Grafenia plc - Issue of Equity & notice of GM
The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). With the publication of this announcement via a
Issue of equity to raise approximately
· Placing to raise approximately
· Strong support from existing and new investors.
· The net proceeds of the Placing are intended to be used to fund further acquisitions as well as to invest in acquiring Nettl partners and franchisees, domestically and internationally.
· Whilst the Group is negotiating these acquisitions, they will utilise up to
· The Group plans to finance acquisitions with a prudent mix of equity and debt.
· The Placing Shares will represent approximately 25 per cent. of the issued share capital of the Company as enlarged by the issue of the Placing Shares.
Notice of general meeting
The Company will shortly be posting to shareholders a circular and notice of General Meeting (the "Circular") to convene the General Meeting which will be held at the offices of Gateley plc, Ship Canal House,
Related party transactions
Langfrist and Value Focus are related parties of the Company for the purposes of the AIM Rules as they each hold more than 10 per cent. of the Existing Ordinary Shares, being 29.35 per cent. and 22.20 per cent. respectively. Langfrist will participate in the Placing in respect of 8,581,428 new Ordinary Shares and Value Focus will participate in the Placing in respect of 11,428,571 new Ordinary Shares, each such participation represents a related party transaction pursuant to Rule 13 of the AIM Rules.
The Directors, having consulted with the Company's Nominated Adviser,
Total Voting Rights
Upon Admission, the Company's issued share capital will consist of 113,338,252 Ordinary Shares with one voting right each. The Company does not hold any ordinary shares in treasury. Therefore, the total number of ordinary shares and voting rights in the Company will be 113,338,252. With effect from Admission, this figure may be used by Shareholders 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
Market Abuse Regulation (MAR)
MAR came into effect from
Defined terms used in this announcement shall have the meaning ascribed to them in the Circular.
For further information:
David Hart / Liz Kirchner / Nicholas Chambers 0203 328 5656
Grafenia creates software and systems which power the graphic arts industry. The Group licences its brands, software and technology to partners in the UK and internationally. It also sells and manufacturers products, ranging from printed business marketing to large scale signage.
The Group has multiple routes to market, including the printing.com network. Its retail-based Nettl formula is expanding. In cities, the Group operates company-owned Nettl stores. In towns and neighbourhoods, it partners with existing businesses who 'bolt-on' the Nettl formula. Nettl mostly sells a range of 'cross-media' products and services to SMEs such as websites, apps, e-commerce, print, display, signage and exhibition marketing.
The Group is acquisitive, with its largest acquisition being
Further information can be found at https://www.grafenia.com/
Information to Distributors
Solely for the purposes of the product governance requirements contained within: (a) EU Directive 2014/65/EU on markets in financial instruments, as amended ("MiFID II"); (b) Articles 9 and 10 of Commission Delegated Directive (EU) 2017/593 supplementing MiFID II; and (c) local implementing measures (together, the "Product Governance Requirements"), and disclaiming all and any liability, whether arising in tort, contract or otherwise, which any "manufacturer" (for the purposes of the Product Governance Requirements) may otherwise have with respect thereto, the Placing Shares have been subject to a product approval process, which has determined that the Placing Shares are: (i) compatible with an end target market of retail investors and investors who meet the criteria of professional clients and eligible counterparties, each as defined in MiFID II; and (ii) eligible for distribution through all distribution channels as are permitted by MiFID II (the "Target Market Assessment"). Notwithstanding the Target Market Assessment, investors should note that: the price of the Placing Shares may decline and investors could lose all or part of their investment; Placing Shares offer no guaranteed income and no capital protection; and an investment in the Placing Shares is compatible only with investors who do not need a guaranteed income or capital protection, who (either alone or in conjunction with an appropriate financial or other adviser) are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear any losses that may result therefrom. The Target Market Assessment is without prejudice to the requirements of any contractual, legal or regulatory selling restrictions in relation to the Placing and Subscription. Furthermore, it is noted that, notwithstanding the Target Market Assessment, only investors who have met the criteria of professional clients and eligible counterparties have been procured. For the avoidance of doubt, the Target Market Assessment does not constitute: (a) an assessment of suitability or appropriateness for the purposes of MiFID II; or (b) a recommendation to any investor or group of investors to invest in, or purchase, or take any other action whatsoever with respect to the Placing Shares.
