Proposed Acquisition of Eschenbach Holding GmbH

THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN, INTO OR FROM THE UNITED STATES, CANADA, AUSTRALIA, JAPAN, THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF REGULATION (EU) NO 596/2014

For immediate release

19 November 2020

Inspecs Group plc

("Inspecs", the "Company" or the "Group")

Proposed Acquisition of Eschenbach Holding GmbH

Inspecs Group plc, a leading designer, manufacturer and distributor of eyewear frames, is pleased to announce that it has conditionally agreed to acquire all of the equity interests in Eschenbach Holding GmbH ("Eschenbach") (the "Acquisition") for €94.85 million (approximately £84.7 million⁽¹⁾) (the "Consideration"). The Consideration will be paid wholly in cash on closing.

Eschenbach is a leading, global, eyewear supplier headquartered in Nuremberg, Germany. It has two divisions, one focused on designing and distributing glasses frames (the "Eyewear Division") and one on designing, manufacturing and distributing specialist optics products (the "Optics Division").

The Acquisition represents a key strategic step in the Company's growth as a global, vertically integrated, eyewear firm. Eschenbach's established presence in the USA and continental Europe (in particular Germany and France) alongside its portfolio of more than 15 'in house' and licensed brands are complementary to Inspecs and will help position the Company as one of the leading eyewear companies in the world.

The Acquisition and associated costs will be funded by way of; (i) a conditional placing to raise gross proceeds of £64 million (the "Placing") to be announced separately today (the "Placing Announcement"); (ii) $8 million (approximately £6.0 million⁽²⁾) drawn down from the Company's existing bank facility and a further $10 million (approximately £7.5 million⁽²⁾) under an accordion facility; and (iii) approximately $15 million (approximately £11.3 million⁽²⁾) in cash reserves.

The Inspecs board of directors (the "Board") believe that the Acquisition will deliver on all of their strategic acquisition objectives (as set out at the time of the Company's IPO) whilst also being financially compelling for the Company.

Acquisition highlights include:

·      The Acquisition extends the Company's presence internationally in key global markets, such as the USA and Germany, through a network of over 250 sales representatives and more than 12 international subsidiaries.

·      The Company's greater scale post-Acquisition is expected to provide the opportunity for Inspecs to acquire bigger global licences.

·      The Company will be able to utilise its manufacturing expertise in Asia to assist Eschenbach in providing cost synergies going forwards.

·      Eschenbach's senior management team from both Germany and the USA will join Inspecs, adding a wealth of experience to the leadership team and helping to mitigate risks arising from the integration process.

·      The Acquisition presents opportunities to deliver innovative business models that broaden the Company's routes to market and enhance its product offering (e.g. online B2B platform, developing Eschenbach's insurance business in the USA and providing a complete frame and lens package through integration with the Company's Norville lens manufacturing facility).

·      For the financial year ended 31 December 2019 Eschenbach generated audited revenues of €143.3 million (approximately $169.2 million⁽³⁾) having grown revenue at a compound annual growth rate ("CAGR") of 5.9% between 2017 and 2019. EBITDA (excluding leasing costs) was €10.3 million (approximately $12.2 million⁽³⁾) in 2019 and the business was cash generative.

·      The Acquisition is expected to be earnings accretive for Inspecs in the financial year ending 31 December 2021 ("FY21").

The Acquisition will represent a substantial transaction under Rule 12 of the AIM Rules for Companies.

Robin Totterman, Inspecs CEO, commented,

"We are delighted to have agreed to acquire Eschenbach, Germany's no.1 eyewear company which in turn owns one of the leading eyewear companies in the USA, Tura. As a high-quality business with a strong management team and track record of margin-accretive growth, Eschenbach represents the ideal fit for Inspecs. Moreover, it will enable the Group to penetrate key global markets, broaden our customer reach, strengthen our brand portfolio and capitalise on the compelling structural opportunities that exist in the fragmented global eyewear market. 

"By adding to the Group's resilient, vertically integrated business model, this deal expands our global distribution network and brings over 250 salespeople into the Group, propelling Inspecs to a new high by creating one of the largest eyewear companies in the world.

"We look forward to welcoming the Eschenbach team and working together to build on Inspecs' recent positive trading momentum while accelerating our long term growth and delivering value to our shareholders."

Eschenbach overview

Eschenbach is a leading eyewear supplier headquartered in Nuremberg, Germany. The Eyewear Division generated approximately 78 per cent. of Eschenbach's revenue in the year to 31 December 2019, while the Optics Division generated approximately 22 per cent. of such revenue.

