Press release
13 April 2018, 07:30

Sdiptech enters into agreement regarding previously announced divestment of support operations

As announced in Sdiptech's AB (publ) ("Sdiptech" or the "Company") year-end report of 2017, the Board of Directors of Sdiptech resolved on 14 February 2018 to separate and divest Sdiptech's support operations. Against this background, Sdiptech has today entered into an agreement regarding the sale of its shareholding of 60 per cent in S. Professionals AB ("Sprof") and its subsidiaries (jointly the "Support Operation").^[1]

The purchaser of the Support Operation is the CEO of Sprof, who already holds the 40 per cent of the shares in Sprof that are not held by Sdiptech.

The purchase price for the Support Operations is calculated on a cash and debt free basis and consists of a fixed cash purchase price of SEK 0.5 million, and additional purchase price corresponding to 30 per cent of the aggregate amount as Sprof and Sprof's subsidiaries have invoiced customers for advice regarding M&A during 2018 and 2019. At the execution of the agreement, the total purchase price (including the additional purchase price) is estimated to amount to approximately SEK 8.0 million on a cash and debt free basis. The Board of Directors has obtained a fairness opinion from BDO to establish whether the purchase price is on market terms.

Sdiptech keeps its financial interest in three of the Support Operation's product companies which are in different stages of commercialization. In the event the Support Operation divests these product companies or receives value transfers or earn-outs, Sdiptech is entitled to additional purchase price corresponding to Sdiptech's ownership interest in the companies prior to the divestment of the Support Operation. One of these three companies is InsiderLog AB, which to 80 per cent was sold to Euronext in January 2018, which resulted in revenues of approximately SEK 56 million for Sprof's subsidiary S. Legal AB. By way of a net cash purchase price adjustment, Sdiptech will receive its indirect share of this purchase price. An earn-out and an ownership interest of 20 per cent remains to be settled.

As the transfer of the Support Operation is made to the CEO of Sprof, the transfer is subject to approval at a general meeting in Sdiptech. A proposal on resolution to this effect will therefore be included in the notice to the Annual General Meeting of Sdiptech.

Background
The Support Operation offers consultancy services to both intra-group and external customers. These services mainly consist of advice regarding M&A, law, PR, communication and recruitment and HR. The different operations were initially established to meet a continuous internal need of these services in order to, inter alia, acquire, support and develop the companies within the Sdiptech group.

The largest branch within the Support Operation is comprised of Sprof's advisory services regarding M&A. Sdiptech is Sprof's largest customer, but services are also offered to external customers provided that such customers do not compete with Sdiptech with respect to target companies. The business model for this sector is based on one-time payments at completion of acquisitions (a success fee) based on the purchase price of the acquisition. Since the revenues of Sprof vary significantly between different periods depending on when the acquisitions are completed, and the personnel costs (the largest cost item of the business) at the same time are equally distributed over the year, the Support Operation has had a volatile profitability. Several other consultancy companies within the Support Operation have similar personnel dependent cost bases but transaction-based revenue streams, which additionally has contributed to irregular revenues and results.

Motive and considerations
Sdiptech's core business comprises delivery of services and products with focus on urban infrastructure. The Support Operation is not a critical component in this respect, since all services can be purchased from external suppliers or over time be replaced with internal functions.

The Board of Directors and management of Sdiptech consider the variation in earnings that the Support Operation represents, leads to an undesired complexity for the group. This includes increased complexity as regards internal management and governance and that external parties, such as existing and potential investors, must evaluate and assess a non-core result unit where earnings are volatile.

The financial contribution from the Support Operation for the full year 2017 was negative when intra-group revenues are excluded. Even though this has been the opposite during certain other years, the Board of Directors and management consider that any potential contribution from the Support Operations is not in proportion to the complexity and increased cost it entails.

Through the divestment of the Support Operation, the Board of Directors and management assess that the core business of Sdiptech will be made clearer and that shareholder value may be generated in a more efficient manner. This also entails a streamlining of the group.

Cooperation agreement
In order to secure continuity in Sdiptech's M&A activity, Sdiptech and Sprof have entered into an agreement regarding cooperation and knowledge transfer, which ensures that the process of identifying, contacting and acquiring entrepreneurial companies will continue to the same extent as previously up until the end of 2019. During the period up until this date, Sdiptech will in parallel establish an internal function that replaces and takes over the acquisition processes. Recruitment processes have already been initiated in this respect.

Purchase price
Sdiptech has made a cash flow valuation for each divested business in order to establish a total market value of Sdiptech's ownership interests in the different companies within the Support Operation. The estimated value is approximately SEK 8.0 million. The consulting businesses included in the divestment have been established during 2013 to 2015 and are thus fairly recently established companies in which the profitability have varied.