Extracts from the Circular
The following has been extracted from, and should be read in conjunction with, the Circular, which will shortly be made available for download from the Company's website: https://www.grafenia.com/reports-downloads/
The Company has conditionally raised approximately
The Placing is conditional, inter alia, on the passing of the Resolutions at the General Meeting and Admission becoming effective by no later than
The Net Proceeds are intended to be used to fund acquisitions, investing in acquiring Nettl partners and franchisees, domestically and internationally, to repay and renegotiate certain of the Company's existing debt arrangements and for general working capital purposes as further described below.
The Board believes that raising equity finance, by way of a placing, is the most appropriate method of financing for the Group at this time. It allows the Company to raise funds relatively quickly and at a lower cost than might be possible by undertaking another form of fundraising, such as an open offer or rights issue. It also avoids the need for a prospectus to be prepared and issued, which is a costly and time-consuming process.
Background to and reasons for the Placing
The Directors believe that Grafenia is still too small to be a public company. Quite simply, the ongoing costs of being listed impact significantly upon the Group's earnings. In addition, as our traditional market has become more commoditised and margins have eroded over time, we have sought to reposition the business.
In 2016, the Directors began a strategic review to assess ways to improve shareholder value. The Board considered delisting the Company from AIM. However, this was rejected as it would result in a loss of liquidity in the Company's Ordinary Shares and would not enhance trading performance.
The market opportunity
In 2017, we announced our plans to acquire sign businesses. We like this sector for a number of reasons. It's complementary to our core business. It's highly fragmented and there are multiple acquisition targets. We've evaluated many sign businesses and have acquired three of them so far.
Our aim is to create a national sign solution capability serving SMEs by acquiring sign businesses and converting them to Nettl Business Superstores.
However, opening new Nettl Business Superstores is capital intensive. As we are currently loss-making, it would take some time to make a sufficient contribution to profitability, with just the incremental acquisition and conversion of smaller businesses alone.
That's why we're looking at acquisition opportunities in two size brackets. We'll continue to look for suitable Superstore targets - those typically have up to 10 employees and revenues of up to
We're also looking at a second group of larger businesses. They tend to have up to 100 employees and revenues of
With the Placing, we are prioritising acquisitions of businesses in the second group. Once these are in place, we should be able to acquire smaller businesses and convert them to Nettl Business Superstores from cash-flow.
We'll discuss each in turn.
Nettl Business Superstores
The Nettl Business Superstore format combines sales, design, marketing, manufacturing and installation in one place. Stores are slightly out-of-town in 'trade counter' units, from 5,000 to 7,500 square feet.
At the front of the store there are displays to explain different ways SMEs can promote themselves. Some people have said the space looks more boutique hotel than print shop, and that's not an accident. We want our stores to be inspirational places where clients can get ideas on ways they can promote their businesses and decorate their premises.
There's a permanent design and account management team on site. Different specialists talk to clients about web, e-commerce, print and signage. We'll measure-up for signs, build e-commerce sites and design brochures all in-house.
To draw businesses in, we sell coffee and rent out meeting space.
Finally, we make signs and fit vehicle graphics. There's also a sign installation team based at the store.
Two Superstores are currently trading. The first, Nettl of Liverpool Waters, opened in
We also operate three other Nettl locations - a city-centre 2,000 square foot
We've learnt from operating these stores ourselves. Our systems were originally designed to deliver print and web projects, so we've had to extend our back-office to handle and invoice sign projects. There's still work to do so we can manage all aspects of sign manufacture in our process; from survey to quoting and installation.
There are 50 locations in the UK which we've identified as potential targets for a
On two occasions so far, we've combined a sign business with a nearby Nettl partner team we've hired or acquired. That's likely to happen again. Many Nettl partners are interested in joining Grafenia as we roll-out future Superstores. Their history and behaviour as licensed partners are helpful indicators of whether we're a suitable match.
Signs and display graphics are a logical extension to the range of products that both our company-owned and partner-operated stores sell. However, there's often a gap in knowledge and sales competence levels that can lead to a lack of confidence, which is an obstacle to sales.
We aim to help clients choose the right product, within their budget and without confusing them with jargon. We've developed marketing tools, like our "Wall of Wonder" and companion buying guide. It helps explain the options, with easy-to-follow price brackets. As we launch new products, it's important we develop design templates, technical documentation and marketing collateral to support them.
Nettl Works regional hubs
However, we've still yet to crack the conundrum of national manufacture and installation. Whilst we've won some national project work, we've found that the distance from manufacture to installation directly affects competitiveness and/or profitability.
We believe that regional hubs are part of the answer. We call them 'Nettl Works'.
When the first Nettl Business Superstore opened, we just relocated all the manufacturing equipment ADD was using. In Exeter AG Signs was subcontracting more manufacturing and so our Superstore has less equipment. Instead there's more meeting and display space.
