Source - LSE Regulatory
RNS Number : 9090O
Duke Royalty Limited
04 February 2019

4 February 2019


Duke Royalty Limited

("Duke Royalty", "Duke" or the "Company")


Acquisition of UK royalty finance provider with a portfolio of existing Royalty Partners


Duke Royalty Limited (AIM: DUKE), a provider of alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad, is pleased to announce that it has acquired 100 per cent. of the issued share capital of Capital Step Holdings Limited and Capital Step Investments Limited (together "Capital Step"), which together represent the only known UK-based diversified royalty competitor to Duke of which management is aware (the "Acquisition").




·     The Acquisition more than doubles Duke's royalty portfolio, increasing the Company's core investments from five to eleven and thereby significantly accelerating the Company's growth plans and providing portfolio diversification benefits.


·     The new Royalty Partners are in a range of diversified industry sectors, including new investment sectors such as telecommunication services, media, recruitment, insurance broking and technology solutions.


·     Implied enterprise value of £21.65 million; initial £10 million of cash consideration and the assumption of £11.65 million of debt.  In addition, deferred consideration up to a maximum of £1.5 million which is subject to the achievement of certain performance related milestones to the period ended 31 March 2020.


·     The Acquisition is expected to be immediately accretive to Duke's shareholders in terms of cash flow per share and assists with the Company's strategy to consistently increase its quarterly dividend.   


·     The Acquisition fits with the Company's strategy to diversify its royalty portfolio and to become the premier diversified royalty finance company in Europe and abroad.


·     The debt facility assumed is with Honeycomb Investment Trust plc ("Honeycomb"), a credit fund with Pollen Street Capital as Investment Manager.  Pollen Street Capital was a spin-out of RBS in 2013 and currently manages £2.6 billion of assets.  This enables Duke to fund future investments via debt before having to raise additional equity, thus avoiding dilution to shareholders and excess cash on its balance sheet.


·     The Acquisition is expected to generate significant additional synergies in the form of an expanded team with deep credit experience as well as an enhanced origination platform and deal pipeline of potential future Royalty Partners.


Neil Johnson, CEO of Duke Royalty, said:


"This transformational and accretive acquisition fits with our strategy to deploy the capital raised last year to diversify our royalty portfolio. It also removes our only known competitor in the UK royalty finance market, strengthens our team and provides a robust future deal pipeline for the enlarged group to deploy capital into. 


"We are very much looking forward to working with our new Royalty Partners, which include a number of solid businesses across a broad range of complimentary sectors. We also welcome the existing members of the Capital Step executive team who will enhance Duke's offering in a number of areas. Having undertaken extensive due diligence on Capital Step's Royalty Partners and its financing model, which is closely aligned with that of Duke's, the Board is confident that this strategic acquisition will extend the Company's first mover advantage in the UK royalty financing sector. We look forward to updating the market as our growing brand continues to gain traction in the UK and European SME market."


Transaction Overview


Duke Royalty has acquired 100 per cent. of the issued share capital of Capital Step, the only known diversified royalty competitor to Duke in the UK, from its shareholders, Jonathan Schneider and Rael Sarembock.


The initial implied enterprise value of £21.65 million (and up to £23.15 including deferred consideration) payable in respect of the Acquisition is comprised of:


·     Initial cash consideration at closing of £10.0 million for purchase of 100 per cent. of the equity of Capital Step and repayment of all subordinated and shareholder loans. 

·     Assumption of £11.65 million of senior secured Honeycomb debt with Capital Step.

·     Deferred cash consideration of up to a maximum of £1.5 million payable to the shareholders of Capital Step which is subject to the achievement of certain performance related milestones to the period ended 31 March 2020.


Due to Duke's strong underlying liquidity, no Duke stock will be issued in this transaction.


Further information on Capital Step


Capital Step's portfolio includes six Royalty Partners which substantially fit Duke's stated investment criteria.  Furthermore, Capital Step's portfolio is well positioned to have opportunities for follow-on investments in the near term, which will grow the investment size into Duke's traditional transaction size.  The Board believes that the Royalty Partners acquired, which more than double the Company's current core portfolio of five royalty investments, represents an important step in the development of the Company's growth.  In addition, the enlarged group retains significant liquidity to complete additional royalty investments over the coming months.


Capital Step's core investments are structured either by way of perpetual royalties or 'unitranche' investments, which are perpetual royalties alongside senior secured loans.  The royalty agreements are structured slightly differently than Duke's; they fluctuate with revenue changes but structured with a floor and a cap of cash on cash yields.  Capital Step's investment floors are above the initial cash yields of Duke's royalty agreements, adding to the attractiveness of the Acquisition.  Additionally, Capital Step has received minority equity or warrant stakes in four of its underlying portfolio companies. The portfolio is well diversified both across sector and size and the follow-on possibilities may over time increase the exposure levels to several of Capital Step's underlying investments.