The Eyewear Division currently supplies frames for over 15 brands, including both 'in house' and licensed brands. These brands are typically addressed to the 'premium' eyewear market. Eschenbach has won awards for the design of its frames, including being a 'German Design Award Winner' and 'Red Dot Award Winner' in 2020.

In 2019, Eschenbach sold approximately 3.6 million frames.

The Optics Division produces vision technology (e.g. low vision aids) and consumer optics (e.g. binoculars), utilising the expertise of more than 70 in-house opticians. The division has a strong engineering pedigree and is a world leader in magnification.

Eschenbach has a global distribution network, with over 250 sales representatives, more than 12 international subsidiaries and distribution into over 80 countries. It is the number one supplier of prescription glasses in Germany and one of the leading independent eyewear distributors in the USA.

The table below summarises the results of Eschenbach for the three years ended 31 December 2019, 31 December 2018 and 31 December 2017.

Notes:

a)   Revenue shown as net revenue.

b)   Eschenbach had gross assets of $104.8 million as at 31 December 2019, excluding losses not covered by equity that have been presented as an asset under German GAAP.

c)   All data from audited Eschenbach accounts under German GAAP, except EBITDA (excluding leasing costs) which is derived from management accounts and not audited.

d)   Original currency was Euros, converted to USD at a fixed FX rate of €1:$1.18 from Eschenbach's statutory financial statements and management accounts.

Background to and reasons for the Acquisition

Inspecs has agreed to acquire all of the equity interest in Eschenbach and the benefit of loans owed by the Target to the Sellers⁽⁴⁾ and one other individual, Uwe Schultze (the "Shareholder Loans"). Inspecs has agreed to pay cash consideration on completion of the Acquisition of €94.85 million. The existing debt of Eschenbach, beyond the Shareholder Loans, will remain in place.

As set out at the time of IPO, the Company's growth strategy includes identifying earnings accretive acquisition opportunities where the target has:

i)          its own proprietary brand, which can expand geographically; and/or

ii)          sales in a territory where Inspecs is under-represented; and/or

iii)         manufacturing capability that would be incremental to Inspecs' capabilities.

The Board believes that the acquisition of Eschenbach will deliver on all three of these objectives, while being earnings accretive in the first full financial year post-transaction.

The Acquisition is expected to deliver the following key benefits for Inspecs:

i)          Penetrate key global markets

Eschenbach is well established in Germany and the USA, two of the most important eyewear markets in the world, where Inspecs has historically been underrepresented. It is the number one supplier of prescription glasses in Germany and one of the leading independent eyewear distributors in the USA. Globally, Eschenbach has a network of more than 250 sales representatives, distributing into over 80 countries, and in excess of 40,000 points of sale. The Board believe that this extensive distribution network will provide a significant and immediate extension of the Company's presence internationally that might otherwise have taken several years and significant investment to build organically.

ii)         Revenue synergies

The penetration of key global markets (as set out above) also provides Inspecs with the opportunity to supply selected existing Inspecs brands through Eschenbach's distribution channels (and vice versa), especially in the USA, Germany and France. The Company also believes that some of Eschenbach's brands are well-suited to being sold to Inspecs' existing customers.

In addition, the greater scale of Inspecs and Eschenbach (together, the "Enlarged Group") is expected to make the Company a more attractive partner for larger global brands - offering Inspecs the opportunity to secure significant licences.

iii)        Diversified product and customer portfolio

The Acquisition will help to manage Inspecs' risk profile by diversifying the Company's product and customer portfolio. Eschenbach addresses the 'premium' segment of the frames market, while the Company's existing focus is on mid-market and entry-level priced products.

Eschenbach will also broaden the Company's portfolio of customers, as it has strong relationships with a broad range of independent opticians and mid-sized retail chains beyond Inspecs' existing customers.

