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Jan 15th, 2013
 
Acquisition of Kopin Wireless for $75 million, placing to raise £16.5 million and trading update
 
IQE plc (AIM:IQE, "IQE", the “Company” or the "Group"), has agreed to acquire the compound semiconductor (“CS”) epiwafer manufacturing business (“Kopin Wireless”) of Kopin Corporation (“Kopin”) for total consideration of $75 million in cash (the “Acquisition”).
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Kopin Wireless is the leading global manufacturer of heterojunction bipolar transistor (“HBT”) materials which are used in power amplifiers (“PA”), a key wireless component in mobile devices. These are produced using Metal Organic Chemical Vapour Deposition (“MOCVD”) epitaxial wafer technology.

Acquisition highlights:

  • $60 million payable in cash (“Initial Consideration”) to Kopin on completion of the Acquisition (“Completion”) and $15 million payable in cash to Kopin on the third anniversary of Completion (“Deferred Consideration”)
  • Significantly extends IQE’s market share and leadership in wireless industry supply and delivers a market leading position in MOCVD HBT
  • Builds substantially on IQE’s risk mitigation strategy in wireless - adding Skyworks Solutions, Inc. (“Skyworks”), which has a long standing supply agreement with Kopin Wireless, as a major customer
  • Taiwan manufacturing facility adds to IQE’s global manufacturing footprint and will provide the Group with a strong position to access the growing Asian semiconductor market
  • Attractive terms - earnings enhancing from 2013 financial year onwards
  • Significant cost synergies of at least £7 million per annum expected from 2014

Acquisition financing:

  • New banking facility with HSBC for $40 million
  • $20 million will be funded from the £16.5 million proceeds of the Placing (defined below)
  • Organic cash flow to pay the Deferred Consideration of $15 million payable in January 2016

Placing

  • IQE intends to raise approximately £16.5 million through a placing by the Joint Bookrunners, Espirito Santo Investment Bank and Canaccord Genuity Limited, of 56,900,961 new ordinary shares (“Placing Shares”) at a price of 29 pence per Placing Share (the “Placing Price”) (the “Placing”)
  • The Placing Shares represent approximately 8.82 per cent. of the Group’s enlarged share capital following Admission (defined below)
  • The Placing Price represents a discount of approximately 0.85 per cent. to the closing mid-market price of IQE’s ordinary shares of 29.25 pence on 9 January 2013, being the last practicable date before this announcement
  • The books for the Placing will open with immediate effect and are expected to close no later than 4.30 p.m.

Trading update for 2012
For the year ended 31 December 2012, IQE expects revenue to be in the range of £87 million to £88 million, with earnings before interest, tax, depreciation and amortisation in the range of £16 million to £17 million and net debt as at 31 December 2012 of approximately £15.5 million.

Drew Nelson, CEO of IQE, said:
This acquisition is our third key transaction in the past 12 months. It significantly enhances our scale and provides us with a highly complementary product line in the wireless space".
The transaction marks another major step forward in our risk mitigation strategy, whilst significantly boosting our wireless market share. At the same time, it delivers excellent opportunities for additional business growth, particularly in Taiwan and from there into the Asian semiconductor market".
This transaction will be a key driver of significant earnings and cash generation and also brings substantial financial and scale benefits. This will enable the Group to make significant cost savings from FY14 onwards and further underpins our leading position in the supply of wafers to the global compound semiconductor industry.

There will be an analyst conference call at 2.30 p.m.; please contact Lucy Moseley at College Hill on +44 (0)20 7457 2040 or lucy.moseley@collegehill.com for details.

Rationale for Acquisition

During the last 12 months the Group has significantly boosted its market leadership in wafer supply to the wireless industry, and has taken substantial steps to achieve risk mitigation in those markets. At the same time, the Group is well positioned to rapidly build a global leadership position in the supply of wafers for the burgeoning CPV sector. As a result, IQE has built a powerful platform for continuing growth and cash generation.

The Kopin Wireless transaction represents IQE’s third strategic and complementary transaction since the start of 2012, following the Solar Junction Corporation and RFMD agreements in February and June 2012 respectively.

Additionally, the Group announced in December 2012 substantial progress in its optoelectronics business, with its first single production order valued at more than £1 million for a new generation of opto devices for data storage and high speed data transmission applications.

The Acquisition of Kopin Wireless builds on IQE’s strategic developments in 2012 to further extend IQE’s leadership in wireless industry supply and deliver a market leading position in MOCVD HBTs.

The transaction also builds on IQE’s risk mitigation strategy and market share in wireless, adding Skyworks as a major customer and increasing IQE’s wireless market share. Skyworks’ current contract with Kopin Wireless runs until the end of 2013 and guarantees a significant proportion of Skyworks’ business.

Additionally, the move extends IQE’s global manufacturing footprint with the addition of a Taiwan manufacturing facility, providing a strong position to access the growing Asian semiconductor market. Following the Acquisition, the Board believes that the Group will be able to use its expanded global footprint and the increase in scale of IQE’s business to deliver significant cost synergies. The Board expects to deliver cost savings of at least £7 million per annum on a recurring basis from 2014. It is expected that the Group will incur one-off exceptional costs of approximately £3 million in 2013 and £2 million in 2014 as part of the plan to achieve these synergies.

IQE will finance the Initial Consideration through a new banking facility with HSBC for $40 million and $20 million from the proceeds of the Placing. The Deferred Consideration will be paid from the enlarged Group’s organic cash flow.

