7 Digital (AIM:7DIG) Acquisition and Major New Contracts

Further to its announcements of 10 March 2017 and 6 June 2017, 7digital (AIM:7DIG) is pleased to announce that it has agreed to acquire the business of 24-7, a significant European competitor and B2B provider of digital music services, headquartered in Copenhagen (the “Acquisition”). The Acquisition is expected to complete on 21 June 2017.

7digital has agreed to acquire 100 per cent of 24-7 Entertainment ApS, together with certain other assets from MMS, Europe’s largest retailer of consumer electronics, which, via its brands MediaMarkt, Saturn and Redcoon operates in 15 European countries and has approximately 6 million customer contacts every day. 24-7 is the technical backend and catalogue provider for digital music service, Juke!, that MMS delivers to customers in selected countries.

As part of the Acquisition, MMS will become one of 7digital’s largest customers with a range of existing and new services and will also become its largest shareholder. Three year contracts totalling £11m have been agreed for existing services. A new contract to the value of £6m over its lifetime, including an initial set up fee of £1.4m, has also been agreed with MMS to develop several new digital music services. Under the terms of the Acquisition, a proportion of these revenues are expected to be paid to 7digital within 14 days of completion, further strengthening the Company’s balance sheet.

24-7 has other significant customers, including Danish telecom operator TDC, which together account for anticipated annual revenues of £2.7m.

MMS is the largest ‘bricks and mortar’ retailer of packaged music in Europe and is therefore a significant influence as the music industry transitions to a digital streaming future. In its recent report on the industry, PWC estimated that revenues from streaming would become the largest source of global recorded music sales in 2017, rising 37 per cent. to $9.1 billion [“Global Entertainment & Media Outlook 2017-2021”, PWC, Ovum]. The digital strategies of major retailers like MMS will strongly influence this transition.

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The business being acquired, which comprises 24-7 Entertainment ApS and certain associated assets and contracts, does not produce consolidated standalone audited financial information. On the basis of due diligence undertaken and the detailed review of certain management accounts, the Company estimates that the Acquisition will increase 7digital licensing revenue in 2017 by approximately £5m and more than £8m in 2018. The Company expects that the Acquisition will be earnings enhancing in 2018 and the Directors expect that the Company, as enlarged by the Acquisition, will be both profitable and cash generative in 2018. At 31 May 2017, it is estimated that 24-7 had net assets of approximately £1m including £1.1m of cash.

The total consideration of £2.2m will be satisfied by the issue of 23,144,616 new Ordinary Shares to MMS. In addition, 7digital has agreed to pay an initial cash payment of £0.9m in respect of the cash which remains on the balance sheet of 24-7. A balancing cash sum will be received, or paid, by the Company within three months of the Acquisition in relation to the final audited net assets of 24-7 Entertainment ApS at 31 May 2017.

Application has been made for the 23,144,616 new Ordinary Shares to be admitted to trading on AIM (“Admission”) and dealings are expected to commence on 21 June 2017. The new Ordinary Shares will rank pari passu with the Company’s existing Ordinary Shares. Completion of the Acquisition will take place on Admission. Pursuant to Admission, MMS will hold a total of 23,144,616 Ordinary Shares of the Company representing approximately 12.7 per cent. of the total voting rights of the Company (as enlarged by the Acquisition and Admission).

The total number of Ordinary Shares in issue following Admission will be 183,011,298 of which 28,336 are held in Treasury. Accordingly, the figure of 182,982,962 may be used by shareholders as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in the Company under the FCA’s Disclosure and Transparency Rules.

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Simon Cole, Chief Executive of 7digital, said:

“We set out three years ago to create a profitable, globally dominant player in what we believed would be a rapidly expanding market for the technology and content needed to build streaming music services. This transaction represents the culmination of that strategy, completing our consolidation of European competitors – following the Snowite acquisition last year – and transforming 7digital in terms of size, scale and profitability.

MediaMarktSaturn is of central importance to the European music industry as it builds from a year in which the importance of streaming to future revenues has been confirmed. For one of the world’s top retailers of music to make the statement MMS is making by committing to this digital strategy sends an important signal about broadening the digital services available to consumers.

For 7digital, the revenues will nearly double our licensing revenues and confirm 2018 as a year of healthy profit and positive cashflow.”

Wolfgang Kirsch, COO MediaMarktSaturn Retail Group and CEO MediaMarktSaturn Deutschland, said:

“As the number one music retailer in Europe, music streaming is increasingly important for us. Being a shareholder of 7digital will enable us to strengthen our digital entertainment service Juke! and develop further business models for the growing music streaming business.”

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