Eschenbach also produces specialist optics products and the Company is assessing the opportunity to supply these additional product ranges to the Company's existing customers.

iv)        Cost synergies

The Company will be able to utilise its manufacturing expertise in Asia to assist Eschenbach in providing cost synergies going forwards. The Company also expects there to be additional supply chain optimisation benefits through creating a lean global logistics and distribution network across the Enlarged Group.

v)         Strengthens the senior management team

Eschenbach's highly experienced senior management team (Dr. Jörg Zobel, CEO; Holger Maas, CFO; Matthias Anke, Managing Director of Optics in Germany; Scott Senett, CEO of Tura; and Ken Bradley, CEO of the US Optics Division) will join Inspecs following the Acquisition and continue to lead the business from Nuremberg and New York. The strength of their leadership, alongside continuity of management, will help mitigate risks arising through the integration process.

vi)        New business models

The Acquisition presents opportunities to deliver innovative business models that broaden the Company's routes to market and enhance its product offering. These opportunities include:

·      further development of an online B2B sales platform across the Enlarged Group;

·      developing Eschenbach's insurance business in the USA, whereby it acts as an approved supplier for certain medical insurers; and

·      providing a complete frame and lens package to customers through the integration of its Norville lens manufacturing facility into the Company's frame supply chain and distributing through the Enlarged Group's distribution channels.

vii)       Enhances shareholder value with attractive financial returns

The Board believe that the Acquisition will enhance shareholder value. It is anticipated that, based on the Company's base case assumptions and without any expected synergies, the Acquisition will be EPS accretive in FY21, the first full financial year following the Acquisition. The Board believe there are opportunities for significant recurring synergies for both revenue and costs, as set out above.

The Enlarged Group's pro-forma net debt post the Acquisition is expected to be $33.5 million versus the Group's net debt at 31 December 2019 of $13.7 million. The Board is targeting a medium term net debt/EBITDA ratio of 1.5x and does not expect to pay a dividend in FY21.

The Acquisition is conditional upon, among other things: (i) shareholder approvals in relation to the Placing and the Placing arrangements having become unconditional and not having lapsed (the "Placing Condition"); (ii) clearance from the German Federal Ministry for Economic Affairs (the "FDI Condition"); and (iii) satisfaction of a customary UK antitrust condition. If the Placing Condition is not satisfied within four weeks of satisfaction of the FDI Condition, Inspecs will (subject to certain exceptions) be liable to pay €6.5 million in liquidated damages.

(1) Based on GBP/EUR exchange rate of 1.12 as of 18 November 2020

(2) Based on GBP/USD exchange rate of 1.33 as of 18 November 2020

(3) Based on EUR/USD exchange rate of 1.18 as of 18 November 2020

(4) Barclays Industrial Investments Limited, Equistone Founder Partners II Limited Partnership, Equistone Partners Europe Fund II "A" L.P., Equistone Partners Europe Fund II "B" L.P., Equistone Partners Europe Fund II "C" L.P., Equistone Partners Europe Fund II "D" L.P., Equistone Partners Europe Fund II "E" L.P., Equistone Private Equity PVLP Limited Partnership, Am Platzl Nominees GmbH, Parallel Ventures Nominees No. 2 Limited, Eurovent II SCCV, Dr Wolfgang Rebstock, Ingolf Knaup, Walter Eschenbach and Dr Thomas Luce (together, the "Sellers")

For further information please contact:

All information regarding Eschenbach is based on information provided by the management of Eschenbach and has not been independently verified and accordingly, each of the Company, Peel Hunt, their respective affiliates and their respective representatives expressly disclaim, to the maximum extent permitted by law, any responsibility or liability arising in connection with the information in this Announcement relating to Eschenbach. Unless otherwise indicated, historical financial information relating to Eschenbach has been extracted without adjustment from Eschenbach's financial statements. The information in this Announcement is subject to change.

This Announcement contains forward-looking statements, which relate, inter alia, to the Inspecs Group's proposed strategy, plans and objectives. Forward-looking statements are sometimes identified by the use of terminology such as (but not limited to) "believes, "expects", "may", "will", "could", "shall", "risk", "intends", "estimates", "aims", "plans", "predicts", "continues", "assumes", "positions" or "anticipates" or the negatives thereof, other variations thereon or comparable terminology. By its very nature, such forward-looking information requires the Inspecs Group to make assumptions that may or may not materialise.  Such forward-looking statements may be price-sensitive and involve known and unknown risks, uncertainties and other important factors beyond the control of the Inspecs Group that could cause the actual performance or achievements of the Company to be materially different from such forward-looking statements. Past performance of the Inspecs Group cannot be relied upon as a guide to future performance. Accordingly, you should not rely on any forward-looking statements and the Inspecs Group accepts no obligation to disseminate any updates or revisions to such forward-looking statements. No statement in this Announcement is intended as a profit forecast or a profit estimate and no statement in this Announcement should be interpreted to mean that earnings per share for the current or future financial periods would necessarily match or exceed historical published earnings per share. As a result, you are cautioned not to place any undue reliance on such forward-looking statements.