GN Enters into Agreement to Sell GN ReSound to Phonak
Summary: GN has signed an agreement to sell GN ReSound at a price of DKK 15.5 billion, which is expected to yield an accounting profit of at least DKK 10 billion. The transaction is expected to be completed in the first half of 2007. The full-year forecast exclusive of results relating to GN ReSound is adjusted due to a weaker outlook for the headset operations. The Supervisory Board intends to capitalize GN with a net cash position of DKK 1 billion and return the remaining part of the proceeds to the shareholders. GN President and CEO Jørn Kildegaard and GN ReSound CEO Jesper Mailind will both be retiring from the Executive Management. Toon Bouten is appointed new President and CEO and will together with Executive Vice President and CFO Jens Due Olsen comprise GN's Executive Management. Toon Bouten's principal task will be to generate profitable growth. GN has today signed an agreement to sell GN ReSound to Phonak Holding AG ("Phonak") for a total consideration of DKK 15.5 billion in cash on a debt and cash free basis. The agreement is subject to approval by the competition authorities and Phonak's subsequent rights issue to fund part of the acquisition price. The founding shareholders of Phonak, who own approx. 30% of the Phonak ordinary share capital, have committed to vote in favor of the capital increase. However, in the event that Phonak does not complete the share issuance by August 15, 2007, GN has the right to receive consideration consisting of cash and new shares at the then prevailing market price subject to a maximum number of shares. The transaction is expected to be completed in the first half of 2007.
The agreement with Phonak comprises the divestment of GN ReSound and all assets and liabilities of that company, including affiliated activities within audiologic diagnostics equipment in GN Otometrics, as well as those parts of GN Store Nord's joint corporate functions related to GN ReSound.
Net of costs related to the divestment, the transaction is expected to result in proceeds of at least DKK 15 billion and an after-tax profit of at least DKK 10 billion at closing.
Use of the Proceeds from the Transaction
The Supervisory Board intends to return approx. DKK 13 billion of the net proceeds from the divestment of GN ReSound to GN's shareholders as soon as reasonably possible taking into account that GN will retain a net cash position of DKK 1 billion reflecting GN's future requirements for working capital requirements.
The Supervisory Board intends to convene an extraordinary general meeting at which the shareholders will be asked to consider a resolution to return excess cash in the form of a capital reduction. It is expected that the extraordinary general meeting will be held immediately after closing and that the write-down of the share capital can subsequently be made after the statutory three-month waiting period.
The Supervisory Board will continue to support that GN's cash and cash equivalents are kept at the level of approx. DKK 1 billion. Any surplus cash not needed for acquisitions or other major investments will, when appropriate, be returned to the shareholders by way of share buybacks and dividends.
Strategic Rationale for the Divestment
For a number of years, GN's strategic platform has been to build technology-based activities which can achieve leadership in their respective markets through organic growth and acquisitions.
Since launching "The new GN" in January 2003, GN has focused partly on headsets and partly on hearing instruments including audiologic diagnostics equipment. The goal has been to achieve leading global positions in all activities since critical mass is essential in order to fund necessary investments in development, sales and marketing, so that the activities can generate attractive earnings. Therefore, GN has actively consolidated the relevant industries, not only within headsets, but also within hearing instruments, acquiring and integrating five manufacturers into GN ReSound over a period of time.
The outcome of this strategy is that GN is now the world's largest manufacturer of headsets and, through its size and strong tradition of innovative product launches, GN has every possibility of developing into a very attractive business in high-growth markets.
GN has not achieved the same global position within hearing instruments and, moreover, the need for critical mass in the industry is constantly intensifying because the demand for more frequent and faster product launches in all price categories is constantly increasing, necessitating ever greater investments in development, marketing and sales. Therefore, on July 5, 2006 GN announced that a strategic review would be initiated for GN ReSound and its affiliated activities in GN Otometrics. The review was to clarify whether the shareholders' interests would be best served by letting GN ReSound form part of further industry consolidation or whether the business could generate similar value by adhering to the strategy of organic growth complemented by minor acquisitions and investments at the distribution and retail level.
JP Morgan plc was engaged to assist GN in the strategic review and to run a structured process in which a group of strategic and financial investors were invited to indicate their interest in acquiring GN ReSound. Based on these indications, certain interested parties were given the opportunity to carry out due diligence and submit binding bids. The Supervisory Board of GN believes that, based on overall assessment of price, terms and conditions, the agreement to sell GN ReSound to Phonak is the most attractive solution to GN's shareholders.
GN Chairman Mogens Hugo Jørgensen said: "The price reflects the fact that the process has been competitive and that significant synergies may be achieved when we unite the forces of Phonak and GN ReSound in creating a global hearing health care powerhouse. The price exceeds the implicit value of GN ReSound as expressed in the price of GN's shares before the process was initiated in July. And the price produces a higher return to the shareholders than we could realistically have hoped to generate on our own." JP Morgan plc acted as sole M&A advisor to GN on this transaction and the Supervisory Board has received a fairness opinion from JP Morgan plc, which confirms that the offer price is fair to GN's shareholders from a financial point of view.
