Company Announcements

Bigblu Broadband plc

("BBB" or the "Company" or the "Group") 

£12m funding for Quickline to accelerate growth

Supporting the build-out of new infrastructure targeting a significant increase in customer base and profitability

Bigblu Broadband plc (AIM: BBB.L), a leading provider of alternative super-fast broadband services, announces that QCL Holdings Limited ("QCL"), a subsidiary of BBB and new holding company for Quickline Communications Limited ("Quickline"), has secured  £12m of new equity and debt funding to support the build-out of its fibre backed fixed wireless network business across the UK.

This £12m funding allows Quickline to significantly increase the size and scale of its fixed wireless access ("FWA") business to target a customer base of approximately 30,000 subscribers over the next three years, with significantly increased revenue, EBITDA and profitability anticipated as new capital is deployed and the business increases in scale.

Highlights

·    Transaction values QCL at an enterprise value of £15m (pre new money), a significant uplift compared to the valuation at the time of BBB's acquisition of Quickline in August 2017 of £8.4m[1].

·   The funding includes £4m of new equity initially with a further £4m of equity committed and a £4m revolving credit facility provided by HSBC. This will allow Quickline to expand its infrastructure, consider selective acquisitions and target grants issued by BDUK to support investment in rural broadband projects.

·    Compelling market fundamentals given the digital divide in the UK with over a million homes still unable to receive superfast broadband services. Pure fibre to the home is widely considered uneconomic in rural areas. FWA is a quicker and lower cost solution and is supported by government grants.

·    Current government programmes largely managed by BDUK include a £200m Rural Gigabit Connectivity Programme and a Rural Gigabit Voucher scheme worth up to £3,500 for each SME and up to £1,500 per residential premise.

·   QCL plans to invest around £20m over the next three years, including funds provided by potential government grants and internal cash flows, targeting a customer base of around 30,000 and a significant increase in revenue and profitability.

·    BBB's shareholding in QCL will initially reduce to 70% but BBB will continue to fully consolidate QCL into its accounts.

·    BBB is expected to benefit from QCL's increased valuation, revenues and profitability as the accelerated growth strategy is implemented.

·    The new funding reduces BBB's gearing to approximately 1.0x - 1.5x net debt/EBITDA, allowing BBB to continue investing across the Group and maintain a robust balance sheet. The transaction is expected to be significantly earnings enhancing in the year to November 2021, once the initial investment has been made.

·   Funds managed by Harwood Capital, which manages or advises BBB's two largest shareholders, are providing £7.75m of equity. Paul Howard (BBB non-executive director) is providing £0.25m and will become Chairman of QCL. Simon Clifton (BBB CTO and co-founder) will join the board of QCL.

·    Steve Jagger, Quickline's founder and CEO, is re-investing his final earn-out payment of £1.4m into QCL for an initial shareholding of 7.7%.

Background

Quickline, a leading provider of fixed wireless broadband in the UK, was acquired in August 2017 for an initial consideration of £5m plus an earn-out due to Steve Jagger (founder and CEO of Quickline) dependent on Quickline's financial performance. £2m of this earn-out has been paid to date and as part of the transaction announced today the earn-out is being settled in full for a total of £3.4m with a final £1.4m payment being taken in the form of equity in QCL. Since acquisition and integration, Quickline has performed strongly increasing customers from approximately 4,500 to 7,500 with revenue of £3.4m and underlying EBITDA[2] of £1.6m for the year ended 30 November 2018.

During the first half of 2019, BBB concluded that the main impediment to further growth of BBB's FWA business is lack of access to growth capital. In order to satisfy this requirement for growth capital, while protecting BBB from dilution, the Board has agreed £12m of new funding into QCL through £4m of equity capital with a further £4m of equity committed and a £4m revolving credit facility from HSBC.

Extension of BBB's debt facility with HSBC

Separately, BBB has today secured an extension to its main revolving credit facility with HSBC for an additional £1.75m to support further investment and continued growth in its core markets including working capital and the Preferred Partner Programme with Eutelsat where prospects are positive.

Andrew Walwyn, CEO of BBB, commented:

"Since we acquired Quickline, its performance has exceeded our ambitious expectations. It has also been at the forefront of broadband technology developments to deliver fixed wireless services, with fibre like performance, without the high cost and lengthy timescales associated with full fibre roll-out.

