Pace Micro Tech - Publication of Prospectus

RNS Number:2065R
Pace Micro Technology PLC
31 March 2008

Pace Micro Technology plc

Announcement of revised acquisition terms, publication of prospectus and
resumption of share trading

31st March 2008

Pace Micro Technology plc ("Pace" or "the Company"), a leading digital TV
technology company, today announces the publication of a shareholder prospectus
(the "Prospectus") detailing its proposed acquisition of the Set Top Box
Division and Connectivity Solutions Business ("the Philips STB and CS Business"
or "the Business") of Royal Philips Electronics ("Philips") (the "Acquisition")
on revised terms agreed with Philips earlier today.

Copies of the Prospectus in relation to the Acquisition, originally announced on
19 December 2007, have today been posted to shareholders and will shortly be
available on the Pace website. The existing shares in the Company, which have
been suspended from trading, are expected to recommence trading from tomorrow,
Tuesday 1 April 2008. The new shares to be issued to Philips are expected to
commence trading upon completion of the Acquisition ("Completion").

Commenting on the Acquisition, Neil Gaydon, Chief Executive Officer of Pace
said:

"We are very pleased to have reached a revised agreement with Philips to acquire
its set-top box and connectivity solutions business. Following a rigorous
process of due diligence and appraisal we are confident that the proposed
acquisition represents a significant value-enhancing opportunity for both Pace
and our shareholders."

Key revised terms of the Acquisition

On 19 December 2007, Pace announced it had entered into an agreement with
Philips to acquire the Philips STB and CS Business valuing it at up to €95
million (approximately £68 million) on a cash-free and debt-free basis.

As a result of changes in trading terms with certain key customers and a number
of other matters that were identified after 19 December 2007, the terms of the
transaction were amended under a settlement agreement signed by the parties
earlier today, which included the reduction of the total consideration payable
by Pace for the Philips STB and CS Business from up to €95 million
(approximately £68 million) to up to €88 million (approximately £63 million).

Up to €83 million of the revised consideration (approximately £59 million) will
be satisfied by the issue of up to 64,481,049 (see note 1) new Pace ordinary
shares ("the New Ordinary Shares") to Philips, with the balance of €5 million
being payable in cash (subject to the satisfaction of certain conditions).

At completion of the Acquisition, Philips will hold approximately 21.6% per
cent. of the enlarged share capital of Pace (see note 2)
("Enlarged Share Capital"), with 17% of the Enlarged Share Capital subject to a
one year lock-in from the date of Completion.

The agreement is conditional on, inter alia, Pace shareholders approving the
Acquisition, which is to be sought at a general meeting of shareholders on 16
April 2008.

Summary background on the Philips STB and CS Business

The Philips STB and CS Business employs approximately 335 staff predominantly
based in France and is a designer and leading supplier of a range of digital TV
products including satellite, cable, terrestrial and IPTV set-top box products.
For the year ended 31 December 2007, the Philips STB and CS Business generated
revenue of €415.7m (approximately £328.3m).

The Philips STB and CS Business has long-established relationships with a number
of key payTV operators in multiple geographies, major IPTV customers and an
established international retail business. As part of this transaction, Pace
will be entitled to utilise the Philips brand in retail distribution for an
agreed range of products for up to three years from completion of the
Acquisition.

Summary of the rationale for the Acquisition

Pace and the Business each have over 20 years' experience in the set-top box
market and they are two of the world's leading set top box companies. Combined
they will have a broader customer and product portfolio than that of the
existing Pace Group.

The Directors expect there to be a number of key areas in which the operating
and financial performance of Pace and the Philips STB and CS Business (together
the "Enlarged Group") will be improved as a result of the Acquisition:

- A broader customer base, with limited overlap

- Addition of new technologies and business streams to Pace

- Scope for operating improvements

- Margin improvements as a result of implementing the Pace operating model

- Opportunities for potential cost savings

The Board believes that the Enlarged Group has significant potential to further
develop its position as one of the world's leading set-top box companies with a
global customer portfolio of major payTV operators. The engineering skill-set
for the delivery of digital TV into the home will be extended and the Enlarged
Group will be capable of creating products across more technology platforms than
a number of its competitors. This will enable the Enlarged Group to extend its
market reach into new technologies such as IPTV, into new geographies, including
Latin America, and to grow its research capability by combining work in areas
that are expected to drive the next stage of market development, such as home
networking.