"We are very pleased with the outcome of the process and we are confident that we have found a good new home for GN ReSound and GN Otometrics. There is a strong business, cultural and geographic match between ours and Phonak's organizations. With this solution and given Phonak's impressive track-record, we have established a platform for future growth for the benefit of the employees and the other stakeholders," said the GN Supervisory Board Chairman. He was also pleased that Phonak intends to maintain GN ReSound's brands, sales organizations and competence centers. In addition, Phonak has announced its intention to submit that a member of GN's Supervisory Board is elected to Phonak's Board of Directors, underlining the common perception of this transaction as a partnership.
Future Management and Organization
After the divestment, GN will be a dedicated manufacturer of headsets. This entails a number of management and organizational changes.
GN's Supervisory Board will be changed to best handle the company's new challenges and focus. Additional capabilities will be added to the Supervisory Board within international manufacturing, sales and marketing of technology products and consumer electronics. The more specific proposals will be presented at the annual general meeting in 2007.
In the course of the strategic review of GN ReSound, GN's President and CEO Jørn Kildegaard, announced that if the outcome of the investigation was a divestment of GN ReSound, he would want to resign from his position because it would signify a material change to the nature of his job. Jørn Kildegaard therefore leaves his position with GN effective today, but he will make his services available to the company during a transition period in order to ensure a successful handover to his successor. The Supervisory Board has accepted his resignation and would like to thank Jørn Kildegaard for his great efforts and the results achieved in GN. Since January 2003, the company's market capitalization has increased from approximately DKK 4 billion to approximately DKK 17 billion, and more than DKK 1.2 billion has been returned to the shareholders by way of dividends and share buybacks.
Also effective today, Jesper Mailind, CEO of GN ReSound, has retired from GN's Executive Management as he will move with GN ReSound to Phonak.
Toon Bouten has been appointed new President and CEO of GN effective today. Until recently, Toon Bouten was Executive Vice President of Philips Consumer Electronics, in charge of Consumer Electronics EMEA (Europe, Middle East, Africa). The division represents a large proportion of Philips' Consumer Electronics operations, which generate revenue of EUR 10 billion (approx. DKK 75 billion). In appointing Mr. Bouten, the Supervisory Board took into account the significant results he has achieved in international groups focusing on consumer electronics and technology and his experience as a CEO of listed companies. The Supervisory Board also believes that his management style and dynamics will be a great asset to GN.
Toon Bouten (47) is a Dutch national and lives in Germany. He graduated from the University of Technology in Eindhoven, the Netherlands, in 1984 and joined Philips the same year. After appointments in various countries, including Sweden and Germany, he ended his career with Philips in 1993 as Director of Consumer Electronics. From 1994 to 2000, he was Vice President, Consumer Group EMEA with Compaq, responsible for sales in 22 countries as well as for OEM sales. From 2000 to 2001, he was CEO of Jobline International AB, Europe's largest on-line search company, which was listed on the Stockholm Stock Exchange during his period of employment. From 2002 to 2004, he worked as a consultant focused on strategy and restructuring, and his activities during this period included positions as interim CEO of the German-based listed consultant firm Plaut AG and the listed Dutch-based technology company AND International Publishers N.V. In 2004, he returned to Philips as head of Consumer Electronics EMEA in charge of sales and marketing in 48 countries, product management, supply chain, service, administration, etc. He reorganized the activities focusing on profitability in 2004-05 and in 2006 with parallel focus on growth, and he has achieved strong results.
Toon Bouten makes up the Executive Management of GN together with Jens Due Olsen, Executive Vice President and CFO.
Hans Henrik Lund, currently president of GN's Headsets Division, has previously indicated that at some point in time he would want to pursue new challenges outside GN. As a result of the new, single-tier management structure, Hans Henrik Lund believes that now is the right time to do so and, as a result, he will leave his position after completing an appropriate handover to Toon Bouten.
After the divestment of GN ReSound, all GN employees in Denmark, except for a development department based in Aalborg, will have relocated to GN's headquarters in Ballerup by the end of the first quarter of 2007. The plan is that Phonak will lease a part of GN's headquarters.
As a result of the transaction the costs of group functions are expected to fall from approximately DKK 50 million in 2006 to approximately DKK 30 million in 2007. This figure does not include certain transitional costs associated with the separation of GN ReSound from GN. These costs will be further assessed and communicated at closing.
Results and Forecasts of the Continuing Business
At the same time, GN hereby provides information about the disappointing performance of the headset operations in third quarter and announces changes to the full-year forecast. All third quarter figures are preliminary and thus subject to uncertainty.
