Integumen PLC (SKIN.L) RECOMMENDED ALL-EQUITY OFFER FOR MODERN WATER PLC

RECOMMENDED ALL-EQUITY OFFER (“Offer”)

for

MODERN WATER PLC (“MODERN WATER”)

by

INTEGUMEN PLC (“INTEGUMEN”)

Summary

The Boards of Integumen and Modern Water are pleased to announce that they have reached agreement on the terms of a recommended offer to be made by Integumen for the entire issued and to be issued share capital of Modern Water.

Under the terms of the Offer, Modern Water Shareholders will be entitled to receive:

for each Modern Water Share 1 Existing Integumen Share

Integumen is seeking shareholders’ approval for the Share Consolidation whereby every 10 Existing Integumen Shares are proposed to be consolidated into 1 New Integumen Share, at a general meeting scheduled for 15 September 2020. If the Share Consolidation is approved, the Modern Water Shareholders will instead be entitled to receive:

for every 10 Modern Water Shares 1 New Integumen Share

Based on the Existing Integumen Share Closing Price of 4.05 pence per Existing Integumen Share on the Last Practicable Date, the Offer values the entire issued and to be issued share capital of Modern Water at approximately £21.25 million.

The Offer represents a value of approximately 4.05 pence per Modern Water Share and a premium of approximately:

– 44.6 per cent. to the Modern Water Share Closing Price of 2.80 pence on the Last Practicable Date; and

– 110 per cent. to the 90 trading day average price of 1.92 pence per Modern Water Share as at the Last Practicable Date.

The number of Existing Integumen Shares expected to be issued pursuant to the terms of the Offer is 524,693,214 (or 52,469,321 New Integumen Shares in the event that the proposed 10:1 Share Consolidation is approved by Integumen Shareholders).

The Offer is expected to result in Modern Water Shareholders owning 32 per cent. of the share capital of the Enlarged Group (and 34 per cent. on a fully diluted basis).

If any dividend or other distribution or return of value is proposed, declared, made, paid or becomes payable in respect of Modern Water Shares on or after the date of this announcement and prior to the Offer becoming unconditional, Integumen will have the right to reduce the value of the consideration payable for each Modern Water Share by up to the amount per Modern Water Share of such dividend, distribution or return of value.

Offer Rationale

Integumen and Modern Water have been working together since signing a production and logistics agreement on 17 March 2020, under which Integumen is contracted to produce test kits for Modern Water . This has led to significant collaboration between the two companies which has provided invaluable insight into the Modern Water business. The Board of Integumen believes that a merger of the two businesses would be a natural next step and there are synergies and opportunities across the combined businesses in the areas of science, IT, distribution channels, global reach, marketing and sales and management.

COVID-19 has presented challenges but also major opportunities for Integumen. Integumen’s Labskin business provides the only commercially available lab-grown, full thickness human skin model with AI assisted testing platform, and delivers human skin microbiology services to support product R&D activities in the cosmetic, personal care, medical device and pharmaceutical sectors. The initial difficulties that the Board of Integumen assumed would occur for the Labskin business, as many clients went into furlough, have not materialised to the extent expected. Significant growth of new business opportunities, from Labskin’s own real-time water contamination detection and environment sector solutions, have increased pressure on demand with additional staff recruited over the lock-down period. In addition, the Board of Integumen has seen an increase of new and core business enquiries from Labskin customers as they emerge from furlough.

Integumen’s positioning in water and wastewater is timely. The pandemic has heightened the need for additional surveillance of waterways. This has resulted in contracts to supply reagents for the Microtox water monitoring equipment sold by Modern Water. These reagents are used by many water authorities and environmental management authorities to monitor water systems, with more than 2,900 Microtox instruments sold worldwide. These instruments continuously require consumables in the form of bioluminescent reagents presenting significant revenue opportunities.

It has resulted in demand to engineer Integumen’s RAWTest artificial intelligent solution, originally developed over the last 4 years for the detection of E.coli bacteria in reservoirs, lakes and rivers, into a retrofitted real-time alert system that can be added to Modern Water’s equipment and, in due course, network the overall Modern Water equipment range with communications, data exchange and AI capability.

With COVID-19 driving rapid changes in the nature of global trade as nations become more protectionist, Integumen has plans to open laboratory and sales facilities in both the US and China. Modern Water already has a presence in New Castle, Delaware (US) and a 100 per cent. owned subsidiary in Shanghai (China).

The recent capital investment that Integumen made into facilitating Modern Water’s reagent production in the UK, and the ongoing investment in development of RAWTest AI equipment that can be retrofitted into Modern Water’s existing Microtox and Microtrace water contamination detection equipment, is evidence of the value of merging the laboratory, engineering, sales, marketing and distribution channels of both companies to leverage the expertise that is inherent in each.

