7 December 2015
Challenger Acquisitions (CHAL.L)
Leisure & Attractions
Acquisition of Starneth completed
So urce: LSE
 Challenger raised £1.1m upon admission to the LSE in February 2015 and a further
£3.0m through the issue of convertible notes in April. The company subsequently
invested US$3.0m for a 2.463% equity stake in the New York Wheel Project which is
expected to open in mid-2017.
Challenger was formed as a vehicle to undertake acquisitions of highly prospective companies within the “attractions” sector of the leisu
market. The company recently acquired the Starneth Group which specialises in the design and engineering of large observation wheels an
structures. Starneth is currently a providerChallenger
of technicalwas
support
services
the New
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project, a development
in which Challeng
formed
as a to
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to undertake
of highly prospective
also has a direct equity interest. Part ofcompanies
Challenger’s
corethe
strategy
is to acquire
significant
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in additional
iconic gia
within
“attractions”
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The company
recently
observation wheel projects around the world.
acquired the Starneth Group which specialises in the design and engineering of giant
observation wheels. Starneth currently provides technical support services to the New
York Wheel project, a development in which Challenger has a direct equity interest. We
believe that Starneth’s activities coupled with a very exciting project pipeline are highly
complemented by Challenger’s strategy to acquire equity interests in additional iconic
giant observation wheel projects around the world.
Market data
Pri ce (p)
12m Hi gh (p)
12m Low (p)
Sha res (m)
Ma rket Ca p. (£m)
EV (£m)
EPIC
Free Fl oa t (%)
Ma rket
38.0
78.5
13.0
13.3
5.1
4.5
CHAL
45%
LSE
Description
Cha l l enger i s a n i nves tment vehi cl e
formed to underta ke va l ue a ddi ng
a cqui s i tons i n the 'a ttra cti ons ' s ector
of the l ei s ure ma rket. The compa ny i s
currentl y focus ed on the gl oba l ma rket
for gi a nt obs erva ti on wheel s .
Directors and Company information
Ma rk Gus ta fs on
Cha i rma n
Ma rkus Di eter Ka mei s i s
CFO
Gert Ri eder
Non-Exec
+1 604 454 8677
www.cha l l engera cqui s i ti ons .com
Analyst
Ba rney Gra y
+44 (0)207 186 9950
 Challenger completed the acquisition of the Starneth Group for €7.2m in July 2015. We
believe that Starneth is the only global provider of turnkey design and engineering
solutions in the highly specialised giant observation wheel sector.
 The acquisition excluded two subsidiaries; Starneth B.V. and Starneth LLC. Starneth B.V.
is currently engaged in legal arbitration in Singapore with a substantial claim against
Hyundai related to the Dubai-I project. Starneth LLC is part of the joint venture which
has been contracted to design, engineer and supply the giant observation wheel for the
New York Wheel Project and could not be acquired for contractual reasons. Challenger
retains its involvement in this project through the provision of technical services to
Starneth LLC from a wholly owned subsidiary.
 The iconic observation wheel market is characterised by a small number of high value
contracts. Challenger believes that a major project is completed every 2-3 years and
the market could consist of up to 10 such projects over the next 10 years with a
potential value of at least US$1.0bn. With at least 25 opportunities in Starneth’s
project pipeline and discussions regarding several major projects close to fruition, we
believe that the potential for winning exciting new mandates is huge.
 The company is in advanced discussions to provide turnkey project management
services for a US$121m iconic wheel project in Jakarta in Indonesia. The group is also
conducting negotiations with regards to 24 other potential giant observation wheel
projects.
 These projects provide the prospect for near term revenue generation. However, highly
leveraged upside will be derived from direct equity ownership in major projects
through which Challenger has the potential to derive highly significant long term
income streams.
At its core, we believe that Challenger represents a highly attractive management play.
In particular, the group has retained Starneth’s founder, Chiel Smits, who has unrivalled
experience in the sector and is the architect of Starneth’s growth. This expertise is
complemented hugely by the existing Challenger team which has wide experience in the
acquisition of funding for major industrial and commercial projects.
Year end Dec (£000)
Revenue
EBITDA
Profit (loss) before tax
EPS fully diluted (p)
Net cash
Dec-15E
3,250
-386
-638
594
Dec-16E
36,724
4,191
3,942
17.8
5,946
Dec-17E
63,954
7,991
8,003
29.4
13,960
Dec-18E
82,067
11,313
11,421
37.8
24,763
7 December 2015
Introduction to Challenger
Challenger Acquisitions Limited (LSE: CHAL) is a holding company for the recently
acquired Starneth Group which specialises in the design and engineering of giant
observation wheels and structures. Prime examples of these include the London Eye
which opened in 2000 and the upcoming New York Wheel which, when completed in
mid-2017, should be the tallest of its kind in the world.
Challenger also has a 2.463% equity interest in the New York Wheel. This investment of
US$3.0m was completed in May 2015. The New York Wheel Project which is located on
Staten Island includes a 630 foot high observation wheel with 36 viewing capsules. In
addition, the wider project includes 68,000 square feet of retail and leisure space and a
large parking garage for 950 vehicles.
Recent landmarks
Challenger was incorporated in November 2014 as an investment vehicle with a clearly
stated aim of making acquisitions in the leisure and entertainment sectors. At this stage,
the company outlined its intention to focus specifically on acquiring business in the
“Attractions” sector. Challenger was admitted to trading on LSE in February 2015 raising
initial capital of £1.1m before expenses.
Co-operation agreement with Starneth
In March 2015, Challenger announced the landmark step of signing a cooperation
agreement with Starneth Holding B.V. As outlined previously, Starneth and its
subsidiaries specialise in the design and engineering of giant observation wheels and
structures. Of particular interest to Challenger was the fact that the Starneth team is
comprised of several people who were involved in the design and construction of the
London Eye. In particular, the Starneth CEO, Chiel Smits was the project manager for the
London Eye project. Mr Smits’ detailed biography and those of his colleagues on the
Challenger management team can be found in Appendix B.
Initial funding
At the end of April, Challenger raised approximately £3.0m through the issue of
convertible notes. These funds were earmarked for the purposes of future acquisitions.
An initial tranche of approximately £2.2m was received in early May and the balance of
£850,000 was received by July 2015. These notes accrue interest of 12% per annum
payable quarterly or upon conversion in cash or ordinary Challenger shares. The shares
can be converted at either a fixed price of 50p or the market price at the time less 7.5%.
Challenger has the option to redeem the notes at any time at a 10% premium anytime
that the market price is below the fixed conversion price of 50p.
Investment in the New York Wheel
As a result of the funding conducted in the previous months, Challenger was able to
participate as an investor in the New York Wheel project. The company invested
US$3.0m for a 2.463% interest in New York Wheel Investor LLC at the end of May 2015.
Under the terms of the investment, Challenger may be required to make further capital
contributions in the event of a cash shortfall during the construction phase of the
project. However, given the comparatively modest initial interest that Challenger has
acquired, we would not expect this to be a significant contribution.
2
7 December 2015
Acquisition of Starneth
Challenger completed the acquisition of the principal operating businesses of Starneth
in mid-July. On 15 July 2015, Challenger entered into a Share Purchase Agreement (SPA)
with the sellers:



Smits International B.V.
Yamapro Trading - F.Z.E.
Systems Engineering International, Inc.
The SPA related primarily to the acquisition of all the shares in Starneth Holding B.V.,
and its subsidiary companies. These are outlined in the pre-acquisition group structure
below. At this stage, it should be noted that the post-acquisition group has several
significant differences to the model below.
