TIDMFRAN
RNS Number : 9051O
Franchise Brands PLC
07 October 2019
7 October 2019
FRANCHISE BRANDS PLC
("Franchise Brands", the "Company" or the "Group")
Acquisition of Willow Pumps - adding highly complementary
services to Metro Rod
Group trading update for Q3
Change to total voting rights
Franchise Brands plc (AIM: FRAN), a multi-brand franchisor, is
pleased to announce that it has acquired a leading water pump
supply, installation and servicing business to complement and
expand Metro Rod's drainage and plumbing businesses. The Company
also provides an update on Group trading for the third quarter of
the year.
Acquisition
Franchise Brands has acquired the entire issued share capital of
WPL Group Holdings Limited and its subsidiaries, Willow Pumps
Limited and Willow Drainage Limited (together, "Willow Pumps") for
an initial consideration of GBP5.0 million (net of non-trading cash
of GBP700,000 in WPL Group Holdings Limited) ("Initial
Consideration") and a performance-based deferred consideration of
up to GBP7.5 million ("Deferred Consideration") payable over the
next five years (the "Acquisition").
The Initial Consideration has been paid as to GBP4.0 million in
cash and GBP1.0 million through the issue of 1,212,121 new ordinary
shares of 0.5p each in the Company ("Ordinary Shares") at 82.5
pence per share (the "Consideration Shares"). The cash element of
the Initial Consideration has been satisfied from the Group's
available cash resources and existing debt facilities. The Deferred
Consideration will be payable in cash, subject to the Company
having the right to settle 20 per cent. of the amount due in new
Ordinary Shares at the then prevailing share price.
Acquisition Highlights
-- Willow Pumps, founded in 1992, is a leading water pump
supply, installation and servicing business, with a below-ground
(foul water) and above-ground (fresh water) capability.
-- Willow Pumps achieved revenue of GBP12.4 million, EBITDA of
GBP1.6m and a profit before tax of GBP1.1 million in the year ended
31 December 2018 and has grown strongly in the first half to 30
June 2019, having achieved revenue of GBP8.4 million, EBITDA of
GBP1.0 million and a profit before tax of GBP0.8 million.
-- The Board believes the Acquisition will be significantly earnings enhancing for the Group.
-- The Acquisition has a strong strategic rationale:
-- It is consistent with Metro Rod's Vision 2023 strategy of
expanding its range of services to the commercial market.
-- The longer-term aim of the Group is to provide a "water in,
waste out" range of drainage, pumps and plumbing-related services
to commercial customers nationally.
-- Pumps are an engineered solution and the acquisition of this
high quality, well-established business represents the optimum way
to enter this specialist market.
-- Willow Pumps will benefit from a significantly expanded
delivery capability through Metro Rod's national network of over
400 engineers working out of 43 depots across the UK.
-- Metro Rod will benefit from potential demand from its
national account customers who are progressively tendering for
combined drainage and pump services and from the opportunity to
supply its wide range of drainage services to Willow Pumps'
customers.
-- The above-ground pump capability of Willow Pumps also
provides a new strategic opportunity to develop the Group's Metro
Plumb and Kemac businesses.
-- The deal structure provides both a significant incentive for
Willow Pumps to help upskill the Metro Rod franchise community and
then subcontract pump work to them, and for Willow Pumps'
management to continue to grow the existing business.
-- The principal vendor, Willow Pumps' founder and Managing
Director Ian Lawrence, will continue to manage the business and
becomes part of Franchise Brands' senior management team.
-- Willow Pumps will continue to operate as a direct labour
organisation ("DLO") within Franchise Brands, working closely with
Metro Rod and its franchisees and benefiting from the Group's
management, resources, and commercial customer relationships.
Commenting on the Acquisition, Stephen Hemsley, Executive
Chairman of Franchise Brands, said: "I am delighted to announce the
acquisition of Willow Pumps, which represents an important step in
expanding Metro Rod's scope of services to the commercial market,
consistent with our Vision 2023 strategy. The longer-term aim of
the Group is to be able to serve our valued commercial customers
with a "water in, waste out" range of drainage, pumps and
plumbing-related services on a national basis. The acquisition of
Willow Pumps, a highly respected business and one of the leaders in
the market, which Metro Rod has already worked alongside, provides
the optimum way for Metro Rod to enter the specialist pump sector
and develop this expertise across our franchise community.
"The deal structure also provides a significant incentive for
Willow Pump's management team to continue to grow its existing
business by developing the many national accounts where Metro Rod
only provides drainage services at present. As such, the Board of
Franchise Brands believes the Acquisition will be significantly
earnings enhancing for the Group.