The Directors of Pace (the "Directors" or the "Board") also believe the Philips
STB and CS Business will bring a new cultural dimension to Pace including
mainland European sales skills and relationships.

Pace will apply its proven operating model to the Business, which the Board
believes has the potential to drive further growth in revenue and margins and
deliver certain cost synergies to create value for shareholders.

There will be an analyst presentation on 1st April at 9.00am at the Turner Room,
Brunswick Group LLP, 16 Lincoln's Inn Fields, London, WC2A 3ED.

For further information, please contact:

Pace Micro Technology plc +44 (0) 1274 532000
Neil Gaydon Chief Executive Officer
Stuart Hall Chief Financial Officer
Helen Kettleborough Director of Corporate Communications

Rothschild
Scott Sheldon +44 (0) 207 280 5000
David Forbes +44 (0) 113 200 1900

Hoare Govett Ltd
Alexander Garton +44 (0) 207 678 8000

Brunswick Group LLP + 44 (0) 207 404 5959
Fiona Laffan
Sarah West
Tim Williamson

1 The maximum number of New Ordinary Shares to be issued is based on the average
closing middle market quotation of a Pace ordinary share (as derived from the
Daily Official List published by the London Stock Exchange) for the 10 business
days prior to 19 December 2007, translated at the prevailing exchange rate on 19
December 2007 of €1.397:£1.

2 Assuming the maximum number of New Ordinary Shares is issued and no exercise
of share options over existing Pace ordinary shares.

This announcement has been prepared by, and is the sole responsibility of, the
Directors of Pace.

N M Rothschild & Sons Ltd, which is authorised and regulated in the United
Kingdom by the Financial Services Authority, is acting as financial
adviser and sponsor to Pace and no-one else in connection with the matters
referred to herein and will not be responsible to anyone other than Pace for
providing the protections afforded to clients of N M Rothschild & Sons Ltd or
for giving advice in relation to such matters.

This announcement does not constitute a prospectus relating to the Company and
does not constitute, or form part of, any offer or invitation to sell or issue,
or any solicitation of any offer to purchase or subscribe for, any shares in the
Company in any jurisdiction nor shall it, or any part of it, or the fact of its
distribution, form the basis of, or be relied on in connection with or act as
any inducement to enter into, any contract therefor.

This announcement may include "forward-looking statements". These
forward-looking statements contain the words "anticipate", "believe", "intend",
"estimate", "expect" and words of similar meaning. All statements other than
statements of historical facts included in this announcement, including, without
limitation, those regarding Pace, the Business or the Enlarged Group's financial
position, business strategy, plans and objectives of management for future
operations (including development plans and objectives relating to products and
services) are forward-looking statements.

Forward-looking statements are subject to risks and uncertainties and
accordingly the actual future financial results and operational performance of
Pace, the Business and the Enlarged Group may differ materially from the results
and performance expressed in, or implied by, the statements. These factors
include but are not limited to those described in the Prospectus.

These forward-looking statements speak only as at the date of this announcement.
Pace expressly disclaims any obligation or undertaking to update or revise any
forward-looking statements contained herein to reflect actual results or any
change in the assumptions, conditions or circumstances on which any such
statements are based unless required to do so by the Financial Services and
Markets Act 2000, the Listing Rules or Prospectus Rules of the Financial
Services Authority or other applicable laws, regulations or rules.

The financial information set out in this announcement relating to the Pace
Group does not constitute statutory accounts with the meaning of section 240 of
the Act. The Reporting Accountants have given unqualified audit reports on the
statutory accounts of the Company for the seven months ended 31 December 2007
and for each of the three financial years ended 2 June 2007, 3 June 2006 and 4
June 2005, within the meaning of section 235 of the Act. None of these reports
contained any statements under 237(2) or (3) of the Act. Statutory accounts of
the Company for the seven months ended 31 December 2007 and each of the three
financial years ended 2 June 2007, 3 June 2006 and 4 June 2005 have been
delivered to the Registrar of Companies in England and Wales pursuant to section
242 of the Act.