Starneth: Pre-acquisition structure
Source: Challenger Acquisitions
Consideration
The total consideration under the SPA was equivalent to €7.2m in cash and shares plus a
variable component. As the table below depicts, €1.25m was paid in cash upon closing
and two further cash payments of €1.25m will be made on the first and second
anniversary of the initial closing date.
The balance of the fixed consideration will be settled in Challenger shares. A total of
1,100,000 Challenger shares were issued to the sellers upon closing and two identical
instalments will be made on the first and second anniversary of closing. It should be
noted that all the Challenger shares already issued and those to be issued to the sellers
are valued at 75p per share, a significant premium to the share price prior to
suspension.
Applying a Euro/Sterling exchange rate of approximately €1.40 to the Sterling valuation
of £2.475m for the equity component of the acquisition implies a valuation of €3.45m
for the shares. This brings the aggregate total up to €7.2m as per the original news
release.
3
7 December 2015
Summary of the SPA terms
Item
Total consideration (€)
Cash instalment (€)
Cash instalment (€)
Cash instalment (€)
Total cash component (€)
Shares component
Shares component
Shares component
Share value (GBp)
Value of equity component (£)
Consideration
7,200,000
1,250,000
1,250,000
1,250,000
3,750,000
1,100,000
1,100,000
1,100,000
75p
2,475,000
Notes
Cash paid on closing (paid)
1st anniversary (c. 16 July 2016)
2nd anniversary (c.16 July 2017)
Cash component
Shares issued on closing (paid)
1st anniversary
2nd anniversary
Source: Challenger Acquisitions, RNS
Variable component provides leverage to the sellers
The deal incentivises Starneth significantly given that 30% of the consolidated EBITDA of
the acquired companies in excess of €1,267,000 is payable to the sellers over the next
three financial years. This variable component will be paid in Challenger shares valued at
75p per share after the end of each twelve month period.
Current equity structure of Challenger
At publication of this report, Challenger has approximately 13.3 million shares in issue.
The company also has 1.345 million options in issue of which 615,000 are held by
employees and consultants to the company and the balance is held by Directors of the
company.
We have included the further tranches of shares payable for the Starneth acquisition in
our table. However, the notional diluted equity number is likely to be fluid over the
coming years given that Challenger is likely to issue shares as part of the variable
component of the Starneth acquisition consideration, further acquisitions as yet
unnamed and also for the conversion of outstanding convertible notes. Assuming that
this tranche of equity amounts to 6,134,400 additional shares (assuming a conversion
price of 50p per share), the existing diluted equity structure of the company is outlined
below
Equity structure of Challenger (2015)
Item
Number of shares currently outstanding
Options outstanding
Current diluted equity
st
Starneth Tranche 2 (1 anniversary)
nd
Starneth Tranche 3 (2 anniversary)
Convertible notes (Convert within 12 months)
Fully diluted equity
Equity
13,325,681
1,345,000
14,670,681
1,100,000
1,100,000
6,134,400
23,005,081
Notes
Strike price of 40p
Implied value of 75p
Implied value of 75p
Notes convert at 50p
Source: Challenger Acquisitions, RNS
4
7 December 2015
Equity structure forecasts
Our forecast EPS numbers are based on the equity structure outlined below. We have
made a number of assumptions with regards to the growth of Challenger’s equity base.
These are:

Tranche 2 of the equity components of the Starneth acquisition cost is paid on
or around 16 July 2016

Tranche 3 of the equity components of the Starneth acquisition cost is paid on
or around 16 July 2017

The convertible notes amounting to £3,067,200 convert prior to May 2016 at
50p implying the issue of 6,134,000 new shares

Starneth EBITDA exceeds the earn-out threshold of €1,267,000 (assume
£905,000 at €1.40/£1.00) for the duration of the three year agreement.
Please note the period for which the earn-out is applicable runs over the twelve months
ended July. As such, we expect that the shares payable in regard to the 1 July 2015 – 30
June 2016 period will be issued in Q4 2016. Shares for the 2016/17 period will be issued
in Q4 2017 and so forth for the final year of the agreement in 2018.
Forecast equity structure
Item
Average no. shares
Options
Starneth tranche 2
Starneth tranche 3
Convertible note
Starneth earn out
Year-end basic
Year-end fully diluted
2015
13,325,681
1,345,000
1,100,000
1,100,000
6,134,400
0
13,325,681
23,005,081
2016
17,688,256
1,345,000
1,100,000
1,100,000
6,134,400
299,178
20,859,259
23,304,259
2017
21,754,487
1,345,000
0
1,100,000
0
1,555,706
23,514,965
24,859,965
2018
24,171,000
1,345,000
0
0
0
2,624,137
26,139,103
27,484,103
Source: Challenger Acquisitions, Shard estimates
Based on the current 13.3 million shares in issue, the current shareholder base of
Challenger is outlined below.
Major shareholders in Challenger
Shareholder
GSC Global Fund
YA Global Master Ltd
Smits International B.V.
Quadrum Strategic AG
Mark Gustafson
Gert Rieder
Markus Kameisis
Holding
27.8%
9.9%
6.6%
6.5%
3.8%
0.8%
0.8%
Source: Challenger Acquisitions
5
7 December 2015
Evolution of Starneth
Starneth (Star + Netherlands) was formed as Starneth Ltd in 2007 in order to provide
design and engineering services for the giant observation wheel planned by Dubai Land.
Starneth Ltd was incorporated in Dubai at the time with two owners, Theo Jansen and
Chiel Smits. However, Messrs Jansen and Smits left the company in 2008 as the global
financial crash halted the project. Starneth Ltd ceased trading in 2008 and has been
dormant ever since. Although still owned by Mr Jansen, it does not form part of the pre
or post-acquisition Starneth Group.
In December 2008, an existing dormant company called Hydrospex Engineering B.V.
owned by Dutch entity Shining Star B.V. was renamed Starneth B.V. At this time all the
shares were owned by Shining Star with the beneficial owner being Mr Tjerko Jurgens.
Starneth B.V. was engaged on a new project called Dubai-I which was a project to
construct a giant wheel on the Bluewaters Island in Dubai. Project agreements for this
were signed in 2013.
Mr Jurgens funded Starneth B.V through Shining Star until April 2012 when the shares
owned by Shining Star were exchanged for debt and distributed between three
shareholders:



Smits International B.V. (60%)
Mr Rijinders (20%)
Mr Karssen (20%)
In December 2012, Mr Rijinders transferred a 15% interest to Smits International and
the balance of 5% to Karppa B.V., a company controlled by Mr Karssen. Karppa was
acquired by a business owned by the Smits family in February 2014 and by 25 November
2014, all Starneth shares were owned and controlled by Smits International.
Significant structural changes to the Starneth Group
Starneth B.V. demerged
Prior to Challenger’s acquisition of Starneth in July, Starneth B.V. was demerged into
two legal and separate entities under Dutch law. These were Starneth B.V. and Starneth
Europe B.V. It is very important to note that Starneth Europe B.V. along with its
employees and pipeline of business associated with the original Starneth B.V. formed
part of the acquisition. However, Starneth B.V., which was excluded from the
acquisition, retains all the potential legal benefits and liabilities associated with the
Dubai-I arbitration proceedings (See Appendix A).
Incorporation of Starneth America LLC
Starneth America LLC is a newly formed US entity set up specifically to explore and
develop new projects in North, Central and South America. The entity was set up
specifically to provide technical and support services to Starneth LLC, which was also
excluded from the acquisition. Starneth LLC is a 100% owned subsidiary of Starneth B.V.
Due to a requirement from the City of New York to provide a financial guarantee for the
complete design, procurement, construction, testing and start-up of the New York
Wheel, the pre-acquisition Starneth Group entered into a joint venture (JV) with the
considerably larger and financially substantive global engineering company, Mammoet
USA North Inc.