"I am really looking forward to working with Ian Lawrence and
his high quality management team to create a national leader for
drainage, pumps and plumbing services."
Ian Lawrence, the founder and Managing Director of Willow Pumps,
commented: "I am very excited about building on our success to date
as part of a larger, publicly quoted group with significant
ambitions in the drainage, pumps and plumbing markets. The Group's
management and wider resources will be of particular value as we
continue to grow Willow Pumps under Franchise Brands'
ownership.
"My team and I welcome the opportunity to work with Metro Rod
franchisees all across the country and we look forward to working
with Metro Rod to deliver first-class pump services and support to
their national accounts."
Background to and rationale for the Acquisition
Willow Pumps is one of the UK's leading providers of water pumps
and pump solutions, including supply, installation and servicing.
It has a below-ground (foul water) capability as well as an
above-ground (fresh water) capability. Since 2017, Willow Pumps has
also developed a complementary drainage business which is engaged
predominantly in tanker work to support the pump maintenance and
emergency clearance side of the business.
The business is highly complementary to the Group's Metro Rod
and Metro Plumb businesses and provides a strategic opportunity to
expand the range of services that Metro Rod and Metro Plumb can
offer, consistent with our Vision 2023 strategy. The longer-term
objective is to be able to offer an end-to-end range of drainage,
pumps and plumbing-related services to commercial customers that
will extend from "water in" to "waste out" on a national basis.
Pumps are engineered solutions and incorporate an electrical, as
well as a mechanical, component. As such, they have certain
specialisations over and above drainage services. The Metro Rod
franchisees currently have little or no pump capability because of
the specialist nature of this work. However, given the linkage
between pumps and drainage, such work is frequently encountered.
Currently, Metro Rod franchisees subcontract the pump work which
stems from their drainage jobs, and, since 2013, a proportion of
this has been subcontracted to Willow Pumps. In addition, there is
increasing demand for a pump servicing capability from Metro Rod's
national account customers who are progressively tendering combined
drainage and pump services. As Metro Rod has historically been
unable to self-deliver this service, it has not competed in this
area of the market.
The organic development of a complete range of market-leading
pump services within a franchise business would take a considerable
amount of time to achieve and national coverage would be patchy, as
the pace at which franchisees would embrace the opportunity would
vary across the network. The Board therefore concluded that the
acquisition of Willow Pumps, one of the leading pump companies in
the UK, and one which had a below-ground and above-ground
capability, would be the optimum way to enter this specialist
market.
The above-ground capability of Willow Pumps, which includes cold
water booster sets, storage tanks, and pressurisation units within
its offering, also provides a new strategic opportunity to develop
the Metro Plumb business. Currently, Metro Plumb is focused on
lower-value insurance stabilisation work, but the expertise of
Willow Pumps will provide the opportunity to enhance Metro Plumb's
skill base and to undertake higher value work. Furthermore, an
opportunity has been identified for Kemac, which carries out some
high-end specialist plumbing work for water utilities, to work more
closely with the above-ground team at Willow Pumps.
The Board of Franchise Brands believes that the Acquisition will
be significantly earnings enhancing given the considerable growth
opportunities that have been identified for the Group and Willow
Pumps. The additional pump work undertaken by Metro Rod franchisees
is expected to enhance their profitability and generate additional
Management Service Fee income for the Group. Willow Pumps is also
expected to continue to grow organically as a result of access to a
wider customer base and the opportunity to service customers on a
truly nationwide basis.
Structure of the Acquisition and integration with the Group
The structure of the Acquisition provides a significant
incentive for Willow Pumps to provide the necessary specialist
training and support to the Metro Rod franchise community to enable
them to undertake pump work to the required standard. All Metro Rod
franchisees will be given the opportunity to upskill, identify and
self-deliver pump work utilising Willow Pumps' expertise. Growth
incentives, similar to the incentive scheme that has successfully
encouraged significant investment by franchisees in a tankering
capability, will also be offered to the Metro Rod franchise
community to encourage them to invest in a pump servicing
capability. Over time, Willow Pumps will benefit from a
significantly expanded delivery capability through Metro Rod's
national network of over 400 engineers working out of 43 depots
across the UK. Metro Rod will also benefit from the opportunity to
supply its wide range of drainage services to Willow Pumps'
customers.
The deal structure also provides a significant incentive for
Willow Pumps' management team to continue to grow its existing
business. Willow Pumps will continue to operate as a DLO within
Franchise Brands and will benefit from the Group's management,
resources, and national account customer relationships. In
particular, the business will benefit from Metro Rod's
relationships with facilities management companies to win new
contracts to deliver pump services.
