TIDMKAPE
RNS Number : 8186T
Kape Technologies PLC
19 November 2019
19 November 2019
Kape Technologies plc
("Kape," the "Group" or the "Company")
Proposed acquisition of Private Internet Access
Acquisition creates a truly global privacy company and
significantly accelerates earnings growth
Kape (AIM: KAPE), the consumer security software business,
announces the proposed acquisition of LTMI Holdings ("LTMI"), for a
total consideration of c. US$95.5(1) million and an enterprise
value of c. US$127.6 million (the "Acquisition").
LTMI is the holding company for Private Internet Access ("PIA"),
a leading US-based digital privacy company with a strong position
in data privacy services and over 1 million paying customers. As
part of the Acquisition, Kape will also acquire LTMI's suite of
digital privacy products which are at the forefront of the privacy
technology space.
About PIA
PIA was established in 2009 and is a security software business,
based in Denver, Colorado, with a focus on the provision of virtual
private network ("VPN") solutions. Since its inception, PIA has
grown to become a leading VPN service provider focused on the
consumer market and employing approximately 65 employees amongst
them 35% are in an R&D capacity. PIA has over 1 million paying
subscribers globally, with 48% of them based in the US.
Financial and Operational Highlights of the Acquisition
The Acquisition, which is expected to be immediately earnings
enhancing, represents a significant step-change in the Group's
development, delivering substantial operational and financial
benefits, namely:
-- Customer reach: doubling Kape's existing customer base, with
the enlarged group servicing over 2 million paying subscribers
globally;
-- Earnings growth: the enlarged group is expected to generate
consolidated proforma 2020 revenues of between US$120-123 million
and Adjusted EBITDA(2) of between US$35-38 million;
-- Earnings accretion: c. 90% earnings accretion anticipated in the year ending 31 December 2020;
-- Cash generation: LTMI is a highly cash generative business,
generating c. US$16.3 million of adjusted operational cash flow in
2018 with cash conversion of over 100% with expectations of ongoing
strong cash generation;
-- Brand awareness: uniquely positions Kape as a truly global
leader within the fast-growing digital privacy sector and a strong
presence in North America; Kape will adopt the Private Internet
name following the Acquisition;
-- Product extension: enhances Kape's product stack with a suite
of privacy-based software solutions focused on browsing, encryption
and connectivity;
-- Technology platform: provides the opportunity to leverage
Kape's proprietary technology platform to deliver continued strong
organic growth; and
-- Cost synergies: immediate cost synergies of between
US$3.5-4.5 million on an annual basis and are expected to be
achieved within 12 months following completion, primarily across
general operational costs and infrastructure.
Transaction summary
Kape will acquire LTMI from its co-founders and shareholders
Andrew Lee and Steve DeProspero, for a total consideration of
c.US$95.5 million to be satisfied by a combination of c. US$52.9
million cash and issuance of c. 42,701,548 new Kape ordinary shares
("Consideration Shares") to be paid in three phases:
-- A payment upon closing of c. US$32.9 million in cash and
11,648,059 Consideration Shares ("Initial Consideration");
-- A payment a year after closing of US$5 million in cash and
23,290,117 Consideration Shares; and
-- A final payment two years after closing of US$15 million in
cash and 7,763,372 Consideration Shares.
On completion, Kape will also repay LTMI's existing debt of
approximately US$32.1 million, resulting in a total enterprise
value for LTMI of approximately US$127.6 million.
Kape proposes to fund the cash element of the Initial
Consideration through a US$40 million short-term debt facility from
Unikmind Holdings Limited ("Unikmind"), Kape's largest shareholder,
as well as provide an additional debt facility of US$20 million,
which the Company does not expect to draw, to satisfy the deferred
cash consideration, on similar terms (together the "Term Loan").
Further details of the Term Loan, which is a related party
transaction, are set out below. The balance will be satisfied by
Kape's own cash resources. The Term Loan is intended to facilitate
timely completion of the transaction. Following completion, Kape
expects to put in place a debt facility from commercial banks which
will replace the Term Loan.