Starneth LLC was incorporated in March 2013 to undertake the Starneth Group’s remit
on the New York Wheel through the JV Company, Mammoet-Starneth LLC which in turn
was awarded the contract for the design, manufacture and construction of the New
York Wheel.
6
7 December 2015
The JV was conducted on the following basis:

Starneth LLC would be responsible for the design of the wheel portion,
including the supply of the drive system;

Mammoet USA would generally undertake the erection of the New York Wheel;

All remaining activities including management and all procurement are to be
undertaken by both members of the JV.
As outlined previously, Challenger was not permitted to acquire Starneth LLC as a
consequence of contractual arrangements in the Mammoet-Starneth LLC JV. As such,
Challenger does not have access to the agreements in place between the MammoetStarneth LLC JV and Starneth LLC regarding the New York Wheel.
The Collaboration Agreement between Starneth LLC and Starneth America LLC allows
Starneth LLC access, if required, to additional technical and support services in order to
meet its own contractual obligations with respect to the New York Wheel.
As the majority of engineering and design work has already been completed and billed
to the joint venture, the ongoing work is likely to relate predominantly to the
procurement of items such as the drive system and the capsules and other project
management services which could be provided by Starneth America LLC under the
Collaboration Agreement on a typical charge-out basis.
Madison Capital Markets LLC has the right to take Starneth LLC to arbitration
proceedings in the US (See Appendix A). However, this will not impact Challenger given
that Starneth LLC is not owned by Challenger Acquisitions.
Starneth LLC wound up after the project is completed
It has been agreed in the Collaboration Agreement that Starneth LLC will remain active
only for as long as its outstanding commitments on the New York Wheel will require and
will not be used for any current or future projects.
As of 15 July, the post-acquisition Starneth Group as wholly owned by Challenger
Acquisitions is now represented by the chart below.
7
7 December 2015
Post-acquisition group structure
Source: Challenger Acquisitions
*Note that Starneth retains its involvement in the New York Wheel Project through the
provision of technical services to Starneth LLC from Starneth America LLC.
8
7 December 2015
The Starneth business
Starneth and its subsidiaries, now under the Challenger umbrella, provide a range of
services to developers of giant observation wheels and structures. Depending on the
specific characteristics of a project, Starneth’s services include:
Predevelopment services: For projects that are being advanced by a local developer,
the Starneth team provides initial conceptual ideas on the scope and requirements for a
potential project. The Starneth team gets involved in discussions with the land owner or
leaseholder on the site where the wheel would be located. In some cases, engagement
with local political leaders and special interest groups is also required. A Starneth Group
representative may also be asked to attend meetings with potential funding sources.
Technical and support services: For a fully funded project with an already appointed
project manager in place, Starneth will act as a subcontractor for the design and
engineering element of a major project. Services provided would include providing
technical expertise in relation to the design, engineering and procurement of a giant
observation wheel or structure.
Turnkey project management services: Starneth will also act as project manager for
fully funded projects in order to oversee the entire construction of the project. This role
will include all design, engineering and construction services. In such a role, Starneth is
compensated as the project manager with the responsibility to appoint and manage
multiple sub-contractors over the life of the project.
Project manager and equity owner in the project: In this particular role, Starneth is
appointed project manager and also partakes as a partner in the equity financing for the
project. This role provides Challenger with specific opportunities to participate in future
projects as an equity partner and Starneth is also compensated for its role as project
manager.
Starneth wheel designs
Starneth’s clients are represented by companies specifically formed to develop giant
wheel projects in addition to local municipalities’ intent on providing a significant
revenue generating attraction for tourists and local residents. Starneth provides a core
range of giant wheel designs which include:
Iconic Wheel: A design with a transparent structure with cable spokes and
ovoid glass enclosed viewing capsules. This is the primary choice for many
developers and sizes are available from 100 metres diameter and larger.
Bravo Wheel: Different from the Iconic Wheel in that the spokes are tubular
and the capsules are smaller and round in shape. This choice ranges from sizes
between 90 and 135 metres.
Spider Wheel: A design without an outer rim. It also includes round
mechanically driven capsules smaller than those of the Bravo Wheel. The
Spider is available from 80 metres upwards.
Free Form Wheels: This is a concept design which can take any form to suit the
clients’ specifications. The sizes compare with the Iconic Wheel but with
smaller capacity capsules.
Challenger notes that the basic giant wheel concept is based on long standing designs
available in the public domain and is not capable of being patented. However,
depending on clients’ specific requirements, Starneth’s designs are often unique.
9
7 December 2015
Revenue streams
As is evident from the suite of services that Starneth offer, the group has the potential
to generate several income streams from future projects. For turnkey project
management provision, it is typical that Starneth would receive 10-15% of the value of a
contract as a stage one payment with later staged payments received as the project
progresses to completion.
Similarly, Starneth would be contractually remunerated by third party project managers
in the event that the company provided subcontracted design and engineering services
to other qualified project managers.
The equity participant stakes in major projects represent considerably longer term
revenue generation opportunities but with significant potential upside. It is likely to be
at least five years before Challenger receives income from its equity stake in the New
York Wheel as the senior debt component of the financing of the wheel must be repaid
first. However, if visitor numbers of the New York wheel are in line with projections, it is
likely that Challenger will be the recipient of a highly attractive annual revenue stream
with considerable longevity.
Historical financials
The income statement relating to the Starneth Group prior to acquisition by Challenger
provides a stark example of the income growth available from participation in only a
small number of projects. It should be noted clearly that the revenues generated
between 2012 and 2014 relate to the Dubai-I and New York Wheel projects which were
operated by Starneth B.V. and Starneth LLC (through a JV with Mammoet) respectively.
As outlined in Appendix A, both parties are, or may become, involved in legal disputes
and are not part of the Challenger group as of July 2015. As it stands, payments from
Hyundai to Starneth B.V. were terminated at the end of 2014 pending legal arbitrage in
Singapore. However, Starneth LLC continues its involvement with the New York Wheel
and Starneth America LLC provides technical services to Starneth LLC through a
contractual agreement.
As outlined previously, all future projects in the Americas will be developed through
Starneth America LLC which remains part of the Challenger Group. Please note that the
pre-acquisition Starneth income statement, balance sheet and cash flow statements can
be found in Appendix C at the end of this report.
10
7 December 2015
Current activities - the New York Wheel
Challenger, through its subsidiary Starneth America LLC, is currently providing technical
and support services to Starneth LLC with regards to the New York Wheel Project.
This project which is currently under construction is located on an eight acre site on the
northeast side of Staten Island with views of Manhattan and the Statue of Liberty. The
Staten Island ferry is a tourist attraction in its own right and currently has three million
annual tourists. It also has significant capacity (currently at 16% utilisation) to transport
higher numbers of visitors to the Island when the project is complete.
The New York Wheel (concept graphic)
Source: newyorkwheel.com
Key statistics of the New York Wheel
The wheel will be 630 feet high (192 metres) and represent one of the tallest
observation wheels in the world. With 36 capsules each expected to carry 40 passengers
during a 38 minute rotation, the wheel will have the capacity to carry up to 1,440 people
per revolution. Assuming that the wheel is operating for 14 hours per day in the summer
months, full capacity could be nearly 32,000 visitors per day falling to approximately
27,000 in the darker autumn and winter months where the wheel is expected to be
operating for 12 hours a day.
Powered by clean energy, the wheel will remain in constant motion much like the
London Eye, rotating at approximately 10 inches per second allowing passengers to
embark and disembark safely. On present assumptions, the New York Wheel is expected
to be open and operational in mid-2017.
