Deals
Xchanging plc Acquisition of Italian fund administration business AR Enterprise S.r.l.
Xchanging plc ('Xchanging'), the business process, procurement and technology services provider and integrator, today announces that its subsidiary, Kedrios S.p.A. ('Kedrios'), has acquired 100% of the share capital of AR Enterprise S.r.l. ('AR'). AR, based in Milan, is a leading provider of software packages and comprehensive IT solutions for the securities brokerage and asset management industry in Italy, with a customer base comprising more than 100 leading financial institutions.
Xchanging will combine the newly acquired AR business with Kedrios, which operates in the same business segment.
The acquisition will provide a significantly improved proprietary technology platform and a much improved customer base to Kedrios. Operating synergies will also lead to reductions in the combined cost base, with restructuring costs self-funded from existing and future cash flow generated by the combined business.
The acquisition will enable Xchanging to accelerate the profit growth of the combined business, creating a stronger profitable business with scale and the ability to compete successfully in the Italian financial services, technology services and business processing markets. It was planned that Kedrios would reach a breakeven run rate by the end of 2013; but without scale and significant investment in upgraded technology, its ability to sustain a strong competitive position in the long term would have remained weak.
The initial consideration is €12.85 million, payable in cash on completion, with further consideration contingent upon achieving defined performance criteria. The contingent payments comprise €3.21 million ("First Contingent Payment") payable in Q1 2014 and up to a maximum of €12.49 million ("Second Contingent Payment") payable by the end of Q2 2015, resulting in a total maximum consideration of up to €28.55 million.
Xchanging has acquired AR's gross assets of €6.3 million and net assets of €2.6 million. Revenues for Kedrios and AR in 2011 were €12.5 million and €14.9 million respectively. The pre-tax profit attributable to AR was €3.3 million for the year ended 31 December 2011, and averaged €2.6 million over the last 3 years. The acquisition is anticipated to be earnings accretive, on an adjusted basis, from 2013 onwards.
Immediately prior to the acquisition Xchanging recapitalised Kedrios with €12.85 million which diluted the shareholding of partner SIA S.p.A. ("SIA") from 49% down to 1.3%. This dilution contributes to the stated objective of simplifying Xchanging's corporate structure by reducing this minority interest significantly.
The contingent payments for the acquisition of AR are subject to achieving certain performance criteria as follows:
- The First Contingent Payment is subject to certain technology migration criteria being achieved;
- The Second Contingent Payment is subject to the achievement of certain operating profit targets of the combined business for the year ending 31 December 2014. The full payout would be made when the combined operating profit of Kedrios and AR reaches €12.5 million. This is payable in increments as follows:
b) €0.30 will be paid for each incremental €1 of 2014 operating profit achieved above €6.0 million up to €8.0 million; and
c) €0.50 will be paid for each incremental €1 of 2014 operating profit achieved above €8.0 million up to €12.5 million.
The four majority shareholders of AR were also directors of AR. They will remain with the combined business to ensure continuity and to support achievement of the performance criteria described above. The four directors are: Stefano Brioschi, who will become co-CEO of the newly combined business, alongside the current Kedrios CEO; Peter Arnold, who will also become a director of the combined business; and Michele Hessel and Roberto Roncoroni who will continue to support the combined business.
Under the existing agreements with SIA, Xchanging requires SIA's approval should it wish to transfer ownership of its shares in Kedrios. With respect to SIA's remaining 1.3% shareholding in Kedrios, SIA have a put option which can be exercised from January 2014 and Xchanging have a call option which can be exercised from January 2016.
In a separate transaction Xchanging and SIA have agreed proposed amendments ('Amendments') to the transfer rights of Xchanging and the timing on when the put and call options can be exercised. These Amendments mean (i) that Xchanging would be able to transfer ownership of its shares in Kedrios without the approval of SIA; and (ii) in the event of such a transfer occurring, either party would be entitled to exercise their respective put or call option at that time.
SIA is classified as a related party by the UK Listing Authority as a result of their 49% shareholding in Kedrios immediately prior to the recapitalisation and acquisition. The Amendments are therefore classified as a related party transaction by the UK Listing Authority and are conditional on the approval of Xchanging shareholders at a general meeting of Xchanging.
A circular setting out further details of the Amendments, together with the notice to convene a general meeting and the form of proxy for use at the general meeting, will be posted to Xchanging shareholders as soon as practicable.
Commenting on today's announcement, Ken Lever, Xchanging's CEO said: "The opportunity to acquire AR has enabled us to resolve the weak strategic position of Kedrios and to create a strong combined business with scale and strong profitability. We are delighted to have this foundation from which to establish a market leading position in the industry in Italy."
Commenting on the acquisition, Stefano Brioschi, AR's CEO said: "We are delighted to become part of Xchanging. The combined market presence of AR and Xchanging will enable us to provide a better quality service to our combined customer base."
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