Coronavirus Update

Scapa Group Plc - Recommended Cash Offer

This content has been sourced from: https://www.investegate.co.uk/schweitzer-mauduit/r...

RECOMMENDED CASH OFFER

for

SCAPA GROUP PLC

by

AMS HOLDCO 2 LIMITED

an indirectly wholly-owned subsidiary of Schweitzer-Mauduit International, Inc.

to be effected by means of a scheme of arrangement under Part 26 of the Companies Act 2006

Summary

· The board of directors of AMS Holdco 2 Limited ("SWMBidco"), an indirectly wholly-owned subsidiary of Schweitzer-Mauduit International, Inc. ("SWM"), and the Directors of Scapa Group plc ("Scapa") are pleased to announce that they have reached agreement on the terms of a recommended cash offer by SWM Bidco for the acquisition of the entire issued and to be issued ordinary share capital of Scapa (the "Offer"). The Offer is intended to be effected by means of a scheme of arrangement under Part 26 of the Companies Act (the "Scheme").

· Under the terms of the Offer, each Scheme Shareholder will be entitled to receive:

for each Scheme Share  210 pence in cash

· The terms of the Offer value the entire issued and to be issued ordinary share capital of Scapa at approximately £402.9 million on a fully-diluted basis and represent premia of approximately:

-  58.5 per cent. to the six-month volume weighted average price of 132.5 pence as at 26 January 2021 (being the last Business Day before the date of this Announcement); and

-  18.6 per cent. to the Closing Price of 177 pence for each Scapa Share on 26 January 2021 (being the last Business Day before the date of this Announcement).

· The Offer also represents an Enterprise Value to EBITDA multiple of 11.3x on a reported basis, and 13.8x on a continuing basis for the financial year ended 31 March 2020.

Information on SWM and SWM Bidco

· SWM is a leading global performance materials company. SWM's highly engineered films, nets, nonwovens and papers are designed and manufactured using resins, polymers, and natural fibres for a variety of industries and applications. SWM provides its customers with essential components that enhance the performance of their products. End markets served include filtration, transportation, infrastructure and construction, medical, industrial, tobacco, energy, food services and home décor. SWM and its subsidiaries manufacture on four continents, conduct business in over 80 countries and employ approximately 3,700 people worldwide.

· SWM Bidco is a company incorporated in England and Wales, and is indirectly wholly owned and controlled by SWM.

Information on Scapa

· Scapa is listed on AIM and is the parent company of a diversified Healthcare and Industrial group focused on bringing best-in-class innovation, design and manufacturing solutions to its customers, with manufacturing and sales operations across North America, Europe and Asia.

· For the financial year ended 31 March 2020, Scapa reported revenue of £320.6 million on a statutory basis and £313.3 million on a continuing basis, and a trading profit of £27.8 million on a statutory basis and £20.5 million on a continuing basis.

· Scapa Industrial adhesive based innovative bonding solutions are designed with specific technical requirements to differentiate technologies and positions in core markets, primarily: Construction, Consumer, Cable, Automotive and Specialty. In Construction and Consumer, which are primarily business to consumer, the business leverages its strong brand recognition as well as a broad product portfolio to meet the evolving need of the markets. Cable, Automotive and Specialty are primarily business to business, dealing with major global original equipment manufacturers. Customers receive significant technical and global support.

· Scapa Healthcare is a trusted strategic partner to many of the world's leading companies in Advanced Wound Care, Consumer Wellness and Medical Device Fixation. Scapa Healthcare has significant capabilities and scale in skin technology for healthcare companies. Its products are typically disposables and consumables which are stand-alone products or components of a medical device system. The demand for Scapa Healthcare's products is driven by trends in demographics such as ageing populations and the increase in obesity-related illnesses. Growth opportunities are further enhanced by the trends that the medical device companies have been undergoing. Similar to other segments of healthcare, such as pharmaceuticals, there are increasing trends towards outsourcing by medical device companies. Outsourcing includes not only manufacturing but also development of the products.

· Scapa was incorporated in England and Wales on 5 November 1964 with registration number 00826179 and the Scapa Shares were admitted to trading on AIM on 23 August 2006.