"The market opportunity for a fibre backed fixed wireless network roll-out has never been so attractive with significant investment in the space, including government support, which will mean many more homes and businesses will get connected to next generation super-fast broadband sooner and cheaper than before.

"To enable Quickline to profitably grow to support this increasing demand, we needed to consider the most effective and appropriate form of financing, given the medium to long term growth prospects ahead. With this in mind, the private infrastructure funding structure we have secured will enable Quickline to accelerate growth in our UK fixed wireless business in a way that incentivises both the Quickline team and delivers significant value to BBB."

Contacts

Introduction and investment rationale

In the UK, there remains over 1 million homes unable to receive super-fast broadband services, mainly in rural areas. The current, and future, objective of UK infrastructure investment is to deliver Fibre To The Home ("FTTH") which is focused on urban areas as it is deemed uneconomic to deliver such infrastructure to wide spread rural and semi-rural communities. At present only 8%[3] of UK homes are connected to FTTH and it is expected that despite significant investment from private and public bodies this will only reach approximately 50% by 2025[4].

BBB's focus is, and has always been, to close the digital divide in its core markets where poor fibre infrastructure exists. To accelerate this objective, in August 2017 BBB acquired Quickline, a leading provider of fixed wireless broadband in the UK.

Under BBB's ownership, and under the leadership of its original founder and CEO Steve Jagger, Quickline has grown rapidly with customer numbers nearly doubling since acquisition from approximately 4,500 to 7,500 currently. This growth is a result of Quickline's low churn and strong rural broadband product set. Quickline offers unlimited data allowances and up to 100 Mbps in mainstream network coverage areas, and up to 300 Mbps in areas where the company is rolling out its new mmWave gigabit capable networks. 

Quickline has performed strongly and since BBB's acquisition has outperformed original expectations. Annual customer churn is relatively low at approximately 9% and for the year ended 30 November 2018 Quickline generated £3.4m of revenue (through a balanced sales mix of 50:50 B2B and B2C customers), £1.6m of underlying EBITDA[5] and underlying profit before tax of £0.3m.

With a proven business model, and a rapidly growing market opportunity, Quickline is now looking to accelerate its growth strategy through the expansion of its operating footprint and infrastructure network across the North of England. The new funds announced today will allow increased capital expenditure, selective complementary acquisition activity and support the securing of government backed subsidies (including those supported by Building Digital UK ("BDUK")) designed to support investment in rural and semi-rural broadband projects.

Government backed broadband schemes

The primary Government Agency to support the roll-out of fast broadband to unconnected areas of the UK is BDUK with the objective of increasing super-fast and ultra-fast broadband penetration nationally. BDUK has recently amended its funding award model with a strategy of ensuring fast roll-out of broadband services to unconnected areas. As part of this, BDUK wishes to bring gigabit capable services by utilising a mixture of technologies (including fibre and fixed wireless hybrid networks) to the last 10% of UK homes that are unlikely to receive commercial access to full fibre or FTTH.

As part of BDUK's strategy, a variety of funds and schemes are being deployed to ensure progress is made. Example schemes which are relevant to Quickline include:

·    The Rural Gigabit Connectivity Programme, a £200m fund to be deployed by March 2021 with investment focused on delivering more full fibre connections in locations that are unlikely to benefit from commercial investment;

·    The Rural Gigabit Voucher Scheme which provides rural homes with vouchers worth up to £3,500 for each SME and up to £1,500 per residential premise; and

·    The forthcoming revised regional tenders with local authorities aimed at connecting large rural areas with poor broadband speeds/connectivity.

Quickline has a track record of successfully applying for and receiving support from BDUK including a £2m grant for fixed wireless in North Lincolnshire and a major part of a £2.1m Government funded 5G Rural project. As the largest rural fixed wireless broadband provider in the UK and because of its key ISO certifications, accreditations and OFCOM Code Powers, Quickline is well placed to be awarded future grants under the above schemes as it has the technology, expertise and track record to help BDUK fulfil its strategy of rolling out fast broadband to unconnected areas of the UK outside the fibre footprint.

