Q-Free ASA — M&A Activity 2014

Mar 27, 2014

Q-Free acquires TDC Systems - Extended stock exchange notification

This enclosure contains additional information about Q-Free's acquisition of TDC Systems, in accordance with Section 3.4 of Continuing Obligations for companies listed on Oslo Stock Exchange

According to the signed Share Purchase agreement (SPA), Q-Free has agreed to acquire 100% of the shares in TDC Systems Ltd. in the UK and TDC Systems PTY in Australia (combined: TDC Systems), both of which are owned 100% by the Founder and Managing Director Mark Phillips.

The SPA is based on an estimated sales price of GBP 10 million net of cash and debt, comprising compensation partly in cash and partly in new Q-Free shares in three stages. The range of the total consideration is GBP 5-12.5 million.

The initial consideration is GBP 5 million, consisting of a cash payment of GBP 4 million and issuance of 704,037 new shares in Q-Free at NOK 14.22 per share, corresponding to the volume-weighted average share price over the last 30 days up to and including 25 March 2014. The Board of Directors will as soon as possible resolve the issuance of new shares in Q-Free under existing authorization given by the General Meeting.

The cash consideration will be paid immediately, and the transaction closes upon issuance of the new shares.

According to the SPA, the seller is entitled to further compensation of up to GBP 7.5 million subject to the financial performance of TDC Systems in 2014 and 2015. The SPA is based on an earn-out element of GBP 5 million assuming significant revenue and earnings growth in both 2014 and 2015.

The potential earn-out consideration may consist of at least 50% cash and up to 50% new shares in Q-Free, with closing and transfer of consideration expected during the second quarter of 2015 and the second quarter of 2016.

Mark Phillips has a lock-up on the share consideration until 1. January 2016.

The activities of TDC Systems will be consolidated into the accounts of Q-Free with effect from the first quarter 2014.

On an unaudited basis, the main results from the acquired operations in TDC Systems are as follows:

GBP ('000)	2011	2012	2013
Revenues	4,076	6,026	4,736
EBIT	350	615	736
EBIT-margin	8.6%	10.2%	15.5%
Profit before tax	339	604	725
Net profit	259	498	728
Total Assets	1,948	3,036	2,640
Equity	1,260	1,758	2,151
Equity ratio	65 %	58%	81%
Net cash (debt)	114	249	102

Note: The revenue decline in 2013 reflects less activities in the Saudi-Arabian market compared to 2012.

Measured in NOK, TDC Systems' revenues amounted to approximately NOK 47 million in 2013, compared to Q-Free's reported revenues of NOK 606 million.

As seen in the above table, book equity of the acquired assets amounted to GBP 2.1 million and the excess value of NOK 75 million (GBP 7.4 million) is allocated with NOK 13.7 million to Technology, NOK 3.4 million to Order backlog, NOK 8.5 million to Customer Relationships and NOK 49.4 million to goodwill .

The headquarter of TDC Systems is in Weston-super-mare in North Somerset in England, and the companies runs operations in 50 countries out of main offices elsewhere in the UK, in Australia and in Malaysia. TDC Systems has 40 employees, whereof half within R&D and engineering.

The company's Founder and Managing Director Mark Phillips leads a management team of 6 people; Tony Di Monaco (Sales and Business Development), Lorretta Kavanagh (Business Services), Mark Newbury (R&D), Roger Mitchell (Engineering), Sara Slade (Production) and Christopher David Myatt (General Manager Australia).

The Board of Directors of TDC Systems Ltd. consists of Mark Phillips as a sole director, and the Board of Directors of TDC Systems Pty. of Mark Phillips and Christopher David Myatt.

Mark Phillips will continue as Managing Director of TDC Systems as a part of Q-Free, on salary and terms normal for the industry and with participation in Q-Free's regular bonus scheme. Phillips will have a three-years non-compete clause as part of his employment contract.

The transaction triggers no other agreements to the benefit of members of the managements or Boards in either Q-Free or TDC Systems.

Strategically, the acquisition supports Q-Free's ambition to strengthen its position within the Advanced Traffic Management Systems (ATMS) market, as a complement to its main business in the Road User Charging (RUC) market. Further ahead, the company expects the disciplines to merge into a larger Intelligent Transport Systems (ITS) market, where Q-Free ambition is to build a position as one of the leading players.

Q-Free in 2012 acquired the parking guidance company TCS International in Boston, USA, and in 2013 acquired the Serbian traffic management company Elcom and made a strategic 10% investment in US-based Intelight. Approximately 6 percent of Q-Free's revenues was generated within the ATMS market in 2013, and the inclusion of TDC Systems revenue will significantly increase the relative importance of the ATMS activities within Q-Free.

Q-Free expects to continue to expand its ATMS business, both through further acquisitions and through development of its current businesses within the area.