11
7 December 2015
Huge revenue potential
If we apply some of our internal calculations to the suggested standard fare of US$35
per person, we believe that maximum daily revenue could be between US$0.9m and
US$1.1m depending on the time of year. If we assume that the wheel is fully operational
for 330 days of the year to allow for essential maintenance over the rest of the year, we
calculate that annual revenue could be US$315m to US$365m assuming full capacity
utilisation of the capsules.
This is likely to be reduced to an extent by concession fares and lower capacity
utilisation during off season periods and poor weather. However, given that we estimate
that the cost of the wheel alone will be approximately US$150 - US$170m, based on the
cost of historical projects; we believe that the equity holders will be looking at
substantial annual returns after the project finance has been repaid.
Empire Outlets retail project
In addition to the New York Wheel project (on eight acres of land) the Empire Outlet
project (on a separate six acres of land) is the second major project in the
redevelopment of Staten Island. This retail project features 350,000 square feet of
enclosed retail space which will be New York's first and only shopping outlet mall. This
attraction will have approximately 100 shops, a wide range of restaurants and a
boutique hotel with rooftop views of Manhattan.
As Empire Outlets’ site is located at the base of the Staten Island Ferry Terminal, only a
20 minute free ferry ride from Manhattan, we are confident that a significant proportion
of the estimated six million visitors to the retail site will also visit the New York Wheel as
part of their overall experience of the development.
New York Wheel project cost
It is estimated that the entire site development including the wheel will cost close to
US$500m. Of the total cost of the wider project, US$486m of funding has been secured
to date. Total equity in the project raised to date is US$121m with a further US$365m of
debt finance.
This number excludes the significant funds that would be expected from the sale of
naming rights to the wheel. For reference, EDF Energy paid approximately £8m
(c.US$12.2m) for the naming rights to the London Eye over a three year period from
2011. These naming rights have since been transferred to Coca Cola since the beginning
of 2015 indicating strongly the calibre of companies that are keen to be involved in high
profile attraction projects.
Challenger’s investment in the New York Wheel
Prior to the acquisition of Starneth, Challenger invested a total of US$3.0m for a 2.463%
interest in the New York Wheel Investor LLC, the company set up to fund the equity
component of the project.
It should be noted that Challenger, as with all the equity holders, may be called upon to
make further capital contributions should the project require additional funds for
construction costs or other funding obligations.
Such potential cost overruns are not likely to be particularly significant for Challenger
given its modest equity stake. However, if the company is unable to contribute its share
of further capital contributions, the other unit holders in New York Wheel would
contribute Challenger’s capital deficiency which would be treated as a loan bearing a
compound interest rate of 18% per annum.
Should Challenger be unable to repay the loan with accumulated interest within 180
days, the managing member and other unit holders would terminate the loan and
Challenger’s interest would be diluted by the value of the outstanding loan and interest.
This could leave Challenger with a negligible interest in the project.
12
7 December 2015
The giant observation wheel market
It started in London
Although the concept and design of large Ferris wheels has been in existence since the
Victorian era, Challenger argues that the giant observation wheel industry began with
the London Eye which was completed in March in 2000. The London Eye represents the
first iconic style observation wheel and differs from traditional Ferris wheels primarily
due to the use of mechanically driven observation capsules.
The London Eye is 443 feet (135 metres) in diameter with 32 continually moving
capsules each capable of holding 25 people. A complete revolution takes approximately
30 minutes and a standard ticket to ride a full revolution currently costs £23 (c. US$35)
although considerably more expensive, fast track entry tickets are available.
It should be noted that the build cost of the London Eye was approximately £70m. If we
apply 15 years of price inflation to this amount, we arrive at a cost of approximately
£108.5m, equivalent to US$164m which is almost identical to our estimated cost for the
construction of the New York Wheel.
We believe that it is valid to argue that the economics of the London Eye have set a
considerable precedent in the calculation of the commercial case for the New York
Wheel project.
The London Eye observation wheel
Source: Open
13
7 December 2015
The Asian experience
The Singapore Flyer
The Flyer, which was opened in April 2008, is 541 feet (165 metres) in diameter and has
28 capsules, each with a capacity of 28 passengers (784 passengers per revolution). This
attraction was the tallest of its type in the world until the opening of the Las Vegas High
Roller in 2014.
The Flyer cost approximately S$260m (US$180m) to construct. However, it has
experienced a number of high profile breakdowns which have led to passengers being
trapped for long periods. Back up mechanical drive systems have been installed at
appreciable cost. However, the wheel has suffered financial difficulties since 2010 and
was sold to Straco Leisure in August 2014 for S$140m (c. US$112m at the exchange rate
of the time).
The Singapore Flyer
Source: Open sources
The US – High Roller in Las Vegas
Until the New York Wheel is completed, the Las Vegas High Roller is the world’s highest
wheel at 550 feet (167.6 metres). The High Roller opened in March 2014 and is part of a
similar attraction development structure to that planned in New York. The High Roller
forms the centre piece of a wider US$550m development called The LINQ which also
includes a hotel and casino in addition to retail outlets.
The wheel comprises 28 capsules each with a capacity of 40 passengers equating to a
capacity of 1,120 people per revolution and an hourly capacity of 2,240 people (based
on two revolutions per hour). Tickets for the attraction are US$26.95 for a single 30
minute ride although the cost rises to US$36.95 at night as the Las Vegas strip can be
observed in all its neon glory.
14
7 December 2015
The Las Vegas High Roller
Source: Vitalvegas.com
Dubai – the next big wheel
The Dubai-I wheel which we have outlined during this report is part of the Bluewaters
Island development in Dubai Marina in the United Arab Emirates. The whole project has
an expected cost of US$1.6bn of which only part of this represents the Dubai-I wheel.
The Dubai-I is expected to cost US$270m to construct and when completed in early
2017 will be 689 feet tall (210 metres). The wheel will provide panoramic views of Dubai
Marina and other Dubai landmarks such as the Burj Khalifa skyscraper.
15
7 December 2015
The Dubai-I Wheel (conceptual and in construction)
Source: Arabian Business
The market today
Starneth estimates that an iconic observation wheel project is completed every two and
a half years and as such, the management do not foresee the market being greater than
8-12 such projects over the next ten years. Although the numbers of projects are small,
the market value is large and has a potential value of at least US$1 billion with
comparatively few players involved.
Starneth has a large project pipeline
The company estimates that there are 10-15 ideal sites globally with the potential to
locate and operate profitably a giant observation wheel at the current time. It is very
important to note that Starneth are currently working with local developers in
approximately 25 sites worldwide as part of an extensive project pipeline. The initial
phases in the origination of any project can take several years to complete as many
factors need to be addressed including leasing of a site, project funding, local support
and environmental issues. Although many projects will prove unfeasible at some point
in the development process, it is very pertinent to recognise that there are likely to be
very few projects globally in which Starneth is not involved at some point.
The first table below is illustrative of a selection of major observation wheels completed
since the London Eye was opened in 2000 including major projects currently under
construction. With the inclusion of giant Ferris wheels completed over the last 15 years*
(see overleaf), we believe that Challenger’s estimate of 8-12 world class projects every
ten years is representative of the current market.
16
7 December 2015
Pent up demand
We believe that the market could easily expand given the impact of the substantial
hiatus in activity after 2008 as the global financial crisis effectively mothballed projects
due to a marked reduction in available capital and a generally poor demand outlook.
The period after 2008 is littered with projects that remained at the proposal stage and
were delayed or cancelled during the ‘Great Recession’. For example, projects in
Moscow, Beijing, Bangkok, Berlin and Jeddah were all mooted but foundered at some
stage between 2008 and 2011.
However, the post financial crisis world provides fuel for the market to expand as more
recent projects have firmly established the commercial model required to run a
profitable attraction.