We believe we need five Nettl Works in the UK to get sufficient geographic coverage. These hubs will manufacture sign projects, leaving Superstores to focus on sales, design and installation and printing of fast turnaround graphics.
Unlike a Superstore, hubs will retain their existing identity and continue to service their client base. We plan to implement our supply chain software and co-brand as 'Nettl Works'. Image will be the first Nettl Works.
Our current hub targets have been stable or shown growth over the past three years. Importantly, recent independent research commissioned by ISA-UK1 has shown that optimism in the UK sign and graphics industry is high, with over half of those participating in the survey reporting an increase in business turnover in the past year. A recent report by Smithers Pira2 considers that growth in the global digital textile printing market is set to continue, with the worldwide market rising to
2 The Future of Digital Textile Printing to 2023, published
Our investment criteria
The first stage is to acquire a profitable business, where the owner wants to stay for at least a couple of years - we call them the "remainer".
We'll consider businesses which meet our criteria:
● stable or growing, with a track record of profitability in previous four or five years;
● minimum annual turnover of
● their top three clients represent no more than 30 per cent. of their business;
● gross profit margins above 55 per cent.;
● owner's salary expectation consistent with our Company's pay structure;
● located in a primary city target location (phase 1) or secondary location (phase 2);
● for Superstore targets, property tenure flexible (able to relocate within 24 months);
● good cultural fit (management's business ethos and circumstances i.e. must support rebranding and personal circumstances must underpin / encourage long term commitment).
We evaluate each "remainer" acquisition on its own merits as if it were to remain a standalone business.
Once we've acquired and integrated a "remainer" business, we look for another local business to roll-in. Those could also be nearby Nettl partners. For these other businesses, we target owners seeking to exit - the "leaver". Our plan is to consolidate both businesses into a single team, led by the "remainer". We aim to achieve cost savings by centralising marketing, management information systems, legal support, payroll and accounting.
Our aim is to acquire sign businesses at 2-5 times adjusted forecast EBIT.
Our progress so far
The Nettl business model is licensed to third parties. Designers, printers and sign businesses can access our training, systems and marketing to sell websites, printing and displays to their own clients. We grant them an exclusive territory, in exchange for a licence fee of up to
Our Nettl partner network has grown to over 228 locations around the world. At the date of our last trading update, we had 173 active Nettl partners in the UK and Ireland, 27 in Benelux, 13 in France, eight in the USA, four in New Zealand and three in Australia. Our total subscription and licence fee income grew to approximately
We launched Nettl of America on
Clearly, the United States is a major market. When we research launching Nettl into a new country, we estimate the number of potential locations, relative to the density of the SME population. Using that rule of thumb, we believe the US could support between 1,500 and 2,000 Nettl locations. When we launch, much of the cost is front-loaded. Although we evaluate the project as if it were an investment, we expense the costs as we incur them. This adversely affects our earnings and inflates our short-term overheads, but we are confident that the future upside is worth the management time, opportunity cost and effort.
Use of proceeds
We plan to use the net proceeds of this Placing to acquire businesses which are suitable to become Nettl Works regional hubs and for working capital requirements, while we invest in growing our Nettl partner network domestically and internationally. The actual number of acquisitions will be determined by their profitability and scale.
In the short term, however, while the Company is seeking to identify and negotiate the acquisition of these businesses, the Company will utilise up to
In due course, the Company plans to finance acquisitions with a prudent mix of cash-flow, equity and debt.
Our most recent trading statement was announced on
As a result of these changes to our cost base, we estimate we will be breakeven on a monthly EBITDA run rate during the current financial year. We are targeting an EBITDA margin of 10-15% in the medium term, although we make decisions for the long-term sustainability of the business, rather than short-term performance. At
Since the year-end, trading in the first quarter has been in-line with the Company's internal budgets.
Details of the Placing
The Company is proposing to raise, in aggregate, approximately
The Placing is conditional, inter alia, on:
- the passing of the Resolutions at the General Meeting;
- Admission becoming effective by no later than
- the Placing Agreement not being terminated prior to Admission.
Accordingly, if any of such conditions are not satisfied, or, if applicable, waived, the Placing will not proceed.
Application will be made to the
Recommendation and voting intentions
The Directors unanimously believe that the Placing is in the best interests of the Company and its Shareholders as a whole and recommend Shareholders to vote in favour of the Resolutions, as they intend to do in respect of their own beneficial holdings of 2,791,301 Ordinary Shares, representing approximately 3.30 per cent. of the Existing Ordinary Shares.
This information is provided by RNS, the news service of the
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