10th Dec 2012. LongReach Group (ASX:LRG) has announced that it has entered into a share purchase agreement to sell its principle business, defence technology firm C4i Pty Limited, to multinational defence supplier ITT Exelis (NYSE:XLS) for A$18.3m, a price substantially more than the market capitalisation of Longreach.
C4i is a wholly owned subsidiary of Longreach and is based in Melbourne, Australia. It provides advanced communications software that supports mission critical communications for a range of applications including air traffic management, defence, public safety, mining and homeland security. For the year to June 2012 it had total revenues of $9.4m (2011: $10.7m) indicating a price in the region of two times trailing twelve months revenue. Profit (from continuing operations) after tax was A$1,4m.
The acquisition does not materially impact Exelis financial results for the full-year of 2012 or the first quarter of 2013.
The purchase price payable by Exelis to LongReach in cash is equal to the sum of;
A$16 million on a cash-free, debt-free basis and assuming a normal level of working capital in C4i on completion of the Proposed Transaction;
plus 50% of the amount by which revenues generated by C4i in the two year period to 30 June 2014 (i.e. FY 13 and FY 14) exceed A$27.5 million, with such payment not to exceed A$2.25 million.
The conditions to completion of the Proposed Transaction include no breach of title and authority warranties, no breach of a warranty which would lead to a material adverse effect, no material breach of the share purchase agreement by the Company, no material adverse effect, Shareholder approval of the Proposed Transaction and no regulatory interference prohibiting the transfer of the shares in C4i to Exelis.
The Company must comply with certain pre-completion obligations, including undertaking the necessary steps to obtain Shareholder approval and procuring that C4i conducts its business in the ordinary and usual course with its usual business practices and does not make any significant change to the nature and scale of any activity comprised in the business. The Company must also comply with certain pre-completion business restrictions, including procuring that C4i does not, except with the consent of Exelis or as otherwise contemplated by the share purchase agreement, issue any new securities, declare any dividends, alter the constitution of C4i or its subsidiaries, enter into any material capital expenditure commitments, or enter into, terminate or vary any material contracts.
The share purchase agreement also contains representations and warranties by the Company in relation to C4i and its business. The Company has given indemnities for breach of warranty, products liability, related party transactions and tax liabilities. The Company’s maximum liability under these indemnities is limited to the purchase price (or 50% of the purchase price for some of the warranties). The time limit for bringing any claims is generally in line with the statute of limitations for claims related to title and authority, tax, employee, government contracts or environmental claims. Otherwise warranty claims must be brought with 18 months of completion.
Part of the purchase price ($3.75 million) is to be held by an independent third party escrow agent which may be used to satisfy liabilities of the Company under the share purchase agreement.
If before 28 February 2013, or any other date agreed by the Company and Exelis, the share purchase agreement is terminated as a result of:
a) the condition requiring shareholder approval not being satisfied; or
b) any other condition not being satisfied or waived as a result of any action or omission of the Company or C4i; or
c) the Company not complying with a material obligation to complete the Proposed Transaction as a result of any action or omission of the Company or C4i,
then the Company is required to reimburse the costs, expenses and outgoings of Exelis actually and reasonably incurred in relation to the Proposed Transaction up to a maximum of $500,000.
The Company has agreed not to solicit an offer from a third party or participate in discussions or negotiations regarding any competing transactions. The LongReach directors are not restricted from responding to an unsolicited proposal where their fiduciary responsibilities require them to do so.
The Company has agreed to various non-compete obligations including not soliciting customers or employees of C4i for a period of up to 3 years from completion.
C4i’s Internet Protocol (IP)-based voice control and switching capabilities provide flexible communications connectivity for dispersed operations personnel. This capability ensures that diverse organizations can effectively communicate in real-time to achieve vital mission needs through the flexible inter-networking of disparate telephony and radio systems.
C4i will become part of the Information Systems business of Exelis. Pam Drew, president of Exelis Information Systems said of the transaction, “This acquisition expands our portfolio of critical infrastructure solutions, builds on our presence in Australia, and brings us closer to our customers and markets of interest.” She went on to say, “We welcome C4i to the Exelis portfolio. We look forward to synergies with our air traffic management business with an immediate focus on Australia’s oneSKY Australia initiative to combine civil and military air traffic control. More broadly, we see opportunity for integrating C4i’s communications capabilities with Exelis’ expertise in developing and deploying large scale communications networks.”
Peter Harrison, C4i vice president and general manager, said, “Joining the Exelis team expands the breadth of capabilities we can offer to our existing customers and opens doors to new customers outside of our core markets. We anticipate more opportunities for the growth of our business and our employees. The acquisition represents significant commitment to the Australian market and Exelis business pursuits here.”
In the absence of a superior proposal, the LongReach directors unanimously recommend that Shareholders vote in favour of the Proposed Transaction at the upcoming general meeting, and that subject to the same qualification, LongReach’s two non-executive directors, Larry Case and Christian Bernecker intend to vote all LongReach shares respectively held or controlled by them at the date of the general meeting in favour of the Proposed Transaction. The Company’s largest shareholder, Nightingale Partners Pty Ltd has advised LongReach that it intends to vote in favour of the transaction, in the absence of a superior proposal.
C4i is based in Melbourne, Australia with locations in Perth, Australia, Reston, Va., USA and Singapore.
About ITT Exelis
ITT Exelis is a diversified, top-tier global aerospace, defense and information solutions company with strong positions in enduring and emerging global markets. Exelis is a leader in networked communications, sensing and surveillance, electronic warfare, navigation, air traffic solutions and information systems with growing positions in cyber security, composite aerostructures, logistics and technical services. The company has a 50-year legacy of innovation and technology expertise, partnering with customers worldwide to deliver affordable, mission-critical products and services for managing global threats, conflicts and complexities. Headquartered in McLean, Va., the company employs about 20,500 people and generated 2011 sales of $5.8 billion. www.exelisinc.com