We believe that there is pent up demand in the global market. This is exemplified by the
second table below which is dominated by Asian countries. Although this market is huge
and likely to grow with the inclusion of potential projects in Malaysia and Indonesia, we
believe that there will be additional opportunities in Europe, the US and the Middle East
over the long term.
*Important distinction
It is important to make a clear distinction between giant observation wheels and
traditional Ferris wheels. Although very similar in appearance and usually treated as one
and the same in the wider media, one should note that observation wheels primarily
incorporate mechanically driven observation capsules in their design and Ferris wheel
cabins are kept upright by gravity as the wheel rotates. Although the scale of these
projects and the overall experience to the passenger will be largely the same, there is a
more complex design specification involved in construction of giant observation wheels.
Giant observation wheel projects since 2000
Attraction
Country
London Eye
Singapore Flyer
Melbourne Star
High Roller
The New York Wheel
The Dubai-I
UK
Singapore
Australia
USA
USA
Dubai
Completed
2000
2008
2008
2014
2017*
2017*
Height
(metres)
135
165
120
168
192
210
Height
(feet)
443
541
394
550
630
689
Location
London
Singapore
Docklands, Melbourne
Las Vegas, Nevada
Staten Island, New York
Dubai Marina
Source: Wikipedia
*Scheduled completion date
17
7 December 2015
Giant Ferris wheel projects completed since 2000
Attraction
Country
Diamond and Flower Ferris Wheel
Sky Dream Fukuoka
Shanghai Ferris Wheel
Zhengzhou Ferris Wheel
Harbin Ferris Wheel
Changsha Ferris Wheel
Star of Nanchang
Suzhou Ferris Wheel
Tianjin Star
Star of Lake Tai
Sun Wheel
Orlando Eye
Japan
Japan
China
China
China
China
China
China
China
China
Vietnam
USA
Completed
2001
2002
2002
2003
2003
2004
2006
2006
2008
2008
2014
2015
Height
(metres)
117
120
108
120
110
120
160
120
120
115
115
122
Height
(feet)
384
394
354
394
361
394
525
394
394
377
377
400
Location
Tokyo
Fukuoka
Shanghai
Henan
Harbin
Hunan
Nanchang, Jiangxi
Suzhou, Jiangsu
Yongle Bridge, Tianjin
Wuxi, Jiangsu
Da Nang
Orlando, Florida
Source: Wikipedia
Competition
The company faces competition from large corporations which already own giant
wheels and may decide to add additional locations using existing design blueprints at
the exclusion of players like Starneth. Alternatively, markets such as China may be
inaccessible as State owned corporations decide to enter the market backed by the
Chinese government. As it stands, we believe that this is looking less likely as China
experiences mounting economic difficulties in core industrial sectors of the economy
where government support is likely to be directed at the expense of the leisure sector.
Lastly, there is the prospect of the large engineering and contracting companies taking
the design and engineering elements of the projects in-house at the exclusion of
Starneth. Nevertheless, Starneth currently believes that it is the only global provider of
turnkey solutions that cover the highly specialised giant observation wheel sector that is
operating at the current time.
Risks to the business
Generic risks
We believe that several of the key risks to Challenger’s business are largely generic and
would affect the majority of commercial operations. Core risks include the impact of
global economic slowdown as was witnessed starkly in 2008, contributing significantly
to the postponement and cancellation of several ‘attraction’ projects worldwide. As
such, further global economic turmoil would likely have a similar impact on the sector as
expenditure on high profile leisure projects is usually vulnerable in times of economic
downturn.
Competition
We have already addressed the issue of the potential emergence of competitors in the
market which will always be a factor in Starneth’s risk profile. Additionally, given
Starneth’s status as the only turnkey provider of observation wheel solutions, we also
see the potential loss or defection to competitors of key employees and management as
a major potential risk to the future success of the business, particularly as senior
members of staff retain the ability to transfer substantial levels of experience and
knowhow to competitors.
18
7 December 2015
In addition, there are three companies using the name ‘Starneth’ that were excluded
from the acquisition, specifically; Starneth B.V, Starneth LLC and Starneth Construction
B.V. As there is no obligation for these entities to change their names or desist in the
use of such names, there are no assurances that individuals within these companies will
not engage in competitive business or potentially damage the brands or reputations of
Challenger’s Starneth subsidiaries.
As outlined previously, Starneth’s technology and intellectual property is not suited for
patenting or other registered protection and the business relies on technological
knowhow protected by business secrets and non-disclosure agreements. As such, no
assurances can be provided that a loss of this knowhow will not impact the business
adversely.
Specific risks
As outlined in previous ‘the market today’ section of this report, Challenger relies on a
market characterised by a small number of large contracts. This characteristic of the
market is unlikely to change for the foreseeable future. However, as outlined earlier, we
believe that there is an element of pent up demand in the market and we argue that
every successful project in the post-recession world helps develop the blueprint for
avoiding unprofitable or ‘white elephant’ type projects.
Challenger’s business model will, for the foreseeable future, be reliant on a small
number of large and long term contracts. Consequently, it is likely that revenue and
earnings will be lumpy and difficult to forecast. In adverse market conditions, this could
impact the company’s ability to raise financing through both debt and equity.
Financial risk
At the project level, certain cities or municipalities may require substantial financial
guarantees in the form of performance bonds in order to award contracts for new
observation wheels. In this situation, Starneth may not be in a position to provide
sufficient financial guarantees and therefore be unable to secure contracts.
Additionally, should Starneth enter a joint venture with a considerably larger partner in
order to secure a large contract, the company would likely lose operational control of
the project and disputes with the controlling partner may emerge.
Location, location, location
Observation wheels achieve commercial success due to a combination of factors
including primarily location and the attractiveness of the area as a place that tourists in
their millions are keen to visit. The London Eye is a prime example of a successful
combination of these factors.
Building a giant observation wheel in a poor location with associated problems such as
accessibility and disappointing tourist footfall implies that such a project is destined to
be uncommercial. This is a paramount factor for the company to consider when deciding
whether to make a substantial equity investment in a new project.
We believe that this is less a concern in terms of providing design and engineering
solutions during the construction phase of a project given that the company will
generate revenue during this phase and will be considerably less exposed in the
preliminary years when the wheel is operational.
Nevertheless, a poorly considered project could impact the company over the long term
given the potential negative impact on Challenger’s reputation by association with an
uncommercial project and the potential adverse impact on the company ability to raise
finance for new projects.
19
7 December 2015
Project risk
Challenger is directly exposed to the potential for any defects in the design and
construction of giant observation wheel projects. Product failure that would require
financial reparation or repair or pose a danger to the lives of visitors would lead to
significant financial liabilities, legal proceedings and reputational damage. Legal claims
upon the company would also impair the ability of the group to conduct future business
whether through loss of management time, financial penalties or loss of credibility in
the market.
Challenger relies on sub-contractors during the life of a turnkey project. Much of the risk
associated with relying on third parties can be mitigated by using internationally
recognised companies and businesses that Starneth has worked with previously.
However, delegating of work poses a degree of risk under most circumstances as the
company will have reduced control over the workforce and materials employed in the
project. Any adverse site incidents will be covered by the group’s insurance. However,
the company may be exposed in the event that issues are identified beyond Starneth’s
standard one year warranty coverage for its work.
Legal
For greater detail with regards to the characteristics of legal disputes with entities no
longer within the Challenger group, please refer to the examples in Appendix A.
Specific risks to the investment in the New York Wheel
Many of the risks outlined in this section apply directly to Challenger’s investment in the
New York Wheel. Although we have outlined the major characteristics of the company’s
2.463% investment in the project in this report, we believe that it is pertinent to
summarise some of the dynamics which could impact the value of this investment.
