TIDMHYR
RNS Number : 5188C
HydroDec Group plc
17 April 2013
17 April 2013
Hydrodec Group plc
("Hydrodec")
Strategic partnership established in North America to drive
growth
Transformational deal will create a leading US re-refiner of
used transformer oils and increase US production capacity by
140%
Hydrodec Group plc, the clean-tech industrial oil re-refining
group (AIM: HYR), is pleased to announce a major expansion of its
North American business through a strategic partnership with
G&S Technologies Group ("G&S"), a leading New Jersey-based
electricity transformer recovery services group with a 50-year
track record of serving the industrial and utility industries
throughout the US.
The deal involves the creation of a new entity, Hydrodec of
North America LLC (the "Company"), in which Hydrodec will
ultimately own 50.1 per cent and contribute its existing
re-refining plant in Canton, Ohio. The Company will be one of the
largest handlers and processors of waste and polychlorinated
biphenyl ("PCB") contaminated transformer oil in North America. The
partnership will also enable Hydrodec and G&S to accelerate
their growth in the world's biggest energy market while sharing the
risks and capital investment between strongly complementary
businesses.
Ian Smale, Chief Executive of Hydrodec, commented: "This
partnership enables Hydrodec to aggressively expand its successful
North American business and is a major step on the path to
profitability for the Hydrodec Group. The deal creates an extremely
competitive and efficient oil re-refining business at scale, will
increase Hydrodec's SUPERFINE(TM) penetration in our key US markets
and de-risk our expansion through our association with G&S and
their access to feedstock."
George Newmark, Vice President of G&S Technologies,
commented: "The deal creates an alliance between the best asset
recovery and service provider with the best oil re-refining
technology, providing our electrical utility industry customers
with a compelling one-stop sustainability offer."
Highlights and rationale
-- Delivers first step in Hydrodec's growth strategy to
significantly scale up its profitable North American operations
-- Brings together Hydrodec's proven clean-tech waste oil
re-refining process with G&S's leading customer service offer
that will commit feedstock to the partnership and de-risk
expansion
-- Hydrodec will receive cash consideration based on five times
its 2012 North American EBITDA for the first of three payments that
will result in G&S owning 49.9 per cent when the business is
expanded, with an earn-out of 6.5 times the difference between 2012
and 2013 EBITDA
-- The total cash proceeds are expected to value Hydrodec's
North American operations at or close to book value (US$14
million), subject to the performance of the business in 2013, and
are anticipated to meet Hydrodec's call on capital for the
expansion programme
-- The strategic partnership plans to expand its US re-refining
capacity to approximately 65 million litres per annum, and from
four trains (processing units) to a total of 10 trains, by 2015, an
increase of 140%
-- Establishes a new recurring royalty stream for Hydrodec at
five per cent of North American revenues through a technology
licensing model, in addition to continued equity participation and
share of profits in the enlarged business
-- Substantially de-risks and shares the cost of capital
investment with an established industry partner
Under the deal, Hydrodec will contribute its existing
re-refining plant in Canton, Ohio, with a current re-refining
capacity of 27 million litres per annum. In addition, Hydrodec will
license its patented clean-tech re-refining technology and process
to the Company in return for ongoing five per cent royalties on
total sales of its re-refined SUPERFINE(TM) branded oil in North
America.
G&S, a privately-owned conglomerate with revenues in excess
of US$200 million in 2012, will commit used transformer oil
associated with their utility asset recovery service sufficient to
expand production capacity by up to a further six processing
trains, increasing total re-refining capacity in North America up
to c. 65 million litres per annum, representing 15% of annual US
consumption of transformer oil.
Both parties have committed to invest equally in the expansion
of the Company's re-refining capacity over the next two years.
Importantly, the additional commitment of G&S feedstock to the
Company will provide security of supply and will significantly
de-risk the expansion of the business.
Terms of the partnership
-- G&S Oil Recycling Group LLC, part of the G&S
Technologies Group, will acquire a stake in the Company through a
series of staged payments initially priced at a 5x multiple of
trailing 2012 EBITDA for Hydrodec's existing US operations, with an
earn-out priced at a 6.5x multiple of 2013 EBITDA. The initial
consideration for 25 per cent will be a cash payment of
approximately US$1.7 million, with two further cash payments for
12.45 per cent and 12.45 per cent on completion of additional
processing capacity. A final balancing payment based on 6.5x the
amount by which 2013 EBITDA exceeds 2012 EBITDA will complete the
total consideration which Hydrodec expects, subject to the
performance of the business, will reflect a valuation at or close
to the current Canton book value of US$14 million. Completion of
the acquisition of the initial 25 per cent stake is expected on or
around 30 April.
