24 June 2010
On 19 January 2010, Chemring Group PLC (“Chemring”) announced that it had entered into a conditional agreement (the “Merger Agreement”) to acquire the entire issued stock capital of The Allied Defense Group, Inc. (“ADG”), a US public company traded on the NYSE AMEX, for a cash consideration of $7.25 per share equating to $59 million (£40 million).
On the same day as Chemring’s announcement, ADG received a subpoena from the US Department of Justice (“DOJ”) requesting that ADG produce documents relating to its dealings with foreign governments. ADG also became aware that day that an employee of its US subsidiary, Mecar USA, Inc. (“Mecar US”), had been indicted by the DOJ for allegedly engaging in schemes to bribe foreign government officials to obtain and retain business. The unsealed indictment of this employee and the DOJ’s press release indicated that the alleged criminal conduct was on behalf of another US company unrelated to ADG or Mecar US. Whilst the DOJ initially agreed that ADG could limit its response to the subpoena to matters related to the indicted former employee of Mecar US, the DOJ has recently requested additional documents from ADG and indicated that it would be expanding its review. Against this background, Chemring concluded that it could not complete the acquisition of ADG pursuant to the Merger Agreement.
Revised transaction structure
Chemring has instead entered into a new conditional agreement with ADG to acquire ADG’s two principal operating businesses - Mecar S.A., based in Nivelles, Belgium and Mecar US, based in Marshall, Texas (collectively “Mecar”). Pursuant to this new agreement, Chemring will acquire the entire issued share capital of Mecar S.A. and the business and assets of Mecar US for a total cash consideration of $59 million (£40 million).
Description of the business and reasons for the acquisition
Mecar S.A. is a niche manufacturer of medium and large calibre ammunition, particularly for modern, light armoured vehicles (“LAVs”). Mecar US provides load, assemble and pack and procurement services for the US Government and prime contractors.
In the year ended 31 December 2009, Mecar generated an audited underlying operating profit (before non-recurring costs) of $1.7 million (£1.2 million) on revenue of $142 million (£95 million). Gross assets as at that date were $101 million (£68 million). Mecar’s order book is currently valued at around $88 million (£59 million). The acquisition is expected to enhance Chemring’s earnings in the first full financial year post-completion.*
The acquisition of Mecar brings to Chemring complementary markets, products and technologies. Mecar has a strong presence in the Middle East, complementing Chemring’s current emphasis on NATO customers. As a prime contractor, Mecar’s focus on ammunition for LAVs fits well with Chemring’s leading position in naval ammunition. Finally, the acquisition of Mecar creates an internal customer for Chemring’s propellants, explosives and fuzes, whilst its precision machining capacity should be able to supply a growing Group requirement for metal parts.
Principal terms of the acquisition
The cash consideration of $59 million (£40 million) will be funded from the proceeds of the private placement of $280 million (£188 million) of fixed interest loan notes completed by the Group in November 2009.
On completion of the acquisition, Chemring will assume approximately $11 million (£7 million) of net cash at Mecar. Approximately $14 million (£9 million) will need to be invested in working capital in the short-term. This, therefore, produces an overall enterprise value for Mecar of approximately $62 million (£42 million).
Completion, which is anticipated within ninety days, is conditional upon, inter alia, US regulatory and ADG shareholder approvals.
Commenting on the acquisition, Dr David Price, Chief Executive of Chemring, said: “The two Mecar subsidiaries will enhance our position in both the Middle East and Far East markets. They provide a wide range of complimentary products and technology to our existing businesses. I am delighted that we have been able to negotiate this revised agreement.”
* This statement should not be taken to mean that the earnings per share of Chemring will necessarily match or exceed the historical reported earnings per share of Chemring and no forecast is intended or implied.
For further information:
|Dr David Price ||Chief Executive, Chemring Group PLC ||01489 881880 |
|Paul Rayner ||Finance Director, Chemring Group PLC ||01489 881880 |
|Rupert Pittman ||Cardew Group ||0207 930 0777 |