NCC Group PLC Proposed Acquisition Of The Intellectual Property Management Business Of Iron Mountain

NCC Group plc (LSE: NCC, “NCC”, the “Company” or the “Group”) is pleased to announce the signing of an agreement for the proposed acquisition of the Intellectual Property Management business (the “IPM Business”) of Iron Mountain Inc. (“Iron Mountain”), comprising substantially all of the assets of Iron Mountain Intellectual Property Management, Inc. (“IPM”) together with certain other assets of affiliates of Iron Mountain exclusively related to the IPM Business, for a cash consideration of $220 million (£156 million) (the “Acquisition”).

 Strategic Highlights

 Creating a Market-Leading Escrow Business

• IPM is a leading provider of software resilience services to a large and diverse US market – the combination will provide immediate additional scale to NCC’s core software resilience business, making the US region the largest contributor of the division’s revenues and profits.
• • IPM reported revenue of $32.9 million (£23.3 million) and EBITDA of $21.6 million (£15.4 million) for the 12 months ended 31 December 2020 (audited).
• The IPM Business has built a market-leading escrow business, serving in excess of 6,000 customers, across the full life-cycle of escrow and verification services as well as across a range of industries.
• IPM has a strong, established team, led by Mr. John Boruvka and Ms. Joy Egerton, which is expected to be retained as part of the Acquisition. Mr. Boruvka, Ms. Egerton and the senior members of the IPM Business team have agreed to continue in their roles following Completion.

Strong Strategic Alignment

• In addition to organic growth across the recurring revenue base of IPM, the proposed Acquisition represents a compelling opportunity for both of NCC’s Assurance and Software Resilience divisions to benefit from revenue synergies across an enlarged, blue chip customer base which spans a majority of the Fortune 500.
• NCC believes that these revenue synergies could be made up of:
• • increased penetration of NCC’s verification services into the IPM Business customer base;

• • offering the Group’s nascent but fast-growing Escrow-as-a-Service (EaaS) cloud proposition into the IPM Business customer base; and

• • satisfying IPM client demands for cyber assurance services.

Compelling Financial Rationale

• The proposed transaction is expected to provide the Enlarged Group with a number of financial benefits and therefore provide further compelling reasons for the combination:
• • The Acquisition will be significantly accretive to earnings per share from Completion, even without factoring in revenue synergies;

• • The Acquisition will be immediately accretive to Group EBITDA margins;

• • The Group will have an enlarged recurring revenue base, with 80% of IPM’s revenues being recurring (against 60% of NCC’s Software Resilience division’s revenues being recurring);

• • The Acquisition will strengthen the Group’s cash generation owing to IPM’s cash conversion ratio² of over 90% for the last three years which, following cash interest and tax deductions, should provide a rapid de-leveraging profile and enable further organic and inorganic investment in the near term;

• • Material tax savings which the Directors believe will be created over a 15 year period as a result of intangible assets created by the Acquisition that can be amortised for tax purposes; and

• • The provision of material additional scale to the Group – the IPM Business reported revenue of $32.9 million (£23.3 million) and EBITDA of $21.6 million (£15.4 million) for the 12 months ended 31 December 2020 (audited).

 Greater Strategic Strength

• Following the Acquisition, the Software Resilience business will have a greater global presence and is expected to achieve critical mass and international reach that provides the Group with enhanced scale and strategic flexibility
• The enlarged recurring revenue profile and enhanced cash generation will provide the Group with a platform to make further strategic investments, if deemed appropriate and value-accretive
• • Such investments could take the form of organic initiatives, inorganic opportunities in line with the Group’s strategy or a complementary mix across both divisions

Overview of IPM

The Intellectual Property Management division of Iron Mountain (NYSE: IRM-US) is a leading software escrow platform in the United States. The IPM Business, which is founded on the principles of security and protecting companies’ critical assets, serves as a trusted and secure third party for mitigating the risk for both software users (“beneficiaries”) as well as providing higher levels of assurance for software developers (“depositors”), through the provision of a suite of escrow services.  Such escrow services support the beneficiaries in the event the depositor is unable to support their software as a result of an unforeseen set of circumstances.

Complementary to the core escrow offering, the IPM Business also provides verification services for beneficiaries in order to assist them in determining whether the software IP deposited in escrow is complete and operates in line with expectations.

The IPM Business benefits from minimal client concentration and attractive market dynamics, including increasing corporate spend and focus on software, IT resilience, security and risk management.

Also Read: 3 Strategies for CIOs to Demonstrate higher RoI for IT Investments

The business currently serves over 6,000 customers and in excess of 15,000 beneficiaries across a diverse range of end markets, with a client retention rate of 86%.

For the 12 months ended 31 December 2020, the IPM Business reported revenues of $32.9 million (£23.3 million), of which escrow services comprised 86% with verification services accounting for the remaining 14%. 80% of the IPM Business’s revenues are recurring or re-occurring. EBITDA of $21.6 million (£15.4 million) in 2020 equates to an EBITDA margin of 65.7%.

Financing of the Acquisition

 The consideration for the Acquisition of $220 million will be satisfied entirely in cash. The consideration and all related transaction costs will be funded through a combination of:

• approximately $99 million (£70 million), being the estimated gross proceeds of the Placing announced on the date of this Announcement;
• $70 million (£50 million) from a new three-year Term Facility Agreement;
• existing cash balances of $10 million (£7 million); and
• the balance from the Company’s existing Revolving Credit Facility Agreement.

The Directors expect leverage to be approximately 1.5x net debt to Enlarged Group EBITDA immediately following the Acquisition.

Timetable to Completion

The size of the Acquisition means that it constitutes a Class 1 transaction for the purposes of the Listing Rules and accordingly is conditional on the approval of Shareholders at a General Meeting.

A circular containing further details of the Acquisition, the Directors’ recommendation, the notice of the General Meeting and the Resolutions (the “Circular”), is expected to be published on 14 May 2021. Assuming Shareholders approve the Acquisition at the General Meeting, the Acquisition is expected to be completed a few days thereafter.

Trading update

The Directors reaffirm their current expectation that the Group’s Pre-IFRS 16 Adjusted EBIT for the year ending 31 May 2021 will be no less than market consensus of £33 million.

Pre-IFRS 16 Adjusted EBIT is defined as the Group’s operating profit before adjusting items to assist in the understanding of the Group’s performance. Adjusting items represent amortisation of acquired intangibles, the impact of IFRS 16, share-based payments and individually significant items.

Adam Palser, Chief Executive Officer, NCC, commented:

“This acquisition will transform NCC Group’s Software Resilience business, making it a market leader, and deliver immediate financial and operational benefits to the whole of the Group. The IPM Business shares many similarities with our own Software Resilience business, including a commitment to providing exemplary service for clients. There are tremendous opportunities to grow the combined business by offering IPM’s blue-chip clients the choice of new services and support.

Following completion, NCC Group will be a stronger and broader business with an even greater ability to support clients in the ceaseless struggle against cyber-crime in all its forms.”

The preceding summary should be read in conjunction with the full text of the following Announcement and its appendices. The defined terms set out in Appendix II apply to this Announcement.

Lazard is acting as financial adviser to NCC and Peel Hunt is acting as sponsor to NCC, in each case in relation to the Acquisition. Baird is acting as financial adviser to Iron Mountain in connection with the Acquisition.