TRANSACTION OVERVIEW

1. Introduction

Pace entered into an agreement with Philips on 19 December 2007 to acquire the
Philips STB and CS Business, conditional on the successful conclusion of the
consultation procedure with Philips' relevant works council in relation to the
Acquisition. Pursuant to that agreement, Pace entered into a formal sale and
purchase agreement with Philips on 14 February 2008, valuing the Business at up
to €95 million (approximately £68 million) on a debt-free, cash-free basis
subject, inter alia, to approval by Pace shareholders.

As part of the transaction, Pace and Philips have agreed to enter into a
trademark licence ("Trademark Licence"), which entitles Pace to utilise the
Philips brand in retail distribution for an agreed range of products for up to
three years from Completion.

As a result of changes in trading terms with certain key customers and a number
of other matters that were identified after 19 December 2007, the terms of the
transaction were amended under a settlement agreement on 31 March 2008 which
included the reduction of the total maximum consideration payable for the
Business from €95 million (approximately £68 million) to €88 million
(approximately £63 million).

Up to €83 million (approximately £59 million) of the revised consideration will
be satisfied by the issue of up to 64,481,049 New Ordinary Shares to Philips.
The balance of €5 million (approximately £3.5 million) will be payable in cash
in two instalments of €2.5 million each on the second and third anniversaries of
Completion, contingent on the Trademark Licence not being terminated. If the
Trademark Licence is terminated prior to the date of payment of the relevant
instalment, the relevant instalment will be reduced pro rata to the number of
months which have elapsed.

Assuming the issue of 64,481,049 shares, being the maximum number of New
Ordinary Shares capable of being issued as consideration under the sale and
purchase agreement (as amended), and no exercise of existing options over
existing Pace ordinary shares, at Completion the Enlarged Share Capital of Pace
is expected to be 298,198,633 ordinary shares and would (on a fully diluted
basis) be held as to approximately 78.4 per cent. by the existing Pace
shareholders and as to approximately 21.6 per cent. by Philips.

The Acquisition constitutes a ''Reverse Takeover'' under the Listing Rules and
Completion is conditional, inter alia, upon the approval of Pace shareholders
and for this reason a General Meeting has been convened for 16 April 2008. At
the General Meeting, shareholder approval will also be sought to create and
authorise the issue of the New Ordinary Shares and to increase the Directors'
authority to issue shares generally. In addition, the Company is required to
make an application to the UKLA for the Enlarged Share Capital to be admitted to
the Official List.

2. Background to and reasons for the Acquisition

The Pace management team commenced a wide-ranging strategic review of the Pace
business in April 2006 to reinvigorate Pace's business and to seek to create the
optimum business structure for a successful set-top box business. The outcome of
the strategic review was a business restructuring programme to:

• re-focus Pace's organisation around the technologies and needs of its
customers;
• develop a new business operating model and methodology to:
• improve product execution and customer-driven decision making;
• increase operational efficiencies; and
• drive new diversification opportunities; and
• initiate the development of a new high performance company culture,
starting with Pace's executive team, based on a new vision of ''Great
products to our customers, every time''.

The Directors believe that completion of the strategic review and the
restructuring programme was a key factor in the improvement in gross margin
performance and return to profitability for Pace for the year ended 2 June 2007
and the seven months ended 31 December 2007.

Against the backdrop of the strategic review, the restructuring programme and
the resulting improvement in financial and operating performance, the Directors
assessed a number of opportunities to grow and develop the Pace business. As
part of this review, the Directors considered the impact of and opportunities
presented by industry consolidation. The Directors concluded that there were
significant potential benefits arising from acquiring new technologies,
customers and established routes to market from competitor companies which would
accelerate the growth of Pace's business, better serve customers and provide
access to new products and geographies. The opportunity to acquire the Philips
STB and CS Business provides Pace with an opportunity to realise some of the
benefits of consolidation and accelerate the growth and development of the Pace
Group.