Willow Pumps has a strong management team led by the founder,
Ian Lawrence. Ian will continue to manage the business as Managing
Director of Willow Pumps and has joined Franchise Brands' senior
management team reporting to the Executive Chairman. Each area of
the business is headed by an experienced manager who will be
directly incentivised to assist the achievement of the Acquisition
earn-out targets. This senior team of five individuals will be
incentivised through the grant of EMI options over new Ordinary
Shares to an aggregate value of GBP1.0 million and up to GBP500,000
of cash bonuses payable over five years on the same basis as the
Deferred Consideration.
Details of Willow Pumps' business
Willow Pumps was founded by Ian Lawrence in 1992 and has been
family owned until the acquisition by Franchise Brands. The scope
of work involves the supply and installation of pumps, routine
servicing work, the repair and maintenance of pumps and related
drainage services that may be required. Pumps are supplied and
installed for both below-ground and above-ground applications.
Supply and installation work involves the design and
installation of below ground pumping stations, typically in
new-build developments. These range from central pump stations on
new housing estates to new-build commercial premises. These
installations take place over a number of months, in discrete
phases. At the end of the project a customer may sign up to a
maintenance contract prior to the installation being adopted by a
water authority. The design aspect of directly won work is either
undertaken in house or subcontracted to a specialist consultancy
firm. This firm also wins contracts directly, particularly from
housebuilders, and then refers the installation work to Willow
Pumps, which invoices the customer directly.
Servicing and maintenance work comprises the routine servicing
of pump systems and equipment and reactive call outs for pump
failures or blockages. The routine servicing work can be scheduled
in advance, resulting in high levels of labour efficiency. The
reactive work often involves a significant drainage or tanker
element which is expected to give rise to additional subcontract
work for Metro Rod. Willow Pumps has built up a high-quality
service and maintenance client base, with customers in the
hospitality, retail and housebuilding sectors.
Above-ground pump applications, which handle fresh water,
require a separate means of service delivery in order to mitigate
against the potential risk of cross-contamination with foul water.
Willow Pumps, therefore, has a specialist team operating from
dedicated vehicles and premises engaged in this activity. The Board
believes that there is significant potential in the above-ground
market, in particular to develop a national capability, and this
potential will be further enhanced by the development of
opportunities in association with Kemac and Metro Plumb.
Willow Pumps employs 74 people, including 35 engineers, and has
support centre teams in sales, contracts, national account
management, finance, servicing, operations and health and safety.
The majority of these employees work out of the main premises in
Aylesford, near Maidstone, Kent. In 2018, Willow Pumps established
a depot in Wetherby, Yorkshire, to better service the below-ground
pump market in the north of the country. In addition, the company
has various satellite sales offices and workshops from which a
number of engineers operate.
Financial information on Willow Pumps
Franchise Brands has acquired the entire issued share capital of
WPL Group Holdings Limited and its subsidiaries, Willow Pumps
Limited and Willow Drainage Limited. Consolidated accounts have not
historically been prepared for the group as WPL Group Holdings
Limited was, and remains, a non-trading holding company and Willow
Drainage Limited, which was controlled by the Lawrence family, was
acquired by WPL Group Holdings Limited shortly before completion of
the Acquisition.
On a group pro-forma unaudited basis, for the financial year
ended 31 December 2018, Willow Pumps achieved revenue of GBP12.4
million, EBITDA of GBP1.6 million and a profit before tax of GBP1.1
million. In the six months to 30 June 2019, pro-forma unaudited
management accounts of Willow Pumps show revenue of GBP8.4 million,
EBITDA of GBP1.0 million and a profit before tax of GBP0.8
million.
The net assets of Willow Pumps on a group pro-forma unaudited
basis as at 30 June 2019 were GBP2.7million, including borrowing
(substantially comprising leasing and hire purchase commitments) of
GBP1.6 million and cash of GBP0.9 million, of which the GBP0.7
million of cash not required for trading has been netted off
against the Initial Consideration.
Terms of the Acquisition
Franchise Brands has acquired the entire issued share capital of
Willow Pumps for an initial consideration of GBP5.0 million (net of
non-trading cash of GBP700,000) and a potential deferred
consideration of up to GBP7.5 million. Of the Initial
Consideration, GBP4.0 million has been paid in cash and GBP1.0
million was satisfied by the issue of 1,212,121 new Ordinary Shares
of 0.5p each in the Company at 82.5 pence per share (being the
latest closing middle market price of an Ordinary Share on the last
day of trading prior to this announcement). The Consideration
Shares rank pari passu in all respects with the existing Ordinary
Shares.
