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Aquisition of majority shareholding & Proposed Rights Issue

9:24AM, 31 Mar 2011 | GENERAL


The Board of Directors of Scott Technology Limited (Scott) is pleased to announce the acquisition of a majority shareholding in HTS-110 Limited, a designer and manufacturer of powerful electromagnets and other associated technology which utilises High Temperature Superconductors (HTS). The acquisition will be initially debt funded, with the debt being repaid following the completion of a proposed rights issue to be concluded by the end of June 2011.

The acquisition is for a 50.65% shareholding in HTS-110 Limited for a total consideration of approximately $4.4 million. Under the terms of the sale Industrial Research Limited (IRL) and American Superconductor Corporation have diluted their shareholdings and Endeavour Capital has sold its stake, as have several minority shareholders. IRL will continue to support the development of HTS-110 Limited’s products through its long running superconductor research programme.

HTS-110 Limited

HTS-110 Limited is based at IRL’s Wellington facility and designs and manufactures powerful electromagnets, employing approximately twenty staff. More than 90% of its commercial
revenues are from international sales of systems that range in price from $100,000 to $1 million.

HTS technology is an emerging technology that enables the transmission of electricity without resistance or the loss of energy. HTS enables the manufacture of lighter, smaller and more efficient machines than can be achieved with existing copper wire technology.

HTS-110 Limited’s magnets are used to analyse a wide variety of materials. Applications range from cutting edge nanotechnology to ultra high capacity hard drives, from accelerated drug development to increased yield in bio-fuel plants and from smaller magnetic resonance imaging (MRI) systems to more efficient electrical power systems.

HTS-110 Limited has combined a deep knowledge of these unique HTS materials with advanced engineering, precision manufacturing and specialist in-market representatives to create a dominant international position in HTS magnets.

Initial customers were in major research institutes, but as HTS-110 Limited’s reputation has grown the business has expanded to industrial customers. HTS-110 Limited’s systems are attractive for industrial applications as they combine high-performance and throughput with small size, sturdiness and energy efficiency.

HTS-110 Limited’s products are sold through a world-wide distributor network, direct to the end-user and through various OEM (original equipment manufacturer) relationships.

Despite its early stage of development, Scott expects HTS-110 Limited to be both earnings and cash flow positive from the date of acquisition. Revenues and earnings are expected to grow significantly in the medium to long term as the product range moves through to full commercialisation. There is a pipeline of new products at various stages of development to support long-term growth, while in the short to medium term HTS-110 Limited’s strategy is to grow its market footprint, target industrial users and create alliances to provide integrated solutions for selected industries.

HTS technology has received major research and development support and encouragement from successive Governments. This support will be ongoing and Scott expects HTS-110 Limited to play a key role in further developing the global HTS industry from New Zealand.

Scott Group Synergies

The acquisition of a majority shareholding in HTS-110 Limited provides further diversification (product and industry) to the Scott Group’s activities, while still being underpinned by the Group’s core strengths of excellence and innovation in engineering design and manufacture. Scott’s involvement with IRL and High Temperature Superconductivity started in 2005 when a wire coating machine was manufactured for IRL by Scott. HTS technology and markets have an interest to some existing international customers of Scott and discussions are ongoing.

HTS-110 Limited scored highly when assessed under Scott’s set investment criteria for acquisitions. Like much of the Scott business, the industry in which HTS operates is high technology and growing rapidly. HTS-110 Limited is a world leader and there are synergies with Scott processes, people and skills.

Scott has expertise in scaling up machinery which will enable HTS-110 Limited to enhance its product offering. Scott has achieved this in its previous acquisition of Rocklabs where it
has expanded the product range from standalone rock crushers and pulverisers to large scale integrated and automated sample preparation systems.

Synergies will also be achieved through HTS-110 Limited having access to the Scott Group’s wider design, manufacturing and procurement resources.

Rights Issue

The acquisition will be initially debt funded, with the debt being repaid following the completion of a proposed rights issue.

The terms of the rights issue are still to be concluded, but it is likely to be at a rate of one right for every three ordinary shares, with the rights issue being concluded by the end of
June 2011. Rights are expected to be tradeable on the NZX with the strike price being at a discount to the head share price. A prospectus is currently being prepared, for distribution to
shareholders in late May.

Any share capital raised in excess of the acquisition price of HTS-110 Limited will be applied towards repayment of earlier borrowings for the acquisition of the Rocklabs and Malcolm
Smith Reference Materials businesses. This will provide capacity for future borrowings for further acquisitions as opportunities present themselves to us and which meet our
investment criteria.

The Board of Scott Technology is excited about the opportunities that the acquisition of HTS- 110 Limited will provide to the Scott Group and will continue to look for further opportunities to enhance shareholder value.