Background to and reasons for the Offer

· The SWM Board believes that Scapa presents an attractive opportunity to acquire a highly regarded, vertically integrated healthcare and industrial solutions provider with global presence and a blue-chip client base. SWM expects the combination to deliver a number of benefits to its shareholders given the compelling strategic and financial rationale for transaction. The combination of SWM and Scapa:

-  creates an entity with significant capabilities and scale in the advanced materials segment ("AMS") with differentiated capabilities and scale, allowing SWM to leverage its expertise in performance materials and established medical business within Scapa's integrated ecosystem to better serve customers' evolving needs and cross-sell products. The combined company is expected to generate approximately $1.5 billion in annualised revenues conducting business in over 80 countries, with expanding markets in AMS, accounting for approximately 65 per cent. (approaching $1 billion) of annualised group revenues;

-  creates a ~$250 million healthcare portfolio (as measured by annualised revenues) with scale, global capabilities, and material development and integration skills required by an increasingly demanding and rapidly growing customer base;

-  provides an immediate boost to SWM's industrial market specialisation and grows SWM's manufacturing capabilities;

-  Continues SWM's value creating strategy of organic growth supplemented by strategic acquisition; and

-  delivers compelling financial benefits for the combined company - growth, earnings diversification and meaningful potential synergies.

SWM believes that the combination of SWM and Scapa - two premier businesses within the broader AMS landscape - creates a well-positioned global business with the scale required to achieve and sustain sector leadership. The combination also better positions the combined company in the public market given the combination's enhanced scale, capabilities and financial profile.

Background to and reasons for the Scapa Directors' recommendation

· The Scapa Directors believe that Scapa has demonstrated significant resilience in the face of the ongoing COVID-19 pandemic. In addition to the rapid action taken by management to remove costs in the face of continued uncertainty, in May 2020 Scapa completed an equity raise of £32.6 million, at 105 pence per Scapa Share, to further strengthen the balance sheet and improve covenant headroom. The Scapa Directors remain confident in the medium and long-term standalone prospects for Scapa as it continues its strategy of bringing best-in-class innovation, design and manufacturing solutions to a diverse customer base in the healthcare and industrials sectors.

· In healthcare, Scapa Healthcare is a trusted strategic partner to many of the world's leading companies in Advanced Wound Care, Consumer Wellness and Medical Device Fixation with 'state-of-the-art' facilities including in Knoxville, U.S. and, through the Systagenix Acquisition, in Gargrave, UK. Scapa Healthcare has made progress against its strategic objective of transitioning to be a Global Contract Development and Manufacturing Organisation. However, the current scale and levels of capacity utilisation have impacted growth and the ability to fully compete in a global market. The Scapa Directors continue to assess opportunities to further scale the Scapa Healthcare business through M&A and technical transfers of differing size and scale, commensurate with its current financial resources, but there can be no certainty that either a transaction of significant size, or series of smaller transactions can be concluded in the short term, and on acceptable financial terms.

· Scapa Industrial is a global supplier of bonding solutions and manufacturer of adhesive-based products which offer meaningful value in industrial applications due to their lightweight, easy-to-apply properties. Scapa Industrial is recognised for its broad range of products, including adhesive tapes, films and foams, as well as its ability to engineer custom designs for even the most unique applications. Although a successful niche player in specific geographies and markets, globally the Industrial business unit lacks the scale currently to compete in higher volume markets without significant investment, where larger companies are able to better maintain a competitive advantage.

· The Scapa Directors have considered the current progress of the business and the medium-term value creation potential against the near-term risks specific to the business. These risks include the impact of the ongoing COVID-19 pandemic on the markets served, and, whilst these risks are expected to be temporary, they include, but are not limited to, a continued reduction in the number of elective surgeries performed that utilise Scapa Healthcare products which is an important end-market for the business; a delayed ability to improve plant utilisation following the loss of the ConvaTec contract in 2019 and a continuing uncertainty in the shape and longevity of the recovery in key industrial end markets that Scapa Industrial products address, including automotive and construction.

· The Scapa Directors note that SWM does not expect the Offer to result in material headcount reductions in the Scapa business overall or in any material changes to the balance of skills and functions of employees and management of the Scapa Group.

· The Scapa Directors also believe that for Scapa and its employees, there will be significant potential business benefits in the proposed combination with SWM. The Board recognises that the combination allows both companies to service markets not previously available on a standalone basis. These include, but are not limited to, benefits of scale, which may better insulate against the expected continuing end market volatility in product demand related to the impact of the pandemic; opportunities to cross-sell products across their respective client bases as well as significant other opportunities to enhance inorganic growth from within a larger group, versus the Board's assessment of Scapa's growth trajectory on a standalone basis.

· Set against this context the Offer represents an Enterprise Value to EBITDA multiple of 11.3x on a reported basis and 13.8x on a continuing basis for the financial year ended 31 March 2020 and a premium of 58.5 per cent. to the six-month volume weighted average price of 132.5 pence as at 26 January 2021 (being the last Business Day before the date of this Announcement).