The CC&O business (headsets for offices and contact centers), exclusive of Hello Direct, continued to improve in third quarter with organic growth of approx. 12% and revenue of approx. DKK 280 million. Growth accelerated further in Europe, CC&O Headsets' largest and most profitable market, and in Asia Pacific, whereas growth in North America continues to be modest. As usual, the third quarter was affected by a sales slowdown during the summer months, July and August, followed by strong growth in September. As a result of the planned increased investments in R&D, sales and marketing, EBITA (exclusive of Hello Direct) was largely as expected at around DKK 30-35 million.
As previously announced, Hello Direct, the US sales channel, has discontinued a large-scale "Try'n'Buy" campaign under which potential customers were offered to try out headsets and return them if they did not want to buy them. GN expensed DKK 55 million for the six months ended June 30, 2006 to cover the expected losses and campaign costs based on expectations at the time primarily related to collecting aged receivables. Since then, GN's controllers and independent auditors have closely examined the business, and efforts to recover receivables have been intensified. As these efforts have not produced the necessary results, it has been decided to make an additional provision of DKK 60 million for additional potential bad debts. Sales in Hello Direct also have not met expectations although an improvement was recorded in September. In light of the performance of the sales channel, its general manager Terry Flynn has left the company and until further notice Hello Direct will be under the management of David Wood, the head of GN's US headset operations.
Due to the performance of Hello Direct, the CC&O full-year revenue forecast is reduced to DKK 1.6-1.7 billion. EBITA for the CC&O business in 2006 including Hello Direct is forecast at approximately DKK 100 million due to the significant non-recurring costs of DKK 115 million from Hello Direct. Excluding Hello Direct, the EBITA margin of CC&O Headsets is forecast at around 18%, down from the previous forecast of 19-20%.
Third quarter mobile headset revenue under the Jabra brand fell short of the forecast. Revenue was approx. DKK 210-220 million, which is a decline from Q3 2005. Market trends indicate an increase in sales of low-end products to telecoms operators that bundle headsets with cell phones. Jabra's own new products in the low-end segment, the Basic line, have been well received. In addition, strong growth was recorded in sales of the exclusive and award-winning Jabra JX10 headset.
Revenue from sales of mobile headsets to OEM customers dropped to DKK 120-130 million in third quarter. The significant decline was due to the postponement of orders by a major OEM customer. In addition, sales were impacted by technical issues involving two customer-specific products, but these problems have now been solved.
The decrease in revenue and the lower margins on low-end sales implied that, overall, Mobile Headsets generated an unsatisfactory EBITA loss of around DKK 85 million in the third quarter, of which about DKK 40 million was attributable to write-downs on component and finished goods inventories caused by the lower level of activity.
However, a stronger momentum was recorded in Jabra sales in September, and the order intake for delivery in the fourth quarter showed a growing trend, especially from US sales channels. As a result of these factors, Mobile Headsets is expected to generate an overall improvement in the fourth quarter relative to the third quarter performance. Still, the sales mix shift towards low-end products and reduced OEM orders are not expected to be reversed. The forecast for Mobile Headsets is therefore reduced to a revenue of approx. DKK 1.7-1.8 billion and an EBITA loss of approx. DKK 150 million.
Overall, this implies that GN's headset activities are expected to generate revenues of approx. DKK 3.3-3.5 billion and an EBITA loss of approx. DKK 50 million in 2006. EBITA will be impacted by non-recurring costs of DKK 155 million from Hello Direct and the inventory write-downs.
Strategy of the Continuing Business
The unsatisfactory performance means that the first priority will be to restore profitability and increase growth and cash flows of the headset operations. GN has a strong foundation on which to base these efforts. Being the world's largest independent manufacturer of headsets, GN enjoys significant economies of scale. GN also has a strong tradition for adapting technologies and using them to create innovative products, and GN currently has the most diversified product portfolio on the market. In addition, GN is a recognized supplier and business partner to OEM customers, telecoms operators, IT distribution channels as well as retail channels, and Jabra is a recognized brand. The challenge ahead will be to exploit these positions of strength on global markets with very attractive growth rates in the best possible way.
The office market is expected to experience annual growth rates of about 25% in the years ahead, driven in particular by the following factors: The advantage of wireless headsets is becoming more and more evident and new and more retail-oriented sales channels and IT distributors are beginning to carry these products. IP telephony is steadily becoming more popular and GN's target remains to become the leading manufacturer of headsets for offices. In order to achieve this, GN must establish a position as the leader in VoIP solutions and offer the right products; keep the overall product portfolio updated at all times, including by adding more low-price office products; and strengthen its sales, marketing and distribution know-how.