As a result of the issue of the Consideration Shares, the
vendors of Willow Pumps (Ian Lawrence and his wife) now have an
aggregate beneficial interest in 1.55 per cent. of the issued share
capital and voting rights of the Company. It has been agreed that
the vendors will hold the Consideration Shares for three years and
then be subject to an orderly market arrangement for a further two
years thereafter.
The Deferred Consideration of up to GBP7.5 million will be paid
based on business generated for the Group and profits of Willow
Pumps over the next five years as follows:
I. Up to GBP3.75 million will be paid at the rate of up to
GBP750,000 per annum on a pro-rata basis for every GBP3.0 million
per annum of additional pump and related drainage business that
Willow Pumps generates for Metro Rod for each of the five financial
years ending 31 December 2020 to 2024 (inclusive) ("Further
Consideration"). Therefore, to achieve payment in full,
subcontracted work to Metro Rod would need to have grown by GBP3.0
million per annum and be GBP15.0 million or more in the year ending
31 December 2024. The Further Consideration will be calculated and
will be payable annually. The Further Consideration is capped at
GBP750,000 per annum and GBP3.75 million in total.
II. Up to GBP3.75 million will be paid at the rate of up to
GBP750,000 per annum on a pro-rata basis for every GBP250,000 by
which additional maintainable profits after tax ("PAT") of Willow
Pumps exceed GBP1.0 million in each of the five financial years
ending 31 December 2020 to 2024 (inclusive) ("Additional
Consideration"). Therefore, to achieve payment in full, PAT will
have to grow to GBP2.25 million by the year ending 31 December
2024. For this purpose, maintainable PAT is the PAT excluding items
of income or expenditure of a non-recurring, unusual, exceptional
or one-off nature. The Additional Consideration will be calculated
and agreed annually based on the actual growth in maintainable PAT
in each year and will be payable on finalisation of the
consolidated accounts of Willow Pumps for the year ending 31
December 2022 in respect of the first three years (capped at
GBP2.25 million) and on the finalisation of those accounts for the
year ending 31 December 2024 in respect of the fourth and fifth
years (capped at GBP1.5 million).
III. The Further Consideration and Additional Consideration will
be payable in cash, subject to the Company having the right to
settle 20 per cent. of the amount due in new Ordinary Shares at the
then prevailing share price.
Group trading update
The second half of the financial year ending 31 December 2019
has started encouragingly, with momentum being maintained in Metro
Rod's Systems Sales growth with an increase year-to-date of 15 per
cent. (2018: 6 per cent.). Metro Rod franchisees continue to invest
in their businesses, including the continued expansion of the
tanker fleet. The first of our new Vision 2023 depots is also due
to open shortly in Lincoln. As a result of the growing pipeline of
candidates we have developed, the number of Metro Rod franchise
businesses (or territories) being purchased by ambitious new owners
is accelerating. We are particularly pleased to welcome the first
ever Metro Rod franchisee in Northern Ireland, who began trading on
1 October 2019.
Across our B2C brands, we continue to see an improvement in
franchise recruitment. Year-to-date we have recruited 54 new
franchisees (2018: 49) at ChipsAway, Ovenclean and Barking Mad.
Barking Mad experienced a particularly strong third quarter
following the management change in June.
This good trading performance together with strong momentum
across the Group means that the Board looks forward to the
remainder of the year with confidence.
Issue of equity and change to Total Voting Rights
Application will be made to the London Stock Exchange for the
Consideration Shares to be admitted to trading on AIM
("Admission"). It is expected that Admission will take place on or
around 10 October 2019.
With the issue of the Consideration Shares, the total number of
Ordinary Shares of 0.5p each in the Company in issue is now
79,339,544. There are 25,000 Ordinary Shares held in treasury and
so the total number of voting rights in the Company is 79,314,544.
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
Company under the FCA's Disclosure Guidance and Transparency
Rules.
Enquiries:
+ 44 (0) 1562
Franchise Brands plc 826705
Stephen Hemsley, Executive Chairman
Chris Dent, Chief Financial Officer
Julia Choudhury, Corporate Development
Director
Allenby Capital Limited (Nominated Adviser +44 (0) 20 3328
and Joint Broker) 5656
Jeremy Porter / Liz Kirchner / Nicholas
Chambers
+44 (0) 20 3903
Dowgate Capital Limited (Joint Broker) 7715
James Serjeant / Colin Climie
+44 (0) 20 3128
MHP Communications (Financial PR) 8100
Katie Hunt / Patrick Hanrahan
This information is provided by RNS, the news service of the
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END
ACQMFBMTMBJMTJL
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