BMIT Technologies plc - Asset Purchase Agreement

On 7 August 2023, BMIT Technologies plc announced that following the conclusion of discussions with GO plc for the potential assignment and transfer of certain lease rights and obligations currently enjoyed by GO as well as the passive infrastructure used for hosting telecommunications equipment, it entered into an Asset Purchase Agreement in relation to the proposed transaction.

The proposed transaction is conditional on the prior approval by BMIT’s shareholders in the Extraordinary General Meeting scheduled for 25 September 2023. BMIT explained that an Explanatory Circular will be issued in this regard.

The Board of Directors explained that since the proposed transaction constitutes a material related party transaction, the company’s Audit Committee reviewed, assessed and approved the proposed transaction after ensuring that the agreement was entered into at arm’s length and on a normal, commercial basis and that it is fair and reasonable from the perspective of the company and of the shareholders who are not related parties.

 

Details of the Proposed Transaction

The Proposed Transaction will involve the acquisition of the Passive Telecoms Assets together with the corresponding maintenance functions and all related agreements. These include:

• The passive structures comprising of items such as beam reinforcements, poles, counterbalances and stays that GO plc uses to install certain cellular equipment necessary for the provision of its mobile telephony services.
• A number of lease agreements that govern the conditions for the placement of the Active Cellular Equipment and the Passive Network Infrastructure on rooftops or grounds of third party commercial or residential premises.

As a result of the Proposed Transaction, BMIT will become the new tenant of the underlying leases, whilst providing the passive infrastructure services to GO as its anchor client on the sites, enabling a continuity of service for GO and in turn, its mobile network operator services to its clients.

 

Transaction Agreements

The Asset Purchase Agreement is subject to a number of conditions, including BMIT obtaining the required financing for the transaction from a reputable credit institution in Malta, GO providing a loan to BMIT, and GO providing an undertaking to take up any scrip dividend option offered by BMIT in the year that the Proposed Transaction concludes and in the subsequent four financial years and up to a maximum of €15 million (whichever occurs first).

Under a loan agreement, GO will provide €15 million to BMIT for an initial 5-year term, subject to an interest rate of 3% and repayable in one single repayment on maturity. BMIT will also have the option to extend the loan for a further 5 years, provided that GO is notified 60 days in advance of the initial maturity date, in which case it would be repaid in five equal annual instalments of €3 million throughout the remaining term (and subject to an adjusted interest rate of 6%) to be payable following the initial maturity date. BMIT may prepay the GO Loan in whole or in part at any time without penalty. The GO Loan is subject to standard events of default and acceleration upon change of control provisions.

GO and BMIT will enter into a Master Service Agreement (MSA) for an initial period of 30 years, to be automatically renewed for further periods of five years unless otherwise agreed between the parties in writing. Over the initial 30-year term of the MSA, GO will be paying a predetermined annual service fee (adjusted every year at an agreed annual escalator) for the provision of the services outlined in the MSA. The service fee per site that will be payable by GO is an arm’s length price representative of a market rate fee and similar to the range of prices charged for similar offerings in Europe. Moreover, in terms of this agreement, GO shall be required to deliver to BMIT approximately 30 new Built-to-Suit Passive Network Infrastructure sites across the Maltese islands and transfer such sites to BMIT by the end of 2030. All these transferred sites will be managed by BMIT in terms of the MSA and in respect of which GO shall also be obliged to pay an annual service fee.

 

Benefits and Effect on the Business

BMIT explained that the data centre business, which is the Company’s legacy and core business, is being challenged by an accelerated uptake of cloud services. Local demand for data centre services is finite with a strong dependency on a small number of large customers and on the online gaming industry. These vulnerabilities call for diversification to ensure long term profitability. Such diversification is also a core aspect of the strategy being adopted by the Company to continue its transformation into a hybrid IT and cybersecurity solutions provider in shorter time frames. The expected contribution to total assets, revenue, margin and cash flows, resulting from the Proposed Transaction, will support the Company’s strategy and provides an attractive opportunity for the Company to diversify its business model and become a Maltese “InfraCo”, with the investment in this backed by long term, contracted revenues; and with cash flows generated from GO as its anchor client over a 30-year period.

The company noted that apart from the benefits associated with a transaction of this scale the Company may also face certain risks, all of which have been carefully and duly considered and are deemed to a large degree to be mitigatable. Bank financing will be required to finance part of this acquisition, and a portion of the cash flow generated from the Company’s operations shall be utilised to repay its debt obligations, incurred as a direct result of the transaction, over time pursuant to financial covenants to which it is subject. The agreements regulating the Company’s bank debt may also impose certain operating restrictions and financial covenants on the Company. These restrictions and covenants regulate the Company’s ability to obtain future financing, make capital expenditure or declare a dividend in certain instances. Furthermore, the amortisation charge on the intangible assets resulting from the Proposed Transaction may have an impact on the amount of profits available for distribution.

 

Value and Profits attributable to the Transaction Assets

An independent full asset valuation report was conducted and intangible assets have been valued at approximately €46.51 million (gross), with the MSA being valued at €44.65 million (gross). The Passive Network Infrastructure was, additionally, valued at its carrying value which is assumed to be a close approximation of the fair value of these assets.

The Company and GO have agreed that the final consideration due shall be determined, between the closing date and seven business days prior thereto, by way of a recalculation of the original consideration of circa €47.1 million less an amount corresponding to the GO Loan and any adjustments required in terms of the consideration adjustment provisions.

BMIT explained that it anticipates that initially the proposed transaction will strengthen its EBITDA by approximately €2.5 million, which represents a growth of 30% on the EBITDA recorded in FY2022. Lucrative EBITDA margins of over 70% are eventually expected as a direct result of the proposed transaction. A deduction from the EBITDA figure for finance costs, depreciation charges on the Passive Telecoms Infrastructure and amortisation charges on the intangible assets (primarily the MSA), results in a loss before tax for the same period of approximately €758,000 in respect of the Transaction Assets. However, year on year, this loss is expected to decrease as EBITDA margins improve and BMIT starts making capital repayments on its borrowings and finance costs begin to decrease. A profit before tax from the transaction is expected to be recorded within the first 3 years from the acquisition of the transaction assets.