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Geneva Acquisition to Acquire Global Hi-Tech Industries

12/01/2008 - ABSTRACT: Geneva Acquisition enters into definitive agreement to acquire privately held Global Hi-Tech Industries Ltd., an integrated steel producer in India.

Geneva Acquisition Corp. has entered into a definitive agreement to acquire privately held Global Hi-Tech Industries Ltd. (GHIL), an integrated steel producer in India.
 

Cash from the trust will be used to pursue three value-enhancing initiatives:
 
·     Provide needed working capital to increase existing capacity utilization immediately after the acquisition.
·     Execute its plant expansion plan to triple manufacturing capacity within 18 months.
·     Finalize mining license for captive ore mine, providing competitive advantage.
 
The first two initiatives are expected to bring FY (3/31) 2009 estimated revenue from $53 million to approximately $118 million in FY (3/31) 2010. Estimated EBITDA is expected to grow from $11.1 million in FY (3/31) 2009 to $25.3 million in FY (3/31) 2010.
 
GHIL operates a state-of-the-art manufacturing facility built on approximately 138 acres of land within the last five years. The company manufactures three products: structural steel, billets, and sponge iron, a high-ferrous-content material produced in either lump or pellet form. Approximately 57% of the company’s billet and sponge iron production is currently sold to other steel plants, however as capacity expands, the company intends for all its production of these two intermediate products to be utilized internally.

 
The rapidly growing company’s current annual production capacity of 96,000 tonnes is expected to grow to 300,000 tonnes within 18 months following closing. The company has a solid track record of growth and financial success: its revenues grew from $6 million in FY (3/31) 2006 to $50 million in FY (3/31) 2008, while EBITDA during the same period rose from $1.12 million to $10.4 million.
 
Under terms of the transaction, Geneva will acquire GHIL to form India Steel and Metals Corp. in a multi-step transaction, initially acquiring 51.6% of GHIL at closing, with an option to acquire an additional 15.7% and plans to then acquire the remaining 32.7%. Both of the two subsequent acquisition tranches are expected to occur within 30 days of closing.
 
Total consideration for the 100% acquisition of GHIL (with a proportional amount of such consideration to be paid for each tranche) comprises:
 
  • 2.5 million shares of Geneva stock, with approximately 1.29 million shares payable at closing. Approximately 390,000 shares and approximately 820,000 shares, respectively, are to be escrowed for the two remaining tranches of GHIL.
  • $11.7 million cash, with approximately $6.0 million payable at closing. Approximately $1.9 million and approximately $3.8 million, respectively, will be escrowed for the two remaining tranches of GHIL.
  • The assumption of up to $18 million of debt.
  • 1.0 million shares to be earned upon receipt of mining license if obtained on or prior to March 31, 2010.
  • 5.66 million contingent earn-out shares to be earned according to the defined schedule.
 
In addition, Geneva’s management announces that it intends to declare a single cash dividend of $2.00 per share to the public shareholders of record of the common shares after consummation of the acquisition of GHIL. Geneva’s management also plans to enter into an agreement with the company to return 1.0 million of their 2.5 million pre-initial public offering shares.
 
“Since our IPO, we have evaluated many acquisition candidates in a variety of industries and geographical locations,” said James McGrath, Geneva’s President. “Given the deterioration of the stock market and economic environment, several months ago we concluded that our primary target would be, first and foremost, a foreign company in a basic industry that participates in a sector relatively insulated from today’s uncertainties. We believe GHIL is the right company at the right time because we believe it operates in one of the world’s most rapidly growing economies; serves a vital growth infrastructure segment driven by government policies and incentives; and enjoys a strong competitive position in an area characterized by undersupply. Moreover, we believe these driving forces are long-term and sustainable in nature and, we believe, are relatively unaffected by short-term aberrations or even longer term credit problems. To even further enhance the attractiveness of this transaction, Geneva’s management has agreed to give back 1.0 million shares of the 2.5 million shares we initially purchased. ”
 

Demand for structural steel in India has accelerated over the past several years, driven by the growth of the domestic construction industry and supported by both central and state government initiatives for infrastructure development.
 
India’s central government has undertaken a number of nationwide initiatives to expand, modernize and upgrade the transport infrastructure, railroad system, and electric power distribution system.
 
The rise of India’s ‘middle class’ has also fueled the growth of new full-service townships, shopping malls, and the hospitality industry.
 
He continued, “Before signing a definitive agreement, we retained Mott McDermott, an engineering and technical consulting firm, to evaluate the feasibility, timing, and cost of GHIL’s proposed expansion plan. Moreover, Mott McDermott evaluated the Company’s long-term driving forces and financial dynamics, its management, its success to date, and its market opportunity, all in light of today’s economic aberrations and concluded the plan was both sound and executable.”

 
Prakash Rajgarhia, Co-Founder of GHIL, noted, “We are delighted to join forces with Geneva. We expect that by devoting the first $5 million of the proceeds from this transaction into our presently constrained working capital we can nearly double our utilization on a near-immediate basis. Further, it will allow us to begin to implement an estimated $35 million capacity expansion program that within 18 months of closing is expected to triple our production capacity to 300,000 MTPA.
 
“This expansion plan will help us achieve operational efficiencies by enabling our furnaces to run more continuously, by spreading our overhead over a larger base and through increasing automation content that lowers labor costs and improves quality,” continued Rajgarhia. “By nearly doubling our capacity utilization on a near-immediate basis and by beginning to see initial plant expansion benefits in as little as eight months, we project EBITDA to increase from the $11.1 million we expect for FY (3/31) 2009 to $25.3 million for the following year. I firmly believe that we will achieve our goals for FY (3/31) 2010 and beyond, and through the earn-out we are staking a very large portion of our ownership on that belief. In addition, let me note that we have already secured a governmental indication of approval for our critical initial iron ore prospecting license and upon final approval we will then open an iron ore mine on this approximate 50 acre site that has expected reserves of 15 or more years. This represents both a significant asset in and of itself and a captive source of raw materials for the long term.”
 
Upon closing of the transaction, which is expected in mid-February 2009, Geneva will change its name to India Steel and Metals Corp. Closing, which is subject to approval by the stockholders of Geneva Acquisition Corp., will be consummated if not more than 20% of the shares of Geneva vote against the acquisition and elect to convert their shares into cash.