The Directors believe that the Acquisition will be earnings enhancing from the 2013 financial year onwards.

Terms of the acquisition agreement
Under the terms of the acquisition agreement between Kopin and IQE (the “Acquisition Agreement”), IQE KC LLC, a subsidiary of IQE, has agreed to acquire the assets, certain liabilities and the trading business including all necessary contracts, licenses and permissions of the US business of Kopin Wireless, and IQE has agreed to acquire Kopin’s controlling interest in Kopin Taiwan Corporation (“KTC”) of approximately 90.2 per cent. Following Completion of the Acquisition, there will continue to be a minority interest of approximately 9.8 per cent. in KTC.

The total consideration payable under the Acquisition Agreement of $75 million is payable in cash as follows:

  • $60 million payable upon completion of the Acquisition, which is expected to be on or around 16 January 2013; and
  • $15 million payable on the third anniversary of the Acquisition, which is expected to be in January 2016.

Further information on Kopin Wireless
Kopin Wireless is a division of Kopin, a NASDAQ listed company (NAS: KOPN) co-founded in 1984 by John Fan (current CEO) with a market capitalisation of approximately $221 million (as at close of business on 31 December 2012). It is engaged in manufacturing CS epiwafer with a focus on wireless applications, and supplies into the same markets as IQE. Kopin Wireless currently operates from two key operating bases:

  • US based III-V operations based in Taunton, Massachusetts; and
  • KTC, based in Hsinchu, Taiwan.

Skyworks is a major customer of Kopin Wireless and there is a supply contract in place between both parties until December 2013. In addition, Kopin Wireless supplies HBT transistor wafers to Advanced Wireless Semiconductor Company (“AWSC”), which provides foundry services to Skyworks. Kopin estimated that in the year ended 31 December 2012, 28 per cent. of its total group revenues of $131.1 million were derived from sales of gallium arsenide products to Skyworks. Other significant customers of Kopin Wireless include RFMD and TriQuint.

In the year ended 31 December 2011 Kopin Wireless generated audited revenues of $66.5 million and in the nine months to 29 September 2012 it has generated unaudited revenues of $44.0 million. Management information indicates that Kopin Wireless generated EBITDA in the same periods of $11.2 million and $7.5 million respectively. The net assets of the Kopin Wireless division being acquired are expected to be approximately $42 million.

Key terms of bank finance

The Group has entered into an acquisition banking facility with HSBC Bank plc for $40 million (“Acquisition Facility”) with a margin of 250 to 295 basis points above US LIBOR. The Acquisition Facility will be repayable as follows:

  • 20 quarterly instalments of $1 million each commencing on 31 March 2013;
  • a bullet repayment of $16 million payable on 30 June 2015; and
  • a final repayment of $4 million payable on 31 December 2017

The terms of the Acquisition Facility include market standard covenants in relation to interest cover and the Group net debt to EBITDA ratio. All existing banking facilities remain in place.

Terms of the Placing
IQE intends to raise approximately £16.5 million through the placing by the Joint Bookrunners of 56,900,961 new ordinary shares of 1 pence each ("Ordinary Shares") with institutional investors at the Placing Price of 29 pence per Ordinary Share (the "Placing").

The Placing Shares are equivalent to approximately 8.82 per cent. of the Group's enlarged ordinary share capital following Admission (defined below) and the Placing Price represents a discount of approximately 0.85 per cent. to the 29.25 pence closing mid-market price of IQE's ordinary shares on 9 January 2013, being the last practicable date before this announcement. The Placing is being carried out using the existing share authorities of the Group, which were granted at the Annual General Meeting of IQE on 25 May 2012.

The books for the Placing will open with immediate effect and are expected to close no later than 4.30 p.m. The timing of the closing of the books and the making of allocations may be accelerated or delayed at the Joint Bookrunners' discretion. The appendix to this announcement contains the detailed terms and conditions of the Placing.

By choosing to participate in the Placing and by making an oral and legally binding offer to acquire Placing Shares, investors will be deemed to have read and understood this announcement in its entirety, including the appendix, and to be making such offer on the terms and subject to the conditions contained herein and to be making the representations, warranties, undertakings and acknowledgements contained in the appendix to this announcement.

Approximately £12.5 million ($20 million) of the placing proceeds will be used to satisfy part of the Initial Consideration. The remaining £4.0 million will be used for general corporate purposes and to satisfy the expenses of the Acquisition and Placing.

The Placing Shares will be credited as fully paid and rank pari passu with the existing issued Ordinary Shares when issued. Application will be made for the Placing Shares to be admitted to trading on AIM, which is expected to become effective at 8.00 a.m. on 15 January 2013 ("Admission").

Settlement of the Placing Shares is expected to take place within the CREST system following Admission.

The Placing is conditional, inter alia, on:

  • all conditions to the Acquisition Facility being satisfied other than Completion and Admission;
  • all conditions to the Acquisition Agreement being complete other than satisfaction of the Initial Consideration;
  • the placing agreement between the Company and the Joint Bookrunners relating to the Placing becoming unconditional in all other respects; and
  • the Admission of the Placing Shares to trading on AIM becoming effective by no later than 8.00 a.m. on 15 January 2013 or such other date as the Joint Bookrunners and the Company may agree.

Participation in the Placing will be limited to institutional investors. Members of the general public are not eligible to take part in the Placing.

 

 
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