 million) represents an acquisition multiple of c.9.5x forecast 2020 underlying EBITDA. Return on investment (ROI) is expected to be comfortably ahead of the Group's cost of capital by year three. The acquisition is expected to be accretive to adjusted earnings in the first full year of ownership.

Needlers' revenue and EBITDA for the year ending 31 December 2020 have benefited from the sale of PPE during the COVID-19 pandemic. For the purpose of the acquisition, Needlers' financial results were adjusted so that the business could be assessed on an ongoing basis excluding the one-off nature of pandemic-inflated revenue, with underlying revenue and EBITDA for the year ending 31 December 2020 estimated to be £40 million and £5 million respectively. Adjusted operating profit margin is expected to be broadly in line with Group in the first full year of ownership. Consideration of £40 million represents an acquisition multiple of c.8.0x forecast 2020 underlying EBITDA. The Needlers business has strong momentum and ROI is expected to be comfortably ahead of the Group's cost of capital in year one. The acquisition is expected to be accretive to adjusted earnings in the first full year of ownership.

Retaining financial agility to pursue organic opportunities and growing pipeline of attractive bolt-ons

The Acquisitions' consideration of c.£150 million in cash is to be funded through a £180 million equity issuance. Post completion the Company is targeting pro-forma net debt to adjusted EBITDA of below 1x for the year ending 31 March 2021. This will ensure Electrocomponents Group retains the financial strength and flexibility to continue to invest in organic opportunities and accelerate the Group's inorganic growth strategy.

We are increasingly confident in a growing acquisition pipeline and, having built internal capabilities, we are now well positioned for the raised level of market activity. Whilst we have 3-4x the number of active opportunities versus two years ago, we will continue to be extremely disciplined. We will be guided by our clear acquisition criteria, focusing in our areas of expertise on high returning projects that will deliver economic profit alongside a strong strategic and cultural fit.

Expected timetable

The Synovos acquisition is subject to customary closing conditions, including US anti-trust, and is expected to complete in Q1 calendar year 2021. The details of the equity capital raising are set out in a separate announcement.

Notes to editors

Electrocomponents

Electrocomponents plc is a global omni-channel partner for industrial customers and suppliers who are involved in designing, building or maintaining industrial equipment and facilities. We aim to offer our customers unrivalled choice of product technologies, solve problems with innovative solutions and deliver a world-class customer experience, making it easy to do business with us.

We stock more than 500,000 industrial and electronic products, sourced from over 2,500 leading suppliers. We solve problems and provide a wide range of value-added solutions to over one million customers. With operations in 32 countries, we trade through multiple channels and ship over 50,000 parcels a day.

Electrocomponents plc is listed on the London Stock Exchange and in the last financial year ended 31 March 2020 reported revenue of £1.95 billion. Electrocomponents plc has six operating brands; RS Components, Allied Electronics & Automation, RS PRO, OKdo, DesignSpark and IESA.

More information on Synovos can be found at www.synovos.com , and more information on Needlers can be found at www.needlersdirect.co.uk .

Important notices

This announcement (Announcement) contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014. The person responsible for arranging the release of this announcement on behalf of the Company is Ian Haslegrave - Company Secretary & General Counsel.

This Announcement is for information purposes only and shall not constitute an offer to sell or issue or the solicitation of an offer to buy, subscribe for or otherwise acquire securities in any jurisdiction. Persons needing advice should consult an independent financial adviser.

The proposed offering of the Company's shares has not been and will not be registered under the United States Securities Act of 1933, as amended (the Securities Act), and subject to certain limited exceptions, such shares will be offered and sold outside the United States. There will be no public offering in the United States.

Certain statements contained in this Announcement may constitute forward-looking statements with respect to the financial condition, performance, strategic initiatives, objectives, results of operations and business of the Company and / or Synovos and Needlers. All statements other than statements of historical facts included in this Announcement are, or may be deemed to be, forward-looking statements. Without limitation, any statements preceded or followed by or that include the words 'targets', 'plans', 'believes', 'expects', 'aims', 'intends', 'anticipates', 'estimates', 'projects', 'will', 'may', 'would', 'could' or 'should', or words or terms of similar substance or the negative thereof, are forward-looking statements. Forward-looking statements include statements relating to the following: (i) any statements regarding the expected timing of the completion of the transaction; the ability of the Company and Synovos to complete the proposed transaction considering the various conditions to the transactions, some of which are outside the parties' control, including those conditions related to regulatory approvals; the expected benefits and costs of the proposed transaction; (ii) future capital expenditure, expenses, revenue, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects; and (iii) business and management strategies and the expansion and growth of the Company's and / or Synovos' and Needlers' operations. Such forward-looking statements involve risks and uncertainties that could significantly affect expected results and are based on certain key assumptions. Many factors could cause actual results, performance or achievements to differ materially from those projected or implied in any forward-looking statements. The important factors that could cause the Company's and / or Synovos' and Needlers' actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, the macroeconomic and other impacts of the COVID-19 pandemic, economic and business cycles, the terms and conditions of the Company's and / or Synovos' and Needlers' financing arrangements, foreign currency rate fluctuations, competition in the Company's and / or Synovos' and Needlers' principal markets, acquisitions or disposals of businesses or assets and trends in the Company's and / or Synovos and Needlers' principal industries. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this Announcement may not occur.

Any forward-looking statements contained in this Announcement speak only as of the date of this Announcement. Any obligation or undertaking to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable law or regulation (including to meet the requirements of the Listing Rules, the Market Abuse Regulation, or the Financial Services and Markets Act), is expressly disclaimed.

Numis Securities Limited (Numis) and UBS AG London Branch (UBS and together with Numis, the Joint Bookrunners and each a Joint Bookrunner) are authorised and regulated in the United Kingdom by the Financial Conduct Authority and are acting solely for the Company and no-one else in connection with the contents of this Announcement and will not regard any other person (whether or not a recipient of this Announcement) as a client in relation to the contents of this Announcement or any other matters described in this Announcement. The Joint Bookrunners will not be responsible to anyone other than the Company for providing the protections afforded to a Joint Bookrunner's clients or for providing advice in connection with the contents of this Announcement or any other matters described in this Announcement.

This Announcement has been issued by, and is the sole responsibility of, the Company. No representation or warranty, express or implied, is or will be made by any Joint Bookrunner or by any of its directors, officers, employees, advisers, consultants, affiliates or agents as to or in relation to, the accuracy or completeness of this Announcement or any other written or oral information made available, and any liability therefor is expressly disclaimed. None of the information in this Announcement has been independently verified or approved by any Joint Bookrunner or any of its directors, officers, employees, advisers, consultants, affiliates or agents. Save for any responsibilities or liabilities, if any, imposed on the Joint Bookrunners by the Financial Services and Markets Act 2000 or by the regulatory regime established under it, no responsibility or liability is accepted by any Joint Bookrunner or any of its directors, officers, employees, advisers, consultants, affiliates or agents for any errors, omissions or inaccuracies in this Announcement or in such information or for any loss, cost or damage suffered or incurred howsoever arising, directly or indirectly, from any use of this Announcement or its contents or such information or otherwise in connection with this Announcement or from any acts or omissions of the Company in relation to the matters described herein.

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[1]   Based on Electrocomponents forecast for Synovos for the year ending 31 December 2020

2   Based on Electrocomponents forecast, adjusted for COVID-19 one-offs, for Needlers for the year ending 31 December 2020

 

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