Hydrodec Group plc has announced the disposal of Hydrodec (UK) Limited and Hydrodec Re-Refining (UK) Limited and an agreement to transfer certain other rights and assets relating to its UK Operations for a consideration of £1.
Hydrodec has also announced the appointment of Chris Ellis, previously Acting Chief Executive, as Chief Executive with immediate effect.
Background to the disposal
Further to the appointment of Chris Ellis as Acting Chief Executive in December 2015, the company has undertaken a detailed strategic review of its UK waste oil collections business and proposed UK lubricant oil re-refining project, following a significant deterioration in the outlook of its UK operations. This deterioration has been driven predominately by the rapid decline in global oil prices and continued challenging market conditions, which have resulted in HUK generating an increasing level of significant losses. Despite implementing extensive restructuring and cost saving measures during 2015 (including an approximate 36% reduction in headcount), the company has remained exposed to the impact of the global oil price situation and the UK operations remain unprofitable. Given the significant cash burn rate and limited cash resources available to the company (in the absence of a significant further fundraising), the directors of the company have reviewed all available options and have concluded it was in the best interests of the Company to dispose of the UK operations to a buyer able to properly finance and develop the business in the near term.
The strategic review was initiated in December 2015 following which a strategic auction of HUK was conducted by an independent third party financial adviser, through which potential purchasers were identified, approached and invited to submit indicative offers for HUK. One of the potential purchasers identified was Andrew Black, a Non-Executive Director and a substantial shareholder of the company. Multiple indicative offers were received and evaluated. Following a detailed review of the offers, and an initial engagement and period of exclusivity with another bidder, which did not indicate sufficient signs of progress, the directors of the company (excluding Andrew Black) decided to pursue the offer proposed by Andrew Black. In reaching this decision, the directors of the company took into account, inter alia, the progress of the initial discussions, the bidders' ability to execute the transaction on an expedited basis and the potential to offer the company future value in relation to the UK base oil re-refining project.
Terms of the disposal
With this, the company confirms its UK operations have been sold to Andrew Black for a consideration of £1 in cash, including the transfer to the Buyer of circa. £1.2 million of existing third party indebtedness in HUK. In addition to this, the buyer will grant Hydrodec a contractual right to receive 10% of the buyer's entitlement to any future net profits of the UK lubricant oil re-refining project on distribution or exit. The buyer will bear all risk and responsibility for developing the UK lubricant oil re-refining project going forward, with Hydrodec retaining only a passive economic interest under these profit share arrangements. The transfer of the UK licence and basic engineering package from CEP is subject to the consent of CEP, which the company has agreed to use its reasonable efforts to achieve. The estimated net assets of the UK operations were circa. £4.7 million as at 31 December 2015 (including intangible assets relating principally to goodwill of £1.8 million), and following the release of inter-company indebtedness of £13.3 million owed by the UK operations to the retained group for its initial investment and subsequent funding since the original acquisition of the UK collections business in September 2013. The UK operations generated estimated EBITDA losses of circa. £3 million in 2015.
Related party transaction
Andrew Black is a Non-Executive Director and a substantial shareholder (as defined in the AIM Rules for Companies) of the company. Accordingly, the disposal of the UK operations constitutes both a related party transaction and a substantial transaction for the purposes of the AIM Rules.
The directors, with the exception of Black, consider, having consulted with the company's Nominated Adviser, Canaccord Genuity Limited, that the terms of the disposal of the UK operations are fair and reasonable insofar as shareholders are concerned.
The board believes that the divestment of the UK collections business, whilst retaining an economic interest in the UK lubricant oil re-refining project, addresses the significant downside risk currently posed to the group by its UK operations given current global oil prices.
Importantly, it allows Hydrodec to concentrate on its market leading transformer oil technology and business and to grow that business within the US$2 billion plus global transformer oil market. Specifically, as the company moves forward through 2016, the board intends to look to strengthen Hydrodec's footprint in the US and in the international transformer oil market, with the sales price of transformer oil less correlated to global crude oil prices and where it believes Hydrodec has a competitive advantage through its proven and market leading technology.
Commenting on the disposal and the appointment, Colin Moynihan, Chairman of the company said: "Today sees the completion of a three month intensive turnaround programme for the group driven by the company's Acting Chief Executive, Chris Ellis. The Chairman and the board recognise the significant contribution made by Chris and today announce his appointment to the role of Chief Executive. Whilst there is more to do to reduce cost and strengthen margins, our focus continues to be on delivering operational performance and efficiencies, and driving the company to a profitable 2016."
Commenting, Chris Ellis, Chief Executive of the company said: "I am excited at the opportunity to drive forward our core transformer oil re-refining business and deploy a business model focused on creating shareholder value through combining our world leading technology and execution focused operational performance. The working capital released as a consequence of the disposal of the UK operations positions the company to deliver its plan of profitable trading in 2016 and is the first step in taking advantage of the significant opportunities presented by the rapidly increasing c. US$2 billion global transformer oil market."
Adapted from press release by Rosalie Starling
Read the article online at: https://www.hydrocarbonengineering.com/refining/07032016/hydrodec-announces-disposal-of-uk-operations-2677/