LTMI's management will join Kape with Ted Kim, LTMI's CEO,
joining the Kape board as a non-executive director and, in an
executive capacity, leading Kape's enlarged North America
operations.
Strategic rationale
The Acquisition represents an acceleration in Kape's strategy to
create a world-leader in digital privacy. It is anticipated that
the Acquisition will bring a number of benefits to the Group,
including:
-- Significantly earnings enhancing, with LTMI in the year ended 31 December 2018:
o servicing over 1 million paying subscribers
o generating revenues of US$47.42 million(5) and cash of c.
US$16.3 million(5)
o achieving adjusted EBITDA of US$14.69 million
o having net liabilities of US$(20.1) million(5) as at 31
December 2018
-- Substantially increases the Group's recurring revenue base:
o PIA is focused solely on paid subscribers, offering monthly,
annual and bi-annual subscriptions
-- Material annual cost synergies anticipated:
o Immediate annual cost synergies of US$3.5-4.5 million expected
to be realised in the first 12 months following the acquisition
-- Broadening Kape's existing shareholder base:
o LTMI's co-founders and shareholders Andrew Lee and Steve
DeProspero, in addition to a number of LTMI employees, will be
issued with approximately 42,701,548 Consideration Shares,
equivalent to c. 23.1% of Kape's anticipated enlarged share capital
(assuming the issuance in full of all of the Consideration Shares
and excluding treasury shares and shares held by the Kape EBT)
o Unikmind, Kape's largest shareholder, is to be diluted to a c.
55.9% holding post-completion (assuming the issuance in full of all
the Consideration Shares and excluding treasury shares and shares
held by the Kape EBT)
-- Combines PIA's strong brand equity and track-record of
organic growth with Kape's user acquisition expertise and the
potential for further improved profit margins
-- Adds additional privacy products at the forefront of the
privacy technology space, which are(3) :
o Plus Ultra - a software that speeds up internet
connections
o LibreBrowser - a completely private browser
o Private.sh - a private and encrypted search engine based on
proprietary cryptography technology
Market drivers
-- The Acquisition will strengthen the Group's position within
the fast-growing global digital privacy market:
o The privacy market is currently worth c. US$24 billion and
expected to grow by 50% by 2022 at a CAGR of 15%(4)
o Regulation:
-- Customer and regulatory concern about how data is creating a
climate for increased regulation as well as different regulation
alignments in different countries
-- Consumers are reclaiming data ownership and having increased
digital interactions make them more concerned than ever about data
privacy and identity theft. As indicated in an increase of 18% in
Google search queries for VPN in Q1 2019 year-on-year
o Data Breaches:
-- According to the Breach Level Index in the first half of
2018, more than 25 million records were compromised every day -
which equates to 291 records every second(8) .
-- As more and more data is shared online the need to encrypt
and protect personal data by the users themselves is increasing
exponentially.
o Mobile Devices and IOT devices usage:
-- Research indicates that 48% of phishing attacks occur on
mobile devices(6) . Using a trusted privacy solution like Kape's
can prevent data breaches. Furthermore, mobile users are three
times more likely to submit private information compared to desktop
users(7) .
(1) All US$ figures based on an assumed GBP/USD exchange rate of
1.281
(2) Adjusted EBITDA is a non GAAP measure and a company specific
measure which excludes other operating income and expenses which
are considered to be one off and non-recurring in nature.
(3) Kape will own a controlling 80% stake in Plus Ultra and a
25% in private.sh. These products will be fully managed by Kape
(4) Source: Cybersecurity Market by Solution, Markets &
Markets, September 2018, Start-Up Nation Central: Finder Insights
Series The State of the Israeli Ecosystem in 2018, March 2019
(5) Audited numbers for the year ended 31 December 2018
(6)
https://www.wandera.com/mobile-security/mobile-phishing-report-2018/
(7)
https://securityintelligence.com/mobile-users-3-times-more-vulnerable-to-phishing-attacks/
(8)
https://blog.gemalto.com/mobile/2019/02/11/top-6-trends-driving-trusted-digital-identities-in-2019/
Ido Erlichman, Chief Executive Officer of Kape, commented:
"This is a game changing moment in Kape's development and we are
thrilled to announce the proposed acquisition of Private Internet
Access, a pioneer in the provision of digital privacy. This
transaction will be transformational for our business, enabling
Kape to aggressively expand our footprint in North America, broaden
our product offering, further strengthen our recurring revenue base
and, gain access to an extremely rich pool of talent.