The contact center market is expected to produce stable single-digit growth rates in the next few years. This market differs from the office market in that sales are made generally through system integrators and in the high requirements to product functionality and comfort. GN aims to protect its position on this attractive market by constantly developing its product portfolio and by growing with the contact center industry in general, including by penetrating new markets.
While growing strongly, Bluetooth headset penetration remains low on the mobile market. The number of headsets sold has risen from about 32 million last year to close to 50 million this year. Current trends indicate that market growth is based generally in the low-price segment. This makes it essential for GN to be a supplier to OEM manufacturers and telecoms operators offering low-price products while at the same time covering the rest of the market with the company's own Jabra branded products. Headsets for music applications is an emerging opportunity that emphasizes the current market convergence.
GN's new President and CEO, Toon Bouten, and the rest of the company's management will now develop GN's future strategic platform. The conclusions are expected to be presented in conjunction with the Q4 results in February 2007.
In the short term, GN will take action in four core areas in order to restore profitability and enhance growth and cash flows.
- The Jabra brand will be introduced in all channels in order to increase awareness and strengthen brand impact across the converging mobile and office markets. In addition, by focusing on a single brand, GN will make its investments in branding and promotions more effective. As a result, a number of products will be re-branded during 2007 and all new products will carry the Jabra label.
- GN will launch more products at ever shorter intervals. More products will be brought to market and they will be differentiated more strongly. High priority will be given to more entry level products targeting the office market and to developing low-price solutions for OEM manufacturers and telecoms operators in the mobile market.
- GN will increase its efforts in sales, marketing and distribution, especially in the Mobile Headsets business. The focus on sales channels and end users will be intensified sharply, and know-how in key account management and support will be strengthened.
- The cost structure will be trimmed across the value chain. GN intends to reduce inventories, optimize the global supply chain and achieve the synergies from the mid-May 2006 combination of its headset operations into one global organization.
Transaction Bonus and Share Options
In connection with the divestment of GN ReSound, a number of employees, including the members of the Executive Management, will receive an aggregate amount of DKK 54 million. This amount consists of transaction bonuses and the costs of a retention program for managers whose active and loyal contributions have been crucial in the process of securing the substantial profit from the divestment of GN ReSound.
In light of the divestment of GN ReSound, the Supervisory Board has decided to accelerate, at closing, the outstanding stock options granted to employees in GN ReSound, GN Otometrics and Jørn Kildegaard and Jesper Mailind. As of September 30, 2006, this group has 2.8 million share options, equivalent to 1.3% of GN's share capital at an average strike price of DKK 48.
The option program for GN's other managers and specialists will not be affected.
GN's Full-Year Forecast
From October 1 and until the final approval of the divestment, GN ReSound's operations will be recognized in the financial statements under the line item â discontinuing activities'. In fourth quarter 2006, a profit of DKK 250-275 million is expected on discontinuing activities, excluding the profit from the divestment of GN ReSound, which is consistent with the previous full-year guidance for GN ReSound and GN Otometrics.
Revenue from GN's headset activities in 2006 is projected at DKK 3.3-3.5 billion (down from approx. DKK 4.1-4.2 million), with an EBITA loss of DKK 50 million (down from approx. DKK 285 million). These unsatisfactory results are significantly impacted by the losses in Hello Direct. Excluding the costs of closing down Hello Direct's Try'n'Buy programs of DKK 115 million and inventory write-downs of DKK 40 million, EBITA is forecasted at DKK 105 million.
Group functions are expected to have a negative impact on EBITA of approximately DKK 50 million which is unchanged. Net financials are expected to be DKK (50) million including the effect of the year's share buyback program of DKK 400 million.
In total, EBITA for continuing activities is expected to be approx. DKK (100) million and profits before taxes are expected to be approx. DKK (150) million.
The forecasts are based on an assumption of an average US dollar - Danish kroner exchange rate of 6.
The forecasts do not include the claims made against Telekommunikacja Polska S.A. by DPTG I/S in which GN holds a 75% ownership interest. DPTG I/S has made a claim for DKK 5.0 billion in reimbursement for traffic revenue on the Polish cable network during the period from 1994 until the middle of 2005. For confidentiality reasons and due to the pending arbitration case, GN is precluded from making any further comments in the matter.
Further Information
An analyst and press meeting about this announcement will be held today at 1:00 p.m. CET at GN's headquarters at Lautrupbjerg in Ballerup, Denmark. GN will be represented by Mogens Hugo Jørgensen, Chairman, Toon Bouten, President and CEO and Jens Due Olsen, Executive Vice President and CFO. The presentation will be webcast live from 1:00 p.m. CET at www.gn.com.
For further information, please contact:
Mogens Hugo Jørgensen
Chairman
GN Store Nord A/S
Tel.: +45 45 75 00 00
Jens Due Olsen
Exectutive Vice President & CFO
GN Store Nord A/S
Tel.: +45 45 75 00 00