· After careful consideration of the cash consideration and the deliverability of the Offer, the Scapa Directors believe that SWM's offer represents compelling value given the balance of future opportunities and risks facing the business, limited capital market liquidity resulting in share price volatility and provides an opportunity for Scapa Shareholders to crystallise, in cash, the value of their holdings.

· In considering the recommendation of the Offer, the Scapa Directors have given careful consideration to SWM's statements for the management, employees and locations of the Scapa Group if the Offer becomes wholly unconditional. The Scapa Directors also note that SWM does not expect the Offer to result in material headcount reductions in the Scapa Group, other than in respect of certain corporate and support functions. The Scapa Directors also welcome SWM's statement that any affected employees will be treated in a manner consistent with the high standards, culture and practices of both Scapa and SWM.

Irrevocable undertakings and letters of intent

· SWM Bidco has received irrevocable undertakings to vote in favour of the Scheme at the Court Meeting and the Resolutions to be proposed at the General Meeting (or, in the event that the Offer is implemented by way of a Takeover Offer, to accept or procure acceptance of the Offer) from each of the Scapa Directors who holds Scapa Shares in respect of 1,245,656 Scapa Shares, representing, in aggregate, approximately 0.66 per cent. of the issued ordinary share capital of Scapa as at the Latest Practicable Date.

· SWM Bidco has also received non-binding letters of intent from each of Paradice Investment Management, Sanford DeLand Asset Management Ltd., and Tellworth Investments LLP, to vote in favour of the Scheme at the Court Meeting and the Resolutions to be proposed at the General Meeting (or, in the event that the Offer is implemented by way of a Takeover Offer, to accept or procure acceptance of the Offer) in respect of, in aggregate, 30,028,925 Scapa Shares, representing approximately 15.99 per cent. of the issued ordinary share capital of Scapa as at the Latest Practicable Date.

· SWM Bidco has therefore received irrevocable undertakings or letters of intent in respect of, in aggregate, 31,274,581 Scapa Shares, representing approximately 16.65 per cent. of the issued ordinary share capital of Scapa as at the Latest Practicable Date.

· Further details of these irrevocable undertakings and letters of intent are set out in Appendix 3 to this Announcement.

Recommendation

· The Scapa Directors, who have been so advised by Jefferies as to the financial terms of the Offer, consider the terms of the Offer to be fair and reasonable. In providing its financial advice, Jefferies has taken into account the commercial assessments of the Scapa Directors. Jefferies is providing independent financial advice to the Scapa Directors for the purposes of Rule 3 of the Code.

· Numis is acting as corporate broker and Nominated Adviser to Scapa in relation to the Offer. Berenberg is acting as Corporate Broker to Scapa in relation to the Offer.

· Accordingly, the Scapa Directors intend to recommend unanimously that Scheme Shareholders vote in favour of the Scheme at the Court Meeting and that Scapa Shareholders vote in favour of the Resolutions to be proposed at the General Meeting (or, in the event that the Offer is implemented by way of a Takeover Offer, that Scapa Shareholders accept such Offer) as the Scapa Directors who hold Scapa Shares have irrevocably undertaken to do in respect of their own entire beneficial holdings, amounting to 1,245,656 Scapa Shares, in aggregate, representing approximately 0.66 per cent of the issued share capital of Scapa as at the Latest Practicable Date.

General

· If any dividend, other distribution or return of capital is declared, made or paid in respect of the Scapa Shares on or after the date of this Announcement and with a record date prior to the Effective Date, SWM Bidco reserves the right to reduce the consideration payable in respect of each Scapa Share by the amount of all or part of any such dividend, other distribution or return of capital, except where Scapa Shares are or will be acquired pursuant to the Scheme on a basis which entitles SWM Bidco to receive any such dividend, other distribution or return of capital and retain it. If SWM Bidco exercises this right or makes such a reduction in respect of a dividend or other distribution, Scapa Shareholders will be entitled to receive and retain that dividend, other distribution or return of capital.

· It is intended that the Offer will be effected by means of a Court-sanctioned scheme of arrangement under Part 26 of the Companies Act, further details of which are contained in the full text of this Announcement (and will be included in the Scheme Document). However, SWM Bidco reserves the right, with the consent of the Panel and subject to the terms of the Co-operation Agreement, to implement the Offer by way of a Takeover Offer.