"This transaction makes our vision a reality by creating one of
the most prominent privacy companies globally. In one acquisition,
I believe we have positioned Kape to fast become one of the leading
digital privacy service providers in the world, empowering
consumers to manage their own data and digital security."
Ted Kim, Chief Executive Officer of LTMI, commented:
"We are excited to join forces with Kape, and this transaction
is a truly monumental milestone in realising PIA's vision of
creating a privacy company with a mission to improve our customers'
digital privacy and security worldwide. Being part of a publicly
listed company enables anyone that values digital privacy and
security to be part of our future journey. I look forward to
working with the Kape team to create one of the leading digital
privacy players globally."
A further announcement providing an update on the Acquisition
will be made in due course.
Enquiries:
Kape Technologies plc via Vigo Communications
Ido Erlichman, Chief Executive Officer
Moran Laufer, Chief Financial Officer
Shore Capital (Nominated Adviser & Broker)
Mark Percy / Toby Gibbs / James Thomas (Corporate
Advisory)
Henry Willcocks (Corporate Broking) +44 (0)20 7408 4090
N+1 Singer (Joint Broker)
Harry Gooden / George Tzimas +44 (0) 20 7496 3000
Vigo Communications (Financial Public Relations)
Jeremy Garcia / Antonia Pollock
kape@vigocomms.com +44 (0)20 7390 0237
About Kape
Kape is a leading 'privacy-first' digital security software
provider to consumers. Through its range of privacy and security
products, Kape focusses on protecting consumers and their personal
data as they go about their daily digital lives.
To date, Kape has over 1 million paying subscribers, supported
by a team of over 300 people across eight locations worldwide. Kape
has a proven track record of revenue and EBITDA growth, underpinned
by a strong business model which leverages our digital marketing
expertise.
Through our subscription-based platform, Kape has fast
established a highly scalable SaaS-based operating model, geared
towards capitalising on the vast global consumer digital privacy
market.
www.kape.com
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FURTHER DETAILS REGARDING THE ACQUISTION
Structure of the Acquisition
The Acquisition is structured as a forward merger of LTMI into a
merger subsidiary created by Kape, with the merger subsidiary
remaining. The effect of the merger is that LTMI, as the holder of
the PIA business, will become an indirect wholly-owned subsidiary
of Kape. LTMI will be renamed Private Internet Access Inc. on or
before the merger becomes effective.
Details regarding payment of consideration
The consideration is payable in three stages. On completion,
Kape will pay approximately US$32.9 million in cash (subject to
adjustment to account for the exact amount at Closing of certain
debt and debt-like items of LTMI), issue 11,648,059 Consideration
Shares and also repay LTMI's existing debt of approximately US$32.1
million. On the first anniversary of completion, Kape will pay US$5
million in cash (subject to adjustment to account for any variances
at completion in LTMI deferred revenues against those estimated
prior to completion) and issue 23,290,117 Consideration Shares
(subject to the escrow and set-off arrangements described below).
On the second anniversary of completion, Kape will pay US$15
million in cash and issue 7,763,372 Consideration Shares (subject
to the escrow and set-off arrangements described below).
Andrew Lee and Steve DeProspero will each be entitled to be
issued 19,247,723 Consideration Shares (subject to the escrow and
set-off arrangements described below) representing approximately
10.4% of the enlarged issued share capital of Kape (assuming the
issuance in full of all deferred Consideration Shares on the 2(nd)
anniversary following completion and excluding treasury shares and
shares held by the Kape EBT), of which 5,250,363 will be issued on
completion, 10,498,020 will be issued on the first anniversary of
completion and 3,499,340 will be issued on the second anniversary
of completion. The balance of the Consideration Shares, being
4,206,102 in aggregate, are issuable on completion to 4 senior
executives of LTMI who are also Vendors (the "Senior Executives").