The single most important factor that has driven the historical result of the Support Operation has been Sdiptech's use of M&A advisory services in connection with acquisitions, which have been invoiced in the form of success fees following completed acquisitions. On that basis, the purchase price has been designed to partly comprise of a fixed purchase price of SEK 0.5 million payable when the shares are transferred, and partly an additional purchase price corresponding to 30 per cent of the aggregate amount as Sprof and Sprof's subsidiaries has invoiced customers for advice regarding M&A during 2018 and 2019. The estimated value of the total purchase price, including the additional purchase price, corresponds to the estimated market value of SEK 8.0 million, but may be higher if more acquisitions than expected are completed, or lower in case fewer acquisitions than expected are completed. Sdiptech considers this to in a consistent way reflect the future financial conditions for the purchaser and the seller at signing of the agreement. The additional purchase prices shall be paid after the end of each calendar year.

An independent assessment of the market terms of the calculated market value, a fairness opinion, has been obtained from BDO. As basis for their work, BDO has had free access to collect qualitative and quantitative information regarding the different parts of the Support Operation. According to BDO, the proposed purchase price is considered to be on market terms.

Continued financial interest in three product companies
In addition to the service-providing consultancy companies, there is also ownership interests in three product companies within the Support Operations. In one of these companies, InsiderLog AB, value has been realised through the share purchase agreement with Euronext that was announced in January 2018. The other two companies, VOXO AB and HomeMaker AB, are facing a continued development and commercialization and the future value of both of these companies is currently difficult to determine. In order to ensure that Sdiptech will financially benefit from these companies in the same way as if they were to remain in the Sdiptech group, Sdiptech is entitled to additional purchase price in relation to the companies. This means that in the event these companies are sold or if value transfers are made or earn-outs are paid, Sdiptech will receive an additional purchase price corresponding to its indirect ownership interest prior to the divestment of the Support Operation.

Condition
Given that the sale of the Support Operation is made to its CEO, an approval is required at a general meeting in Sdiptech by a qualified majority representing at least nine-tenths of both the votes cast and the shares represented at the meeting. Accordingly, the transfer is conditional upon such approval. A proposal on such approval will be included in the notice to Sdiptech's Annual General Meeting of 2018. Provided that the Annual General Meeting approves the transfer, it is expected to be completed during the second quarter of 2018.

Financial impacts of the divestment
As described above, the Support Operation offers consultancy services to both intra-group and external customers. These services mainly consist of advisory services regarding M&A, law, PR, communication and recruitment and HR.

Historically, the Support Operation has contributed to the group's operating profit with SEK 2.1 million in 2016 and SEK -7.1 million in 2017, which is after intra-group transactions have been eliminated. Including intra-group transactions, the operating profit was SEK 20.1 million in 2016 and SEK 9.0 million in 2017.

Due to the characteristic of the Support Operation - providing administrative consultancy services - its balance-sheet total has been limited and thereby comprised a small part of the Sdiptech group's total assets. At the end of 2017, the balance-sheet total amounted to SEK 31.8 million. This is after intra-group items having been eliminated. Including intra-group items to other group companies, the balance-sheet total amounted to SEK 43.6 million at the end of 2017.

A calculation has been made to illustrate the impact on the Sdiptech group's operating result in 2017 in the event the now proposed divestment had been completed as per 1 January 2017. The operating result of the Sdiptech group in 2017 had in such case been SEK -0.7 million lower than the reported operating result of SEK 156.3 million. The difference consists of two parts: (i) the return of the negative contribution from the Support Operation in the amount of SEK -7.1 million in 2017 and (ii) additional costs of SEK 7.8 million comprising of invoices from companies within the Support Operation which in this case would have been external to the group.

In addition to the above financial impacts, the divestment of the Support Operation is not deemed to have any impact on the remaining day-to-day business. The main services provided by the Support Operation has related to M&A and this service will be provided to the same extent as before the divestment up until the end of 2019. Sdiptech also intends to purchase other services provided by the Support Operations to the same extent as before, but there will be no contractual obligations to do so. Over time, Sdiptech intends to establish an internal M&A function, which will increase the number of employees in the group's parent company Sdiptech AB as recruitments are made and thereby result in gradually increased personnel costs.

Sdiptech's ordinary share in series B is traded under ticker SDIP B with ISIN code SE0003756758. Sdiptech's preference shares are traded under ticker SDIP PREF with ISIN code SE0006758348. Sdiptech's Certified Adviser on Nasdaq First North Stockholm is Erik Penser Bank. More information is available at the Company's webpage: www.sdiptech.com

For additional information, please contact:
Carl Johan Åkesson, CFO, +46 708 30 70 57, cj.akesson@sdiptech.com 
Jakob Holm, CEO, +46 761 61 21 91, jakob.holm@sdiptech.com

Sdiptech AB is an engineering group with focus on urban infrastructures. The group provides deeply niched services and products for both expanding and renovating fast growing cities. The Company's office is located in Stockholm.

The information was provided by the above contact persons for publication 13 April 2018 at 07:30 CET.