-- Hydrodec will licence its technology to the Company to
manufacture and sell SUPERFINE(TM) transformer oil and
SUPERFINE(TM) base oil in North America in return for a five per
cent royalty on the revenues generated by this business. By way of
illustration intra-group royalty revenue for 2012 on this basis was
US$0.7 million. Given the outlook for 2013 Hydrodec anticipates a
higher contribution from royalty going forward.
-- G&S will commit feedstock to meet existing requirements
at Canton and as required to expand production capacity by up to a
further six processing trains in North America. Hydrodec expects
this will enable existing plant utilisation to increase
significantly, compared with 72 per cent achieved by Canton in
2012. The Canton plant currently has four trains - the proposed
expansion will increase total capacity in North America up to c. 65
million litres per annum by 2015 from 27 million litres per annum
currently, a 140% increase.
-- Both parties will provide or procure the capital funding
required to build out the additional trains in equal measure,
irrespective of their ownership interests at the relevant time. The
total cost of the additional capital investment is expected to be
approximately US$15 million, subject to further detailed analysis.
Hydrodec expects to fund its share from the proceeds of sale and
its own funds. The location of the additional trains is to be
determined between the parties following a detailed market review
but will likely include a future expansion at Canton, and at least
one new facility to widen geographic reach.
-- The parties shall agree a joint procurement strategy for
feedstock; the Company will remain able to procure from other third
parties. An arms' length pricing mechanism for feedstock procured
from G&S has been agreed by reference to prevailing market
pricing.
For further information please contact:
Hydrodec Group plc 020 7907 9220
Ian Smale, Chief Executive Officer
Chris Ellis, Chief Financial Officer
Mike Preen, Head of Corporate and Legal Affairs
Numis Securities Limited (Nominated adviser/joint
broker) 020 7260 1000
Nominated Adviser: Hugh Jonathan
Corporate Broker: David Poutney
Cenkos Securities plc (Joint broker) 020 7397 8900
Corporate Finance: Adrian Hargrave
Sales: Christian Hobart
Luther Pendragon (PR adviser to Hydrodec)
Neil Thapar, Alexis Gore and Sarah Davis 020 7618 9100
Notes to Editors:
Hydrodec
Hydrodec's technology is a proven, highly efficient, oil
re-refining and chemical process initially targeted at the
multi-billion US$ market for transformer oil used by the world's
electricity industry. Spent oil is currently processed at two
commercial plants with distinct competitive advantage delivered
through very high recoveries (near 100%), producing 'as new' high
quality oils at competitive cost and without environmentally
harmful emissions. The process also completely eliminates PCBs, a
toxic additive banned under international regulations.
Hydrodec's plants are located at Canton, Ohio, US and Young, New
South Wales, Australia and its shares are listed on the AIM Market
of the London Stock Exchange. For further information, please visit
www.hydrodec.com
G&S
G&S is a privately owned conglomerate based in New Jersey
with a 50 year track record in the recovery and disposal of
decommissioned transformers, treatment and handling of waste and/or
contaminated transformer oils as well as associated asset recovery
services. The group, which includes G&S Technologies and
affiliation with TCI Alabama, Transformer Technologies (Oregon) and
TCI of New York, serves the industrial and utility industries
throughout the entire US offering its clients a wide range of
services including: PCB sampling and testing, on-site dielectric
fluid disposal and on-site, field dismantling for larger power
transformers through its partnership with Northeast Transformer
Services (Preble, NY). G&S also offers replacement and
rebuilding services to meet its customers' specific needs.
US transformer oil market
The total US consumption of transformer oils is estimated at 400
million litres per annum (recently assessed to be growing at 6 per
cent per annum), compared with Hydrodec's US SUPERFINE(TM) sales
volumes of 19 million litres in 2012. Hydrodec's existing US
capacity is 27 million litres per annum and it is planned that this
will increase to 65 million litres per annum under the strategic
partnership representing a 15% share of annual US consumption.
Hydrodec estimates that 75 per cent of new transformer oil in
the US is used to replace spent and/or contaminated transformer
oil, suggesting a used oil market of c. 300 million litres per
annum.
G&S handled approximately 26 million litres of waste
transformer oil in 2012, of which approximately three million
litres was procured for re-refining by Hydrodec.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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