Pace and the Business each have over 20 years' experience in the set-top box
market and they are two of the world's leading set-top box companies. Combined,
they will have a broader customer and product portfolio than that of the
existing Pace Group and the Business will bring to the Enlarged Group a new
cultural dimension, including mainland European sales skills and relationships.
Pace's existing strength is in its relationships with Anglo, Australian and
American customers.

Benefits of the Acquisition

The Directors expect there to be a number of key areas in which the operating
and financial performance of Pace and the Business will be improved as a result
of the Acquisition.

A broader customer base, with limited overlap
•Pace and the Business have limited customer overlap and, where overlap
occurs, complementary products are supplied, which should result in revenue
growth and broader customer relationships with those customers;

•Significant scope to strengthen Pace's current market position by
acquiring a set-top box company with a similarly strong position; and

•Expanded geographic reach into new markets, primarily in Europe and Latin
America, and opportunities for growth in these new markets following the
Acquisition.

Addition of new technologies and business streams to Pace

•The addition of new technologies to the Pace product portfolio, in
particular, capabilities in IPTV, which the Directors believe will improve
Pace's position in what is expected to be an important sector for future
growth;

•Potential for further new business opportunities through the connectivity
solutions business being acquired, such as through the cross-selling of
products;

•Extension of the engineering team that will widen Pace's software and
applications knowledge. Importantly, this includes skills in conditional
access systems, which will increase the number of payTV operators that can
be targeted by the Enlarged Group; and

•Addition of the Philips STB and CS Business' established retail business,
with scope for future growth of this business within the Enlarged Group.

Scope for operating improvements

•Margin improvements as a result of implementing the Pace operating model

There is potential for substantial benefits and growth in margins through the
application of Pace's operating model and business structure to the Enlarged
Group. The Directors believe that Pace's approach has already delivered a
material improvement in Pace's own operating and financial performance in the
year ended 2 June 2007 and the seven months ended 31 December 2007.

The Business reported gross margins of 10.3% and 14.1% for the years ended 31
December 2006 and 31 December 2007 respectively. The Directors believe that the
Business' gross margins can be improved towards Pace's gross margin over time,
partly as a result of the adoption of Pace's operating model. Pace reported
gross margins of 15.9% for the year ended 2 June 2007, which improved to 20.3%
for the seven months ended 31 December 2007.

The Directors believe that Pace's business structure will enable significant
performance gains within the Enlarged Group. A key area of the Pace operating
model has been to better focus commercial and engineering teams on important
customer needs such as delivering new technology first, competitive pricing and
speed to market, while also improving profitability.

Pace's organisational structure comprises business units with dedicated
cross-functional teams for groups of customers that share common technology
platforms. Each business unit is managed by a management team with a flat
structure, comprising commercial, technology and product delivery (engineering)
staff, all usually based in the same area to ensure strong communication and
alignment and to avoid slow upward management decision making. Each business
unit maintains a close working relationship with its customers and is well
placed to make decisions based on product roadmap priorities and support issues.
In turn, the business unit has a gross margin target that is linked to
remuneration and performance incentives, which has helped to drive growth and
profitability.

This approach, in addition to new business systems and processes that have been
developed in-house specifically for this industry, has delivered increased gross
margin and improved time to market, while producing improved customer
satisfaction. The Directors believe that adoption of the Pace operating model
can lead to similar benefits for the Enlarged Group over time following the
Acquisition.

•Opportunities for potential cost savings

There is potential for improved operational efficiencies, in particular
opportunities to generate greater efficiencies in the global supply chain,
including manufacturing and purchasing.

The Business is currently subject to a number of re-charged costs from the
Philips Group relating to central or support services, such as legal and
treasury functions, central marketing costs and supply chain administration
costs. The provision of certain of these services by Philips will be subject to
a transitional services agreement, but over time the Directors believe that many
of these recharged costs can be eliminated from the ongoing operating costs of
the Enlarged Group.