All other Vendors will receive only cash.
The merger agreement contains certain customary representations
and the Vendors have agreed to indemnify Kape for any breach of
such representations and, in addition, have agreed to indemnify
Kape in respect of certain other matters, subject to certain
limits. The number of Consideration Shares issuable to the Founders
and Senior Executives and the amount of cash consideration payable
to the Vendors on the first and second anniversaries of completion
may be reduced in order to satisfy indemnification claims against
the Vendors which are agreed or determined before such
anniversaries.
Lock-in arrangements applicable to Consideration Shares
The Founders' Consideration Shares will be subject to a
graduated lock-in, whereby the Consideration Shares to be issued on
completion will be subject to a 12 month lock-in and the
Consideration Shares issuable on the first anniversary of
completion will be subject to a lock-in which is released as to 25%
of such Consideration Shares each quarter thereafter. Following the
expiry of their respective lock-in periods, the Consideration
Shares to be issued to the Founders on completion and on the first
anniversary of completion will be subject to a 12-month orderly
market period. The Consideration Shares issuable to the Founders on
the second anniversary of completion will not be subject to a
lock-in period but will be subject to a 12-month orderly market
period from the time of their issue.
All of the lock-in arrangements will be subject to customary
exclusions. In addition, if Unikmind or any of its concert parties
disposes of the beneficial interest in any Kape ordinary shares
during the lock-in period to a person other than another concert
party of Unikmind, the same proportion of the Founders' then
locked-in Consideration Shares (ignoring any shares held in escrow)
will be released from the lock-in but will remain subject to the
orderly market arrangements for 12 months after such release.
Founders' future involvement in the enlarged group
Andrew Lee has agreed to provide consulting services to Kape for
a period of three years following completion through a separate
services company. Steve DeProspero is not involved in the
day-to-day operations of PIA and therefore will not have an ongoing
role in the business following completion. Several of the Senior
Executives have also agreed to ongoing employment agreements with
PIA to ensure continuity of management.
Ted Kim, LTMI's CEO, will, on completion, join the board of Kape
as a non-executive director and as a representative of the
Founders. Further details of the appointment, including any
disclosures under Schedule 2(g) of the AIM Rules for Companies are
set out below.
Financing the Acquisition
Kape proposes to fund the cash consideration and the repayment
of LTMI's existing debt through a combination of its own cash
resources and drawing down under the Term Loan of up to US$60
million.
If Kape does not within 45 days of signing the merger agreement
receive cash proceeds from the Term Loan or another source
sufficient to allow it to pay the cash consideration due on
completion, the Founders may terminate the merger agreement and
require Kape to pay a reverse termination fee of US$4,950,000.
Stakeholder Agreements
Both the Founders and the Senior Executives will enter into
stakeholder agreements with Kape at completion to provide for
individual representations and certain restrictive covenants in
favour of Kape. The Founder stakeholder agreements will also
contain certain voting agreement provisions and, in the case of
Andrew Lee only, a provision permitting Andrew Lee to appoint one
Non-Executive Director to the Board of Kape (which right will
continue for so long as Mr Lee holds at least 9,559,731 ordinary
shares).
Unikmind New Term Loan Facility - Related party transaction
The Company has entered into a binding commitment letter with
Unikmind under which Unikmind has committed, subject to certain
limited conditions, to provide to a wholly owned subsidiary of Kape
and the holding company of LTMI (the "Borrower") a term loan of up
to US$60 million in aggregate, to be made available in 3 tranches
of: US$40 million on completion, US$5 million on the first
anniversary of completion and US$15 million on the second
anniversary of completion (the "Term Loan").
The Term Loan will have a fixed interest rate of 5% above Libor.