These include:




As outlined previously, there is the potential for Challenger’s investment to be
diluted in the event that there are additional capital contributions from new
investors or the group is unable to provide additional capital in the event of a cost
overrun.
Primary revenues from the operation of the wheel will be used to repay project
debt. As such, the equity holders will not receive income distributions until the
debt is repaid.
The New York Wheel is a complex project particularly as a function of its size and
integration into a wider leisure project. As such, the prospect for cost overruns or
delays is a significant risk factor.
The project is also subject to all the general risks associated with major tourist
attractions including adverse economic conditions, mechanical difficulties,
terrorist/security activity, poor weather and rising operating costs. With a large
fixed cost structure in place, revenue from the New York wheel could be
disappointing in the event that visitor numbers are below forecast.
20
7 December 2015
Revenue generation
It is important to note that the financial information outlined in Appendix C relates to
the Starneth Group prior to acquisition and that a substantial proportion of the income,
assets and liabilities are derived from Starneth LLC’s activities with regards to the New
York Wheel. As this subsidiary of the Starneth Group was excluded from acquisition, the
historical financials are for illustrative purposes only and do not provide an accurate
representation of the likely future financial projections for Challenger.
Primary business: South East Asia
As outlined under the section entitled ‘the market today’ we outlined that Starneth had
a potential business pipeline amounting to approximately 25 opportunities. Within this
portfolio of leads, there is substantial interest from developers in South East Asia for an
iconic wheel project which has prompted Starneth to open a representative office in
Singapore to support regional developers.
Subsequent to this, Starneth has signed an initial project contract with Indonesian
developer PT Cendana Emas Windu Investment for turnkey project management
services which will include design, procurement, erection and commissioning of a giant
wheel in Jakarta, Indonesia. As with most contracts, this agreement is subject to the
developer’s ability to secure financing for the project and it should be noted that the
neither the site nor construction funding have yet been secured.
Principal terms of the Jakarta project
The initial project has been signed for a 125 metres tall Iconic Wheel design which will
comprise 18 capsules, each with a capacity for 40 passengers. This would indicate a
maximum hourly capacity of up to 1,440 customers.
The wheel is expected to take 24 months to construct. This could be extended by up to
90 days for Starneth-caused delays.
The turnkey valuation of the contract is expected to be US$121m out of which Starneth
will be responsible for all the principal costs of the project relating to design,
procurement, fabrication, assembly, erection and commissioning of the wheel.
Of the total amount, it is anticipated that US$94m of the total contract value will be
attributed directly to the wheel itself and include:








Design and engineering
Project management
Fabrication and erection of the steel structure
Electrical system
Capsules
Drive and control system
Testing and commissioning
Certification and Inspection
The balance of US$27m will go towards related infrastructure and include:






Wheel foundation
Terminal building
LED lighting
Insurance
VAT
Other contingencies
21
7 December 2015
In terms of the payment structure, the initial payment of 15% of the US$94m for the
wheel component will become payable within seven days of financial close. This date is
represented by the juncture at which funding is officially secured by the developer.
Thereafter, monthly invoices will be issued to the developer with payment delivered
within seven days for all remaining wheel expenditures and infrastructure expenditures.
All expenditures by Starneth will be paid for in advance by the developer and built into
the payment schedule that is agreed with the developer.
Additional projects
We are confident that there are several opportunities available to Starneth in South East
Asia. Given that the company has a permanent presence in the region with its Singapore
office, we are confident that the group will be able to secure additional projects in the
future.
Europe
Starneth has also been approached to provide turnkey project management services for
a project in a European city. This deal would also include the company arranging
financing for all the start-up costs of the project. This agreement is still subject to
negotiation prior to a contract being signed. However, if it goes ahead, we expect that
Challenger will be offered the opportunity to participate as an equity partner.
Americas
Starneth recently commenced discussions with a developer in regard to turnkey project
management services for a giant observation wheel. The company has also been
approached with a proposal to provide turnkey project management services plus a
portion of the start-up costs for his project. Although both of these projects are in the
early stages of development, such is Starneth’s pedigree in the sector; the company’s
potential participation is being leverage to advance this process.
Financial projections
Assuming that Starneth acts as the primary contractor for an Iconic Wheel project in
South East Asia as outlined in the previous section of this report excess, we expect that
Starneth would receive approximately 15% of the contract value in upfront fees with the
balance paid on a monthly basis over the following 24 months.
We would expect that Starneth would operate on a cost plus basis whereby the
company is paid for all of its expenses plus additional payments to allow for profit. With
additional contingencies built into the contract structure, we believe that Staneth could
generate gross margins of up to 20% assuming there are no serious cost overruns or
unforeseen delays.
With a contract underway, we anticipate that the company would incur general and
administrative costs of between £300,000 and £400,000 per month. Although this would
increase if the company took on more business assuming that the group would require
regional office capabilities such as it does in Singapore, the increase in costs would not
be as steep as the anticipated uplift in revenue and we would expect to see EBITDA
margins increase.
In our illustrative income statement, we have assumed that Challenger embarks on the
initial project in South East Asia at the end of Q1 2016 for a duration of 24 months on
the terms outlined above. In addition to this, we have layered an additional contract
with a value of US$120m commencing in 2017 and a further contract valued in
aggregate at US$150m commencing in 2018 in order to illustrate the growth potential of
the Starneth business.
22
7 December 2015
Our revenue projections for 2015 represent the fees generated by the provision of
contracted technical services to Starneth LLC of which we have also factored in an
additional US$2.0m (£1.3m) in 2016.
Illustrative income statement for the consolidated group
Income statement (£000s)
Revenue
Cost of sales
Gross profit
Administration
EBITDA
Amortisation
Depreciation
Profit before tax and interest
Finance income
Finance costs
Profit before tax
Taxation
Profit after tax
Other comprehensive income
Total comprehensive income
Average number of shares (000)
Fully diluted number of shares (000)
EPS basic (p)
EPS fully diluted (p)
Dec-15E
3,250
-1,300
1,950
-2,336
-386
0
0
-386
0
-252
-638
0
-638
0
-638
13,326
23,005
N/A
N/A
Dec-16E
36,724
-28,333
8,391
-4,200
4,191
-20
-51
4,120
6
-184
3,942
-788
3,153
0
3,153
17,688
23,304
17.8
13.5
Dec-17E
63,954
-51,163
12,791
-4,800
7,991
-13
-34
7,944
59
0
8,003
-1,601
6,402
0
6,402
21,754
24,860
29.4
25.8
Dec-18E
82,067
-65,654
16,413
-5,100
11,313
-9
-23
11,282
140
0
11,421
-2,284
9,137
0
9,137
24,171
27,484
37.8
33.2
Source: Shard estimates
It is important to note that the illustrative income statement does not constitute a
financial forecast for Challenger given that the contract values outlined above have not
been secured by the group. However, it does depict starkly the operational leverage
that the company possesses upon embarking upon major contracts over the next three
years.
The three year time horizon also does not factor in the huge financial upside that the
company possesses from the equity stakes in big wheel projects that it intends to take.
These will provide very attractive longer term annuities which could be very significant
but are beyond the timescale outlined in the financial projections above.
Cash flow and balance sheet
We have outlined our illustrative cash flow and balance sheet tables below which relate
to the previous income statement. A number of caveats should be noted at this
juncture.
Primary, we have not assumed any further equity investments in major projects over
time as these are very difficult to forecast at this stage. Likewise, we have not factored
in any issues of new shares to raise additional equity for the same reason. Our numbers
also assume that the convertible is converted after one year in order to depict maximum
equity dilution in regard to our EPS estimates.