Summary

The Board believes that the Enlarged Group has significant potential to further
develop its position as one of the world's leading set-top box companies with a
global customer portfolio of major payTV operators. The engineering skill-set
for the delivery of digital TV into the home will be extended and the Enlarged
Group will be capable of creating products across more technology platforms than
many of its competitors. This will enable the Enlarged Group to extend its
market reach into new technologies such as IPTV, into new geographies such as
Latin America and to grow its research capability by combining work in areas
that are expected to drive the next stage of market development, such as home
networking.

At the same time, the Pace management team will be able to apply its proven
operating model to the Business, which the Board believes has the potential to
drive further growth in revenue and margins over time and deliver cost synergies
that can create value for Shareholders.

3. Information on Pace

Pace is a leading technology developer for the global payTV industry. Pace's
principal activities are the design, development and distribution of digital
receivers and decoders for digital TV and the reception or transmission of
interactive services, telephony and high-speed data. The Company's headquarters
are in Saltaire in the UK. Pace employs over 580 people, developing a wide range
of products and advanced technologies for the digital TV market at sites around
the world, including in the US.

Summary financial information below relating to Pace for the three years ended 2
June 2007 and the seven months ended 31 December 2007, has been extracted
without material adjustment from the information incorporated by reference in
the Prospectus:

Seven Months
Year ended Year ended Year ended Year ended
4 June 3 June 2 June 31 December
2005 2006 2007 2007
£'000 £'000 £'000 £'000
IFRS IFRS IFRS IFRS
Turnover on continuing operations (including
associates and joint ventures) 253,326 178,095 386,513 249,875
Profit/(loss) on ordinary operations
before
interest, tax and exceptional items
(continuing
operations) 8,698 (16,186) 8,320 15,886
Operating profit margin 3.4% (9.1 %) 2.2 % 6.4%
Gross assets 116,363 108,758 124,811 170,397
Gross profit margin 22.6% 18.0% 15.9% 20.3%

Note: Investors should read the whole of the Prospectus and should not rely on
the summary financial information set out above.

4. Information on the Philips STB and CS Business

The Philips STB and CS Business is a designer and supplier of a range of digital
TV products including satellite, cable, terrestrial and IPTV set-top box and
connectivity products. The business is based in France and employs around 335
staff at a number of sites.

Summary financial information below relating to the Philips STB and CS Business
for the three years ended 31 December 2007 is extracted without material
adjustment from the Prospectus

Year ended Year ended Year ended
31 December 31 December 31 December
2005 2006 2007
€'000 €'000 €'000
IFRS IFRS IFRS
Turnover on continuing
operations (including
associates and
joint ventures) 456,109 351,546 415,735

Profit/(loss) on
ordinary operations
before interest,
tax and exceptional
items (continuing
operations) 16,182 (46,525) (21,733)

Operating profit margin 3.5% (13.2%) (5.2%)

Gross Assets 126,796 134,305 131,984

Gross profit margin 17.8% 10.3% 14.1%

Note: Investors should read the whole of the Prospectus and should not rely on
the summary financial information set out above.

Further financial information on the Philips STB and CS Business is set out in
Part IV of the Prospectus.

5. Objectives and strategy of the Enlarged Group

The Acquisition will combine two of the world's leading providers of digital TV
products and systems, focusing on the set-top box market. The Enlarged Group is
expected to be one of the world's largest set-top box companies.

The Enlarged Group's strategic priorities will be to:

•implement Pace's business structure and operating model in the Business,
which Pace believes is an appropriate and suitable structure and model for
both growing revenues and improving financial performance within the
Enlarged Group;

•consolidate new customer relationships and obtain revenue synergies from
the Acquisition;

•engage new employees with the vision, values and objectives of the
Enlarged Group;

•utilise the increased scale of the Enlarged Group to create efficiencies
in the supply chain;

•optimise the development and manufacturing operations of the Enlarged
Group; and

•leverage the engineering and technology capabilities of the Enlarged
Group to identify and create new customer and business opportunities.

6. Financial effects of the Acquisition

Pace is purchasing the Philips STB and CS Business for up to €88 million
(approximately £63 million) on a debt-free, cash-free basis. The Board believes
this represents a reasonable purchase price for the Philips STB and CS Business,
given the medium- and long-term potential to improve the level of profitability
and operating performance of the Business and the significant scope for
synergies within the Enlarged Group.