Capital expenditure and growth targets

Quickline has developed an accelerated growth plan that envisages investment totalling £20m over the next three years. This will be funded from the £12m funding announced today, anticipated BDUK support and internal cash flow generation. Under this accelerated growth plan, there is a significant acceleration in customer numbers in 2020 and 2021 with a targeted customer base of approximately 30,000 by the end of 2022 (compared to 7,500 today). This is expected to lead to a significant uplift in Quickline's revenue, EBITDA and profitability, particularly in 2021 and onwards as the business will be operating at scale with operating leverage benefits and an extended active network (the first 12 to 18 months of the business plan require front-end investment given the time required to deploy capex in order to build the network and up-front costs including staff and sales/marketing investment). As part of the growth plan, Quickline is anticipating extending its geographic footprint in the North of England and will undertake selective acquisitions to add scale and customers.

As such, the Board of BBB expects that Quickline will transform into a larger, higher margin business which is backed by a high-quality infrastructure network and is cash generative.

Investment structure

Quickline's business model differs from BBB's core satellite business in that it is a capital intensive, infrastructure backed model which requires significant capex to generate returns, albeit with commensurately higher margins. As a result, the Board of BBB has facilitated £12m of direct funding into Quickline which supports the future of the business (as a subsidiary of BBB) and provides increased flexibility as well as balance sheet strength.

As part of the secured funding announced today, QCL has raised £8m of new equity with £4m to be drawn down immediately and a further £4m committed and available to be drawn upon request, subject to certain conditions. This private placement values the business at £15m on a pre-money, debt-free, cash-free basis, highlighting the value accretion that has been achieved since Quickline was integrated into BBB. After taking into account current net debt and a normalised working capital position, QCL's equity value (before new money) is £13.8m.

Certain funds (the "Harwood Funds") managed by Harwood Capital LLP ("Harwood Capital"), which also manages or advises Oryx International Growth Fund Limited and North Atlantic Smaller Companies Investment Trust plc, BBB's two largest shareholders, have committed to invest £7.75m with £3.875m of equity drawn down initially. The Harwood Funds` shareholding in QCL will initially be 21.8%.

Paul Howard, an existing BBB non-executive director, will become Chairman of QCL and has committed to invest £250k with £125k initially drawn down. Paul Howard's shareholding in QCL will initially be 0.7%.

The shares in QCL held by the Harwood Funds, Paul Howard and Steve Jagger (other than any Growth Shares as referred to below) have a capital preference on a capital return equal to 1.25 times the subscription price. The preference will be increased, after the second anniversary of issue of each tranche of their shares, at 10% per annum compounded annually and accrued quarterly.  

BBB acquired Quickline for an initial consideration of £5m and has since paid a further £2m under the earn-out arrangement due to its strong performance since acquisition. As part of the transaction announced today, BBB has agreed to settle the earn-out due to Steve Jagger, Quickline's founder and current CEO, for a final payment of £1.4m which is to be taken as an initial 7.7% shareholding in QCL. This arrangement ensures that Steve Jagger is fully aligned and incentivised as CEO to deliver the accelerated QCL growth strategy over the medium to longer term and demonstrates his commitment to the business.

As a result of the transaction, BBB will have an initial shareholding of 69.7% in QCL. BBB will continue to fully consolidate Quickline in its accounts and will recognise 69.7% of Quickline profits given the associated minority interest.

In addition, Steve Jagger, Paul Howard and certain members of the QCL management team will be eligible to acquire growth shares in QCL which will entitle them to 10% of the value realised in the event of a sale of Quickline or liquidity event above a hurdle linked to the post investment value of QCL plus the investors' capital preference ("Growth Shares"). The growth share scheme will be put in place shortly and is designed to ensure that its participants are appropriately incentivised to deliver QCL's growth objectives over the medium to longer term. 

New Quickline RCF

QCL has today secured a new £4m revolving credit facility with HSBC Bank plc ("HSBC") to provide additional financial flexibility as Quickline invests for growth as described above. The facility is available for 5 years.

QCL board structure

The QCL board will comprise Paul Howard as Chairman and Simon Clifton representing BBB as a non-executive director. Steve Jagger will remain CEO and Gary Parkin as CFO. Under the terms of the equity investment, the Harwood Funds have the right to appoint one representative to the Board and it is expected that Tim Sturm, a partner at Harwood Capital,  will be appointed as non-executive director in this capacity.