· The Offer will be subject to the Conditions and certain further terms set out in Appendix 1 to this Announcement including, among other things: (a) the approval of Scheme Shareholders at the Court Meeting and the passing of the Resolutions to be proposed at the General Meeting; (b) the sanction of the Scheme by the Court; (c) the Scheme becoming Effective no later than the Long Stop Date; and (d) SWM Bidco obtaining certain merger control and regulatory approvals. In order to become Effective, the Scheme must be approved by a majority in number of Scheme Shareholders present and voting (and entitled to vote), either in person or by proxy, at the Court Meeting representing at least 75 per cent. in value of the Scheme Shares voted by such holders.

· The Scheme Document will include full details of the Scheme, together with an explanatory statement providing details of the Offer, and the notices convening the Court Meeting and the General Meeting. The Scheme Document will also contain the expected timetable for the Offer and will specify the necessary actions to be taken by Scapa Shareholders. The Scheme Document will be sent to Scapa Shareholders as soon as reasonably practicable (subject to the availability of the Court to approve the posting of the Scheme Document).

· The Scheme is expected to become Effective during the second quarter of 2021, subject to satisfaction or (where applicable) waiver of the Conditions set out in Appendix 1 to this Announcement.

· Commenting on the Offer, Jeffrey Kramer, Chief Executive Officer of SWM, said:

"We are very excited to announce our proposed acquisition of Scapa, which significantly enhances our position as a leading provider of performance materials for attractive specialty applications. Scapa advances our successful valued-added solutions strategy and enhances our ability to solve our customers' toughest innovation challenges by adding a fully integrated model with complementary capabilities. These offerings range from adhesive formulations and product design through converting finished products. This transaction also enhances our growth profile, with nearly 65% of our combined revenues generated from growing end-markets.

We are enthusiastic about adding Scapa's best-in-class global healthcare solutions platform to our already substantial presence, giving SWM immediate critical mass in the growing medical materials space. Together with Scapa, we will offer a comprehensive suite of products focused on skin-friendly specialty applications like advanced woundcare, wellness, and medical device fixation, in addition to our existing portfolio of medical products. Scapa also brings a robust and profitable set of industrial tapes used in construction, transportation, consumer, and industrial end-markets, complementing our existing business. Like SWM, Scapa has significant capabilities and scale in key specialty applications and a well-recognised brand portfolio. With Scapa's industrial business as part of SWM's diversified AMS segment, we see potential to leverage our combined sales and distribution reach.

We are further enthusiastic about welcoming the Scapa people into SWM and are excited to add their deep industry, materials, and manufacturing experience to our organization. We will learn from each other and work together to support our expanded customer base through a deep commitment to our shared values of innovation, customer focus, and operational excellence.

We look forward to closing the transaction, capitalising on the growth opportunities ahead, and creating value for our customers, employees, and shareholders."

· Commenting on the Offer, Heejae Chae, Chief Executive Officer of Scapa, said:

"The Scapa team has worked tirelessly to build our brand to be globally recognised as an innovative, solutions-driven partner for outsourced product development and manufacture. The expansion into healthcare markets, from our initial focus on the industrials space, has significantly broadened our reach and has brought new strategic partnerships, many of which are with blue-chip companies. As another multinational producer for outsourced performance materials, SWM has been on a similar journey to us, also extending into healthcare markets having initially been focused on customers in the industrials sector. We believe the combination of our complementary businesses will bring benefits to all stakeholders. We see these not only resulting from increased scale, but also from an increased ability to cross-sell products across our respective client bases, as well as an increased potential to enhance inorganic growth from within a larger group. We believe the enlarged business will also provide greater career development opportunities for employees"

· Commenting on the Offer, Chris Brinsmead, Chairman of Scapa, said:

"Scapa has successfully executed a strategy of bringing best-in-class innovation, design and manufacturing solutions to a diverse customer base in the healthcare and industrials sectors. We therefore believe there will be significant potential business benefits in the proposed combination with SWM that will enhance both the further execution of this strategy and the growth trajectory of Scapa's business, versus that on a standalone basis. Additionally, while Scapa has demonstrated considerable resilience, significant business uncertainties continue to persist in the near and medium term for a company of our relative size. Therefore, the Scapa Directors intend to unanimously recommend the Offer from SWM, which represents an Enterprise Value to EBITDA multiple of 11.3x on a reported basis and 13.8x on a continuing basis for the financial year ended 31 March 2020, or a premium of 58.5 per cent. to the six-month volume weighted average price of 132.5 pence as at 26 January 2021 (being the last Business Day before the date of this Announcement)."