Deals
Hydrodec Group plc Acquires OSS Group Limited
Hydrodec Group plc (AIM: HYR), the cleantech industrial oil re-refining group, is pleased to announce the acquisition of the principal business and assets of OSS from the administrators of OSS Group Limited (and certain of its affiliates) for a purchase price of £4.65 million in cash.
OSS Business
The OSS business is the UK's largest collector, consolidator and processor of used lubricant oil and seller of processed fuel oil, processing approximately 60 million litres of used oil in 2012.
It has a national network of oil storage and transfer stations, currently serviced by a fleet of more than 90 trucks which collect used oil and other garage workshop waste from over 30,000 customers.
Used oil is converted into processed fuel oil at OSS's plant at Stourport and principally sold on to the UK quarry and power industry. OSS's existing senior management team led by Iain Lees will be joining Hydrodec together with approximately 200 existing employees.
The current OSS business generated revenues of £28.5 million in 2012 and a normalised EBITDA1. of approximately £1 million; the net asset value of the acquired assets is assessed at approximately £4.5 million.
The purchase price is being financed by way of a short term revolving credit facility. Management expect the transaction to be EBITDA accretive to the Hydrodec Group within two months of the acquisition (after transaction costs have been incurred) and accretive to earnings overall in 2014.
Rationale for the Transaction
The combination of OSS's access to used oil together with its operating capability makes it an ideal partner for Hydrodec to utilise Hydrodec's existing transformer oil technology and to develop and deploy its new lubricants re-refining technology in the UK:
- It provides a platform to import Hydrodec's SUPERFINETM for sale in the UK together with a capability to collect used transformer oil from the UK power companies and overseas;
- It will underpin the development of Hydrodec's new lubricants technology in the UK;
- Once Hydrodec's new technology has been deployed in the UK, it offers the potential to provide over 60 million litres per annum of feedstock which the Group intends to re-refine into a high grade lubricant base oil; and
- It provides a platform to develop other opportunities to consolidate the oil collection and re-refining market in the UK and Europe.
Following consideration of possible funding options, and in light of the timing and completion logistics involved in the structure of this particular transaction, the Board has approved financing of the acquisition through the drawdown of funds made available under a short term revolving credit facility (the "Facility") provided by Andrew Black, a non-executive director of the Company. The Facility is for up to £7.5 million and the balance (not required for the acquisition and related costs) will be available to provide additional working capital to the OSS business. Interest is payable at 7 per cent per annum on drawn-down funds and there is a £10,000 arrangement fee. The Facility has a term of 6 months, repayable at any time by the Company. It is initially unsecured but if not repaid within 90 days from the initial drawdown security will be granted over the shares of Hydrodec (UK) Limited, a newly incorporated subsidiary of the Group which has acquired the OSS assets. The Board stated at the time of the interim results in July that active consideration is being given to the Company's debt position with a number of options being explored for managing the balance sheet. This remains a priority for the Board in 2013.
As a director of the Company, Andrew Black's provision of the Facility constitutes a related party transaction for the purposes of the AIM Rules. The directors, with the exception of Mr Black, consider, having consulted with the Company's Nominated Adviser, Peel Hunt LLP, that the terms of the Facility are fair and reasonable insofar as Shareholders are concerned.
Commenting on the acquisition, Ian Smale, Chief Executive of Hydrodec, said: "OSS offers a very exciting new market entry that delivers the key elements of our business development strategy - a strong position in the used oil value chain, a profitable platform for growth with genuine business optionality, and the capability to accelerate deployment of our existing transformer oil technology as well as assist in our technology development.
The choice of the UK is deliberate, and we believe that Hydrodec's technology together with the OSS operating platform can offer a transformational solution to a UK environmental problem and in due course offer the potential to extend into other attractive European markets.
We believe we can integrate OSS swiftly and in a way that makes the transaction accretive to EBITDA this year and accretive to earnings overall in 2014. A key component of this is the high quality management and staff that will join the Hydrodec team. I see this as the next step (after the US strategic partnership announced in April this year) of several we are seeking to take in order to transform Hydrodec's scale and profitability, and to normalise our balance sheet."
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