Each tranche of the Term Loan is repayable on the earlier of a
third-party refinancing of the Term Loan and 6 months after its
utilisation unless such tranche's maturity is extended by a further
6 months with the consent of Unikmind. The Term Loan can be repaid
early in whole or part by the Borrower free of any penalty. The
Term Loan will also include a commitment fee on undrawn amounts
only from the moment they become available in accordance to the
payment schedule. and certain other customary obligations on the
Borrower in relation to the lender's costs and expenses and in
relation to taxes.
Borrowings under the Term Loan will be guaranteed by Kape and
secured by a share charge granted by Kape in respect of its shares
in the Borrower.
Kape intends to re-finance the Term Loan with third party
facilities as soon as practicable.
The directors of Kape consider, having consulted with the
Company's nominated adviser, that the terms of the Term Loan and
related security are fair and reasonable insofar as the Company's
shareholders are concerned.
Completion of the Acquisition
It is anticipated that completion of the Acquisition will occur
early 2020. Completion of the Acquisition is conditional upon,
inter alia, certain merger control consents having been received or
relevant waiting periods expired, the representations in the merger
agreement remaining true and accurate in all material respects, no
event that would have a material adverse effect having occurred,
and certain other conditions which are customary for an acquisition
of this nature.
Following completion of the Acquisition and the full issuance of
the Consideration Shares, assuming no other new Kape ordinary
shares are issued and Unikmind do not acquire or dispose of any
interests in the Company during the period, it is expected that
Unikmind's interest in the entire issued share capital of the
Company will fall to approximately 55.9 per cent.
Appointment of Theodore Kim to the board of Kape
Mr Kim, 52, is CEO of LTMI and prior to that was the CEO of MNET
America, and before that Head of America at the Korean conglomerate
CJ E&M.
Mr Kim has entered into a letter of appointment to the board of
Kape.
The directorships / partnerships held by Ted Kim in the previous
five years are:
Current
London Trust Media
There are no other disclosures required relating to Mr Kim's
appointment in accordance with Schedule 2(g) of the AIM Rules.
Presentation of Information
Forward-looking information
This Announcement may contain and the Company may make verbal
statements containing "forward-looking statements" with respect to
certain of the Company's plans and its current goals and
expectations relating to its future financial condition,
performance, strategic initiatives, objectives and results.
Forward-looking statements sometimes use words such as "aim",
"anticipate", "target", "expect", "estimate", "intend", "plan",
"goal", "believe", "seek", "may", "could", "outlook" or other words
of similar meaning. By their nature, all forward-looking statements
involve risk and uncertainty because they relate to future events
and circumstances which are beyond the control of the Company,
including amongst other things, United Kingdom domestic and global
economic business conditions, market-related risks such as
fluctuations in interest rates and exchange rates, the policies and
actions of governmental and regulatory authorities, the effect of
competition, inflation, deflation, the timing effect and other
uncertainties of future acquisitions or combinations within
relevant industries, the effect of tax and other legislation and
other regulations in the jurisdictions in which the Company and its
respective affiliates operate, the effect of volatility in the
equity, capital and credit markets on the Company's profitability
and ability to access capital and credit, a decline in the
Company's credit ratings; the effect of operational risks; and the
loss of key personnel. As a result, the actual future financial
condition, performance and results of the Company may differ
materially from the plans, goals and expectations set forth in any
forward-looking statements. Any forward-looking statements made in
this Announcement by or on behalf of the Company speak only as of
the date they are made. Except as required by applicable law or
regulation, the Company expressly disclaims any obligation or
undertaking to publish any updates or revisions to any
forward-looking statements contained in this Announcement to
reflect any changes in the Company's expectations with regard
thereto or any changes in events, conditions or circumstances on
which any such statement is based.
Company website
Neither the content of the Company's website nor any website
accessible by hyperlinks on the Company's website is incorporated
in, or forms part of, this Announcement.
This information is provided by RNS, the news service of the
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contact rns@lseg.com or visit www.rns.com.
END
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