In addition, out model depicts a substantial accumulation of cash over the next three
years. We would caution that this will actually be unlikely given that we anticipate that
the management will use this cash make further acquisitions over the next three years.
However, as yet these elements of expenditure are unknown to us and therefore cannot
be factored into our assumptions.
23
7 December 2015
Illustrative cash flow statement for the consolidated group
Cash flow statement (€000s)
Profit after tax
Amortisation
Depreciation
Finance income
Finance costs
Movement in working capital
Cash flow from operations
Purchase of intangible assets
Starneth acquisition tranches
Purchase of PPE
Net cash flow from investing activities
Issue of shares
Issue of convertible notes
Repayment of debt/convertible notes
Finance income
Finance costs
Net cash flow from financing activities
Net increase in cash
Cash at beginning of period
Forex movements
Cash at end of period
Dec-15E
-638
0
0
0
252
-1,066
-1,452
-1,976
-893
0
-2,869
1,020
3,067
0
0
-252
3,835
-486
1,080
0
594
Dec-16E
3,153
20
51
-6
184
3,020
6,423
0
-893
0
-893
0
0
0
6
-184
-178
5,352
594
0
5,946
Dec-17E
6,402
13
34
-59
0
2,457
8,847
0
-893
0
-893
0
0
0
59
0
59
8,014
5,946
0
13,960
Dec-18E
9,137
9
23
-140
0
1,634
10,663
0
0
0
0
0
0
0
140
0
140
10,803
13,960
0
24,763
Source: Shard estimates
In our calculations at this stage, we have assumed that Challenger does not acquire any
bank debt although this position would be subject to change as the group acquires new
projects.
Illustrative balance sheet for the consolidated group
Balance sheet (£000s)
Intangible fixed assets
Tangible fixed assets
Goodwill
Investments
Non-current assets
Receivables
Cash and cash equivalents
Total current assets
Total assets
Borrowings
Convertible loan notes
Accounts payable
Total current liabilities
Borrowings
Related party payables
Total non-current liabilities
Total liabilities
Net assets
Dec-15E
60
154
3,377
1,976
5,567
2,150
594
2,745
8,312
0
3,067
2,443
5,510
0
1,277
1,277
6,787
1,524
Dec-16E
40
103
3,377
1,976
5,496
24,297
5,946
30,243
35,739
0
0
27,610
27,610
0
1,277
1,277
28,887
6,852
Dec-17E
27
69
3,377
1,976
5,449
42,312
13,960
56,272
61,721
0
0
48,083
48,083
0
1,277
1,277
49,360
12,361
Dec-18E
18
46
3,377
1,976
5,417
54,296
24,763
79,059
84,476
0
0
61,701
61,701
0
1,277
1,277
62,978
21,498
Source: Shard estimates
24
7 December 2015
Appendix A
Legal dispute between Starneth B.V. and Hyundai
In June 2013, the pre-acquisition Starneth Group signed a contract in respect of the
Dubai-I contract. Hyundai was appointed as principal contractor and performance bond
guarantor and Starneth B.V. was appointed as a subcontractor to Hyundai for the design
of the Dubai-I for a fixed fee of US$40m. A separate purchase order was given to
Starneth B.V. for the provision of the drive-system for US$5.6m.
Significant delays and disputes with Hyundai in relation to the design and construction
of the Dubai-I resulted in legal arbitration between Starneth B.V. and Hyundai. This
dispute is ongoing as at the date of this report. In particular, the US$5.6m purchase
order for the drive-system was cancelled by Hyundai and all payments and activity in
relation to the principal US$40m design contract were terminated during the year
ended 31 December 2014.
The arbitration procedure is ongoing in Singapore and the Starneth Directors are of the
opinion that it may take until the end of 2016 before the legal arbitration process is
concluded.
As outlined in this report, a demerger of the trade and assets of Starneth B.V. took place
between Starneth B.V. and Starneth Europe B.V. Following the Demerger, the
contingent liabilities described above, as well as any gains arising from the legal
arbitration involving Hyundai are now part of Starneth B.V., which does not form part of
Challenger.
Claim from Madison Capital Markets LLC
A U.S. broker dealer, Madison Capital Markets LLC, filed a complaint on 11 September
11 2015 demanding compensation for alleged services to Challenger and two of its
wholly owned subsidiaries for advising and facilitating the Acquisition and the
Investment.
Madison Capital Markets claims that Starneth LLC has breached the Confidentiality and
Non-Circumvention Agreement between Starneth LLC and Madison Capital Markets LLC
dated 16 June 2014, in which Starneth LLC has agreed not to engage in business with its
alleged contacts without the written consent of Madison Capital Markets LLC.
Madison’s complaint requested an unquantified amount of monetary damages,
including attorney fees and costs, as well as a request for equitable relief. However, in
pre-litigation correspondence Madison Capital Markets requested approximately
€375,000 in cash, 330,000 Ordinary Shares and 10% of the EBITDA of Starneth in excess
of €1,267,000 for the next three financial years.
On 17 November 2015, Challenger filed its response to the complaint, in which it denied
all of the claims made by Madison Capital Markets and moved to have the complaint
dismissed for lack of personal jurisdiction and failure to state a claim upon which relief
can be granted.
The court will hear the motion to dismiss on 28 January 2016, although the decision of
the court will likely take several months. The defence of this lawsuit and related legal
proceedings may be costly and time-consuming and the outcome is uncertain. If the
claim ultimately was successful, it could have a material adverse effect on the Group’s
prospects, results of operation, business and financial condition.
25
7 December 2015
Appendix B: Management biographies
Mark Garland Gustafson – Chairman (Aged 55)
Mr Gustafson is a Canadian based Chartered Accountant with over 30 years of
experience in building public and private companies and arranging financing either as a
senior executive or through his personal consulting company, M.G.G. Consulting. Over
the span of his career, he has been actively involved in numerous corporate acquisitions
directly participating in debt and equity fundings totalling over C$200m.
After qualifying as a Chartered Accountant with Price Waterhouse, Mark joined EnServ
Corporation where he spent 6 years helping to build the company through various
acquisitions into a sizable energy services company, which in 1996 was acquired for
C$229m by Precision Drilling Corporation. Mr Gustafson then served as President and
CEO of Total Energy Services Ltd, a Toronto Stock Exchange listed company providing
oilfield rental services, for which he raised C$25m. He also served as Chairman and CEO
of Triangle Petroleum Corporation where he helped to lead active exploration shale
plays in North America and to raise over US$84m in convertible and equity instruments.
More recently, Mr Gustafson held the position of President and CEO of Euromax
Resources Ltd. where he was responsible for securing funding of C$18m to advance gold
and base metal projects in Serbia, Macedonia and Bulgaria. Previously, Mr Gustafson
served as Chairman of Tuzo Energy Corporation, overseeing an unconventional oil and
gas company and helping to raise C$50m in private equity funding to advance this
project. Mark is experienced in successfully developing and growing start-up businesses
through focused acquisitions into commercially viable companies.
Markus Dieter Kameisis- Chief Financial Officer (Aged 36)
Mr Kameisis is a Swiss-based German finance executive with over 10 years of experience
in the banking and financial industry. After graduating with a “Diplom-Kaufmann” in
Auditing and Controlling from the University of Trier in Germany, Markus joined UBS in
Luxembourg. Following promotion to Associate Director, he moved to UBS in
Switzerland where he worked on a finance IT platform project of UBS across Europe.
Afterwards, Mr Kameisis took over as Head of Accounting of UBS Leasing AG where he
was responsible for implementation of the Basel II internal rating based approach. He
was then promoted to the CFO role within UBS Swiss Financial Advisers AG, a FINMA
and SEC regulated broker serving US clients in Switzerland where he was, amongst other
things, responsible for the implementation of a new software system, the regulatory
reporting and all corporate tax filings.