The historic financial performance of the Philips STB and CS Business over the
past two financial years has been below management's expectations. However, the
Directors believe that there is significant potential to improve the operating
and financial performance of the Business in the future.

The Directors expect the Acquisition to be earnings dilutive in the year ending
31 December 2008. However, the Directors expect the Acquisition to enhance
earnings per share in the year ending 31 December 2009, the first full year
following the Acquisition1.

The unaudited pro forma statement of net assets of the Enlarged Group, prepared
for illustrative purposes only and showing the effects of the Acquisition and
the issue of the New Ordinary Shares, is set out in Part IX of the Prospectus.

It is envisaged that one-off costs (excluding fees in relation to the
Acquisition) estimated to amount to £2.0 million, in aggregate, associated with
the integration of the Philips STB and CS Business will be incurred in the year
ending 31 December 2008.

The Acquisition will result in the recognition of goodwill and intangible
assets. In accordance with IFRS, intangible assets other than goodwill are
amortised in the income statement over their estimated economic life.

7. Current trading and prospects

Pace

The Board is pleased with progress and the benefits that Pace is delivering in
the form of a solid, sustainable platform for growth that has been embedded
across the Pace Group.

While the market remains difficult to predict and Pace's performance is largely
predicated on the performance of its customers, the Board is confident that Pace
is investing in the right products and technologies to meet the demands of its
growing customer base. Further, Pace is currently in advanced negotiations
regarding a significant order for a new product that would, if confirmed, be
delivered in 2008 and 2009.

Following the exceptional sales performance and improvements made by Pace in
2007, the Board is confident it is on track to meet its expectations for the
2008 financial year.

The Philips STB and CS Business

Following the year ended 31 December 2007, the Philips STB and CS Business has
continued to trade broadly in line with the Business management team's
expectations.

The Enlarged Group

The Directors are confident of the financial and trading prospects of the
Enlarged Group due to both the encouraging state of recent trading conditions
and contract wins in Pace's business and also due to the benefits that are
expected to accrue as a result of the Acquisition as described further in the
Prospectus.

8. Information on the New Ordinary Shares

The New Ordinary Shares will, when issued, rank in full for dividends and other
distributions and otherwise pari passu in all respects with the existing Pace
ordinary shares.

Applications have been made to the FSA for the New Ordinary Shares to be
admitted to the Official List and to the London Stock Exchange for the New
Ordinary Shares to be admitted to trading on the London Stock Exchange's main
market for listed securities. It is expected that Admission will become
effective and dealings in the New Ordinary Shares will commence on 21 April
2008.

9. Management and Board of the Enlarged Group

The Board of Pace will remain as constituted at present. No employees of the
Philips STB and CS Business or Philips Group are expected to join the Board of
Pace following the Acquisition.

10. Dividend policy

Whilst recognising the move by Pace towards a sustainable and profitable
business, the Directors have not recommended the payment of a dividend for the
period ended 31 December 2007. The Board will keep the matter under review and
any decision to recommend the payment of a dividend in future will reflect the
Enlarged Group's cash flow and desired capital structure, as well as its future
growth opportunities.

11. General Meeting

A notice convening the General Meeting, to be held at 10.00 a.m. on 16 April
2008 at Pace Micro Technology plc, Salts Mill, Victoria Road, Saltaire, West
Yorkshire BD18 3LF is set out in the Prospectus.

Notes:

1 The statement that this Acquisition is expected to be earnings dilutive for
Pace in the year ending 31 December 2008 and earnings enhancing in the year
ending 31 December 2009 relates to future actions and circumstances, which, by
their nature, involve risks, uncertainties and other factors. These statements
do not constitute a profit forecast and should not be interpreted to mean that
earnings for any future financial period would necessarily match or be greater
or less than those for any preceding financial period. Earnings in this context
represent net after tax earnings on an IFRS basis, excluding the amortisation of
intangible assets and any exceptional items.

This information is provided by RNS
The company news service from the London Stock Exchange

END
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