Science Group begins integration of Frontier Smart Tech acquisition

The AIM-traded firm said trading in Frontier shares was suspended on 14 October, with the AIM listing of Frontier Group expected to be cancelled on 21 October.

Settlement of the consideration payable to qualifying shareholders was anticipated shortly thereafter, with the process completing the acquisition of Frontier Group by Science Group.

The board said the restructuring plan of Frontier Smart Technologies - the UK trading subsidiary along with its subsidiaries - had now been confirmed, and was being implemented.

It said the programme included the closure of the operations in Romania, as announced by Frontier Group on 3 October, and the closure of the Sawston site near Cambridge, and the transfer of resources to Science Group's facility at Harston Mill.

The closure of Frontier’s London office was also planned, with the transfer of employees to Science Group's London office as well as Harston Mill, with Frontier's Advanced Technology Group and internet of things infrastructure to be integrated with Sagentia.

It would also see the repayment of the Frontier bank facility in October, to eliminate the risks associated with the bank covenants and continue the realignment of supplier credit and payment profiles.

Science Group said the restructuring would result in a “substantial reduction” in the cost base of Frontier, and should provide a platform for the future development of the business.

Upon completion of the programme, most of which would occur in 2019, Frontier would be focused on audio technologies supplying modules, chips and associated designs and development from operations in Cambridge, Hong Kong and Shenzhen.

Anthony Sethill, founder and chief executive officer of Frontier, had reportedly decided that it was an appropriate time to leave the company, but Science Group said he would be assisting in a smooth transition.

Sethill had been supportive of the acquisition of Frontier throughout the past six months, and recognised the benefits of Frontier becoming part of a larger organisation.

He would leave at the end of November, with chief financial officer Jonathan Apps also set to leave the firm after a transition period.

Looking at Frontier’s current trading, Science Group said it was now apparent that revenue in 2019 would be lower than previously indicated.

Frontier profitability in 2019 had been similarly affected, and it anticipated that the acquisition would report an operating loss in the fourth quarter of around £1m.

However, the board said the 2019 results were not expected to be a relevant indicator of the future performance of the business due to the restructuring programme, and was looking for the business to be profitable at an operating level in 2020.

The board said the digital audio broadcasting (DAB) retail market overall in 2019 was expected to be broadly flat on 2018 in terms of units, with Frontier's market share not believed to have changed significantly.

It was apparent, however, that some of Frontier's past operating practices had contributed to the company's challenges, Science Group claimed.

Those included annual volume-based rebate structures, which encouraged increased shipments being taken by customers at the end of the year, and incentivising early shipments by offering more attractive terms at the end of the year.

It also said Frontier had based its operations on “over-optimistic forecasts”, for example in relation to the Norway switchover from analogue radio to digital, as well as inadequate monitoring of channel sell-through.

“These practices have resulted in excess inventory in the distribution and retail channel, and corresponding market discounting,” the Science Group board said in its statement.

“While this would create an operating challenge for any supplier, the impact is far greater for the market leader, Frontier.

“Whilst enhancing reported short-term results, such practices damage the long term prosperity of the business, accelerate ASP and margin erosion and create operational inefficiencies.”

Science Group said that in the future, it would adopt a more conservative operating model to try to mitigate rather than exacerbate market variability.

Looking at the integration, Science Group said Frontier’s audio technologies business related to module and chip production, which would continue to be branded ‘Frontier’, would now be led by Prem Rajalingham based in Hong Kong and Bob Heads based in Cambridge as joint managing directors.

It noted that, with its market leadership position in DAB, Frontier had an “excellent reputation” upon which to build.

The company said the acquisition also strengthened the group's capabilities in internet of things and smart audio, with expertise and software solutions, particularly in voice-control applications, and a “resilient” cloud infrastructure to support the deployment of internet of things systems.

“These complement Science Group's existing advisory and product development services which are actively engaged with international clients on internet of things projects across a range of industry sectors,” the board said.

“Science Group anticipates investing around £1m per annum in IoT-related activities which in time may generate potential new revenue streams, although the primary purpose is to ensure that Science Group remains at the leading edge of this rapidly evolving market.”

New employment contracts would be offered to Frontier senior managers and key employees, which could include grants of share options, the board said.

A resolution would be put to shareholders at the group's next general meeting to make those one-off grants, totalling no more than 300,000 options, incremental to the plan limit defined in the performance share plan scheme.

Looking at its trading, Science Group said that excluding Frontier, its businesses had continued to perform satisfactorily, with a “slightly stronger” performance over the summer than expected.

The results of Frontier were set to be consolidated from October, with one-off costs related to the restructuring, including provisions associated with “onerous” leases and “slow-moving” inventory, in the order of £3m, were anticipated to be incurred in 2019.

Following the restructuring, the Frontier business was expected to be profitable in 2020 and the tax losses carried forward - around £21m as at 31 December 2018 - should “enhance” the cash conversion profile for several years, the board said.

Assuming that further restructuring charges or provisions were not required, the board said it was anticipating the Frontier acquisition to be earnings-enhancing in 2020.