In 2013, Markus was recruited by Gutenberg Group AG, a FINMA regulated financial
services group with a banking licence, specifically to oversee the Group’s finance and
reporting function. Shortly after his assignment Gutenberg Group AG decided to give
back its banking license and Markus agreed to support the Group during this transition
as the CFO.
In August 2014, Markus founded an outsourcing and advisory firm for SME companies
called Icelia AG, for which he is the CEO and a director. He also serves as a senior finance
executive at a Swiss based oil and gas company with a portfolio of oil and gas assets in
Africa and Europe. Icelia AG provides accounting services to the Starneth Group.
Gert Rieder - Non-Executive Director (Aged 53)
Mr Rieder has over 20 years of experience as senior executive and consultant building
companies, markets and revenues globally while heading up start-ups, advising on board
positions, and leading business development and growth for companies and customers
in Scandinavia, Europe and the Middle East. After graduating from Aarthus School of
Business, he joined leading telecom provider Tele Danmark where he took on a series of
commercial roles finally becoming a Product Director.
26
7 December 2015
He then moved to a telecom start-up Sunrise Communications in Switzerland where he
joined as Chief Commercial Officer and was later promoted to COO, leading the product
roadmap activities and successfully developing the initial product launch plan. At Danish
TDC Fixnet Nordic he served as Executive Vice President and Member of Executive Board
focusing on restructuring the organisation with emphasis on strengthening customer
service and sales operation. He was also responsible for optimisation of distribution
channels by redefining a nationwide chain of retail shops and call centres. He was also a
Deputy CEO of Vopium, a global VOIP player, helping to prepare the company for listing
on Euronext Paris. Gert also served as CEO of Batelco in Bahrain, one of the leading
telecom providers in the MEA region, and as CEO for Comendo Group, the leading
provider of cloud-based IT-security solutions in Scandinavia - both publicly listed
companies that focus on growing through extensive M&A activities. Mr Rieder is highly
experienced in consumer marketing having built his career creating and selling products
and services.
Senior Managers and Consultants
CEO of Starneth Group - Machiel (“Chiel”) Smits
Mr Smits is a native Dutchman with an engineering degree from Dordrecht Technical
School. Before founding Starneth in 2007, he was a core founder and board member of
the Great Wheel Corporation acting as the Chief Technical Officer and working on startup development of wheels in Beijing, Orlando and Berlin. His experience in the
construction of observation wheels stemmed from having been the lead designer and
project manager of the British Airways “London Eye” for Hollandia B.V. Chiel is acting as
CEO of the Starneth Group and is the Managing Director of Starneth Europe B.V. and
Starneth Holding B.V. with particular focus on new developments, both in market size
and technology.
Senior Manager – Leonardus (“Leon”) Heijkoop
Leon has been based in the Middle East since early 2005. He is the Managing Director of
SME Engineering JLT with a regional office in Dubai. Starneth Middle East’s project team
has worked as a subcontractor on the Dubai-I on a reclaimed island off-coast of Dubai.
In addition to this exciting project, Leon and his highly experienced team are aiming to
expand the business in the Middle East and India. Leon has a strong engineering
background from leading education institutes in The Netherlands and more than 20
years of experience in project management. He also has an excellent worldwide
reputation in delivery of major construction projects in the oil and gas industry as well
as leisure and entertainment. Besides working for major operators (i.e. Total, Elf
Petroland, ExxonMobil, Shell, Encana), he has worked on senior management positions
for steel fabrication contractors, Hollandia (London Eye), Mercon Steel Structures in the
Netherlands and Lamprell Energy in the United Arab Emirates. Prior to joining Starneth,
he worked for the Great Wheel Corporation, acting as the Regional Manager Middle
East from 2005 to 2007.
Consultant – John Le Poidevin
John Le Poidevin is an experienced independent consultant and non-executive who sits
on several company and fund boards and advises companies across the leisure,
hospitality and entertainment sector. Now Guernsey-based, he was a Partner at BDO
LLP in London for many years, where he was Head of Consumer Markets, transforming
BDO's practice into being a significant market player with a leading position in the
leisure sector. John has significant experience of working with leisure and hospitality
businesses in relation to their overall strategy, investment and financing decisions, M&A
matters, corporate governance, risk and financial reporting. He has been involved in the
successful flotations of a number of major leisure businesses, including 888 Holdings
and Carluccios. John is a Fellow of the Institute of Chartered Accountants in England and
Wales.
27
7 December 2015
Appendix C: Starneth pre-acquisition financials
Income statement (December 2012 – June 2015)
Income statement (€000s)
Dubai-I revenue
New York Wheel revenue
Total revenue
Cost of sales
Gross profit
Administration
EBITDA
Amortisation
Depreciation
Profit before tax and interest
Finance income
Finance costs
Profit before tax
Taxation
Profit for period
Other comprehensive income
Total comprehensive income
Dec-12
60
0
60
0
60
-87
-27
0
0
-27
0
0
-27
0
-27
0
-27
Dec-13
4,153
240
4,393
-3,059
1,334
-1,238
96
-14
-32
50
3
-51
2
0
2
0
2
Dec-14
7,763
3,657
11,420
-7,291
4,129
-2,949
1,180
-27
-67
1,086
29
-6
1,109
0
1,109
0
1,109
Jun-15
0
5,980
5,980
-2,588
3,392
-1,705
1,638
-14
-35
1,638
22
-13
1,647
0
1,647
-7
1,640
Source: Starneth, Challenger Acquisitions
Balance sheet (December 2012 – June 2015)
Balance sheet (€000s)
Intangible fixed assets
Tangible fixed assets
Non-current assets
Receivables
Cash and cash equivalents
Total current assets
Total assets
Borrowings
Accounts payable and accrued liabilities
Total current liabilities
Net assets
Share capital
Translation reserve
Accumulated deficit
Total equity attributable to parent company
Dec-12
0
10
10
1
12
13
23
0
165
165
-142
18
0
-160
-142
Dec-13
124
285
409
906
402
1,308
1,717
0
1,806
1,806
-89
69
0
-158
-89
Dec-14
97
247
344
312
737
1,049
1,393
0
1,553
1,553
-160
65
-1
-224
-160
June 15
83
215
298
1,646
710
2,356
2,654
0
1,174
1,174
1,480
65
-8
1,423
1,480
Source: Starneth, Challenger Acquisitions
28
7 December 2015
Cash flow (December 2012 – June 2015)
Cash flow statement (€000s)
Profit from period before tax
Amortisation
Depreciation
Finance income
Finance costs
Cash flow from operations before working capital
Change in receivables
Change in accounts payable and accrued liabilities
Cash generated from operating activities
Purchase in intangible assets
Purchase of PPE
Net cash flow from investing activities
Repurchase of shares
Dividends
Finance income
Finance costs
Net cash flow from financing activities
Net increase in cash
Cash at beginning of period
Forex movements
Cash at end of period
Dec-12
-27
0
0
0
0
-27
18
30
21
0
-10
-10
0
0
0
0
0
11
1
0
12
Dec-13
2
14
32
-3
51
96
-905
1,641
832
-138
-307
-445
0
0
0
0
0
387
12
3
402
Dec-14
1,109
27
67
-29
6
1,180
594
-253
1,521
0
-28
-28
-975
-200
29
-6
-1,152
341
402
-6
737
June 15
1,647
14
35
-22
13
1,687
-1,334
-379
-26
0
0
0
0
0
0
-13
-13
-39
737
12
710
Source: Starneth, Challenger Acquisitions
29
7 December 2015
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instruments. It does not constitute a personal recommendation as defined by the
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30