Managing the route through a COVID-19 world with demand for the products and services means a change to production, sales, support and key management in both Modern Water and Integumen. Integumen management believe there is a need to decentralise and/or out-source to all three territories of US, EU and China, in which Modern Water already has an operational presence. Investment may be considered at a later date to upgrade manufacturing in both US and China to accommodate growth in orders and to be able to secure larger volume of existing and new revenue streams, to extract greater value and not depend on organic growth with existing infrastructure. This also requires alterations to the sales, marketing and distribution channels.

Integumen has global skincare clients in the US, China and EU and has been subject to lockdown restrictions on sales, marketing and scientific staff travelling to and from each territory. Modern Water’s physical presence in the US and China would immediately provide Integumen with a physical presence and lower the substantial capital investment of Integumen’s expansion aspirations at the same pace on all three continents.

The Integumen Board believes the merger creates a unique opportunity for Modern Water to participate and play an important role in the acceleration of the development of the enlarged group with a strong focus on commercial development of the underlying combined products and services range.

Independent Modern Water Directors

In light of his role as Chief Executive Officer of Integumen, Gerard Brandon, Non-Executive Chairman of Modern Water, has not participated in the appraisal by the Board of Modern Water of the Offer. The Board of Modern Water has constituted a committee comprised of the Independent Modern Water Directors for the purpose of evaluating and recommending the Offer to Modern Water Shareholders.

The Independent Modern Water Directors are Simon Humphrey, Chief Executive Officer, and Nigel Burton, Non-Executive Director.

Modern Water Recommendation

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

Accordingly, the Independent Modern Water Directors unanimously intend to recommend that Modern Water Shareholders accept the Offer, as they have irrevocably undertaken to do in respect of their own beneficial holdings, amounting to, in aggregate, 6,182,000 Modern Water Shares, representing approximately 1.18 per cent. of the Modern Water Shares in issue on the Last Practicable Date.

In addition, Gerard Brandon has irrevocably undertaken to accept the Offer in respect of his own beneficial holdings, amounting to, in aggregate, 10,000,000 Modern Water Shares, representing approximately 1.91 per cent. of the Modern Water Shares in issue on the Last Practicable Date.

Integumen Recommendation

In light of his role as Non-Executive Chairman of Modern Water, Gerard Brandon, Chief Executive of Integumen has not participated in the Integumen Board’s deliberation of the terms of the Offer. The Independent Integumen Directors intend to recommend unanimously that the Integumen Shareholders vote in favour of the resolutions to be proposed at the Integumen General Meeting to approve the issue of the Consideration Shares and the Share Consolidation.

The Integumen Directors have given irrevocable undertakings in respect of their own beneficial holdings, amounting to, in aggregate, 184,911,756 Existing Integumen Shares, representing approximately 16.64 per cent. of the Integumen Shares in issue on the Last Practicable Date, to vote in favour of the resolutions to be proposed at the Integumen General Meeting.

General

Integumen is required to seek the approval of Integumen Shareholders for the authority to issue the Consideration Shares in a General Meeting. The Offer is therefore conditional upon, amongst other things, the Resolution being passed by the Integumen Shareholders at the Integumen General Meeting. Integumen will make application for Admission of all the Consideration Shares issued in respect of the Offer to trading on AIM.

It is intended that the Integumen Circular, which will convene a general meeting of the Integumen Shareholders to approve the issue of the Consideration Shares (and the Share Consolidation), will be published later today.

The Offer Document, which will contain further information about the Offer, and the Forms of Acceptance, will be published in due course and in any event by no later than 25 September 2020.

Commenting on the Offer, Ross Andrews, Chairman of Integumen, said:

“There has been significant collaboration between Integumen and Modern Water over the last 6 months which has provided the Integumen Board with invaluable insight into the Modern Water business. The Integumen Board believes that a merger of the two businesses would be a natural next step and that there are exciting synergies and opportunities across the combined businesses in the areas of science, IT, distribution channels, global reach for supply chain, sales, marketing and distribution channels.”

Commenting on the Offer, Nigel Burton, Independent Non-Executive Director of Modern Water, said:

“The Independent Modern Water Directors have carefully considered both this Offer and the alternatives. After a challenging 2019, 2020 has seen a placing which enabled Modern Water to address all outstanding liabilities, and to provide working capital to begin to rebuild and strengthen its sales, marketing and distribution channels.

The Offer provides the opportunity to reduce implementation risks, enhance the technical and human resources available, and grow shareholder value more quickly than any of the alternatives available. The Independent Modern Water Directors therefore unanimously recommend the Offer.”

The Offer will be subject to the Conditions and certain further terms set out in Appendix 1 to this announcement and to the full terms and conditions which will be set out in the Offer Document. The bases of calculations and sources of certain financial information contained in this announcement, and certain additional financial and operational information, are set out in Appendix 2 to this announcement. Details of the irrevocable undertakings received by Integumen in relation to the Offer are set out in Appendix 3 to this announcement. Certain definitions and terms used in this announcement are set out in Appendix 4 to this announcement.


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