In addition, Capital Step has developed a proprietary origination network across the UK and Ireland and the team has identified a number of new investment opportunities which will be evaluated by the enlarged group.     


Financially, the transaction is accretive to the Company on an annualised revenue basis from last quarter.  As shown in the table below, 2018 was an active year for Capital Step in deploying capital as they closed a number of different royalty agreements.   For the year ended 31 December 2018, Capital Step reported revenue of £1.9 million and a loss before tax of £0.2 million, both unaudited.  The business has invested £16.8 million in perpetual royalties and unitranche investments, which does not include the value of the equity and warrant stakes acquired.


In addition, based on the annualised current quarterly revenue, the estimate for Capital Step's revenue net of debt servicing costs will be £1.5 million. When using the initial equity transaction consideration of £10 million, this equates to an estimated cash on cash yield of 15% for the Capital Step portfolio, which would be the highest initial yield for a Duke investment and is approximately 15% accretive on this basis for shareholders.  Additionally, the portfolio could grow organically before the royalty caps are achieved, which provides potential for increasing organic revenue growth.


Duke Royalty Portfolio


Following the completion of the Capital Step Financing, the Company's portfolio of core royalty investments (defined as more than 1% of invested capital) is as follows:


Duke Existing Royalty Partners

Royalty Investment


Original Date of Royalty


Temarca B.V

Euro 9,000,000

April 2017

Lynx Equity (UK) Limited

GBP 10,000,000

October 2017

Trimite Global Coatings Limited

GBP 9,000,000

March 2018

Brownhills Investments Limited

GBP 7,500,000

April 2018

InterHealth Canada Holding Corp

GBP 10,000,000

August 2018

Capital Step Portfolio

Recruitment Company

Euro 1,300,000

June 2017

Telecom Services Company

Euro 5,300,000

June 2017

Technology Solutions Company

GBP 2,000,000

February 2018

Media Company

GBP 2,500,000

June 2018

Insurance Brokerage Company

Euro 4,600,000

August 2018

Recruitment Company #2

Euro 1,875,000

September 2018



Team additions


As part of the transaction, Duke will enhance its team with the addition of Rael Sarembock and Alex Hibbard, who will join Duke from Capital Step.


Rael Sarembock:

·     Rael is a co-founder of Capital Step.

·     Rael was an early employee and served as the global head of Decision Science at Wonga, where he was responsible for consumer and SME underwriting and R&D.

·     Rael spent his early career across several M&A/Leveraged Finance teams at J.P. Morgan in both South Africa and London.

·     Rael holds an Honours degree in Finance and Accounting from the University of Cape Town.


Alex Hibbard:

·     Alex joined Capital Step in 2018 as an Investment Associate.

·     He previously spent over 3 years at London-based Private Equity firm Terra Firma, where he focused on investment opportunities as well as managing portfolio companies across a wide range of sectors and geographies.

·     Alex is a Chartered Financial Analyst and holds an MA in Economics from the University of Edinburgh.


Jonathan Schneider, the founder of Capital Step, has entered into a consultancy agreement for a minimum period to 31 March 2020 with Capital Step for the provision of services for which he will receive consulting fees and commission on successfully concluded transactions. Jonathan has a successful track record of building companies and managing debt funds.  Notably, Jonathan was the founder and manager at Novator Credit Opportunities Fund, a special situation credit fund with assets under administration of c.US$500 million.  He will continue inter alia to assist in the origination and agreement of royalty transactions, portfolio management and debt negotiations.





For further information, please contact, or contact:


Duke Royalty Limited

Neil Johnson / Charlie Cannon-Brookes


+44 (0) 1481 741 240

Grant Thornton UK LLP 

(Nominated Adviser)

Colin Aaronson / Samantha

Harrison/Seamus Fricker  


+44 (0) 20 7383 5100


Cenkos Securities plc 

(Joint Broker)


Julian Morse / Michael Johnson

+44 (0) 207 397 8900

Mirabaud Securities Limited

(Joint Broker)


Peter Krens / Edward Haig-Thomas


+44 (0) 20 3167 7222

Newgate Communications



Elisabeth Cowell / Ian Silvera / Tom Carnegie

+44 (0) 20 3757 6880


About Duke Royalty


Duke Royalty Limited provides alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad. Duke Royalty's experienced team provide financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. Duke Royalty's royalty investments are intended to provide robust, stable, long term returns to its shareholders. Duke Royalty is listed on the AIM market under the ticker DUKE and is headquartered in Guernsey.


The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.


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