BBB financial impact

The transaction provides significant financial backing for Quickline to pursue its growth objectives. Given the equity investment going into QCL the Board of BBB expects that overall BBB leverage will reduce. BBB is continuously focused on financial discipline and the Board expects that as a result of the QCL investment announced today, BBB leverage (net debt/EBITDA) will be in the range 1.0x - 1.5x over the next 12 months.

The accelerated Quickline growth plan includes assumptions around organic growth, acquisitions and securing grants relating to BDUK backed projects in order to reach 30,000 customers by the end of 2022. The timing of such opportunities are inherently uncertain but the directors of BBB are confident that given the strength of the Quickline business model, technology and market opportunity, the direct investment announced today will allow Quickline to grow into a much larger and more valuable company than currently which BBB will benefit from as a major shareholder. Assuming the business plan is delivered as planned (which includes successfully executing acquisitions and securing government funding grants which are not currently committed), the financial impact on BBB is attractive, particularly in 2021 where the BBB Board expects significant accretion to BBB's revenue, EBITDA and earnings. The impact in 2020 is more modest given the up-front nature of costs and that during this year customer numbers are expected to start accelerating. As such the BBB Board expects only very modest accretion to BBB's revenue and EBITDA in 2020 and a marginal level of dilution at the earnings level. It is expected that there will be limited impact to BBB's revenue and EBITDA in 2019 given the time taken to deploy capital but marginal earnings dilution given up-front cost investment and BBB will no longer be a 100% shareholder in QCL for the remainder for the 2019 financial year.

Related party transactions

The following transactions are considered to be related party transactions under Rule 13 of the AIM Rules for Companies.

The Harwood Funds' £7.75m committed equity investment into QCL. The independent directors (excluding Christopher Mills who is Chief Investment Officer of Harwood Capital and Paul Howard) consider, having consulted with Numis, that the terms of this transaction are fair and reasonable insofar as shareholders of the Company are concerned.

Paul Howard's £0.25m committed equity investment into QCL. The independent directors (excluding Christopher Mills and Paul Howard) consider, having consulted with Numis, that the terms of this transaction are fair and reasonable insofar as shareholders of the Company are concerned.

Steve Jagger's exchange of his cash earn-out and roll-through into QCL equity for a sum of £1.4m. The independent directors (excluding Christopher Mills and Paul Howard) consider, having consulted with Numis, that the terms of this transaction are fair and reasonable insofar as shareholders of the Company are concerned.

The proposed Growth Shares investment by Steve Jagger and Paul Howard is yet to be formalised and will also be treated as a related party transaction. Further details on this scheme will be announced in due course.

Numis Securities Limited ("Numis"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting as nominated adviser and broker exclusively for the Company and no one else in connection with the matters set out in this announcement and will not regard any other person as its client in relation to the matters in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to clients of Numis, nor for providing advice in relation to any matter referred to herein.
 

About BBB

Bigblu Broadband plc (AIM: BBB), is a leading provider of alternative broadband solutions throughout Europe and Australia. BBB delivers a portfolio of super-fast wireless broadband products for consumers and businesses unserved or underserved by fibre.

The Company has a significant target market with 27m customers in Europe with speeds of under 4 Mb, and a further 1m in Australia who have been identified as only suitable for either satellite or fixed wireless broadband.

High levels of recurring revenue, increasing economies of scale and Government stimulation of the alternative broadband market in many countries provide a solid foundation for significant organic growth as demand for alternative super-fast broadband services increases around the world. 

Acquisitive and organic growth have enabled BBB to grow rapidly since inception in 2008 during which time the Company has completed 20 acquisitions across nine different countries. It is extremely well positioned to continue growing as it targets customers that are trapped in the 'digital divide' with limited fibre broadband options.

BBB's range of solutions includes satellite, next generation fixed wireless and 4G/5G delivering between 30 Mbps and 150 Mbps for consumers, and up to 1 Gbps for businesses. It provides customers ongoing services including hardware, pre and post-sale support, installation, billing and warranties whilst offering various tariffs depending on end user requirements.

Importantly, as its core technologies evolve, and cheaper capacity is made available, BBB continues to offer ever-increasing speeds and higher data throughputs to satisfy market demands for 'video-on- demand'. Its alternative broadband offerings present a customer experience that is similar to that offered by wired broadband and the connection can be shared in the normal way with PCs, tablets and smart-phones via a normal wired or wireless router.