Share price: 112.80p

Acquisition of Medergy

15th March 2011

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, JAPAN, CANADA, AUSTRALIA, THE REPUBLIC OF SOUTH AFRICA, THE REPUBLIC OF IRELAND OR ANY OTHER JURISDICTION IF TO DO SO WOULD CONSTITUTE A VIOLATION OF THE LAWS OF SUCH JURISDICTION.

Acquisition and placing
15 March 2011
Cello Group plc, (“Cello”, the “Company” or the “Group”), the insight and strategic marketing group, is pleased to announce that it has reached an agreement to acquire MedErgy HealthGroup Inc. (“MedErgy”), a leading healthcare communications consulting company based in Pennsylvania, USA (the “Acquisition”). The initial consideration payable (including certain payments to key members of staff) (“Initial Consideration”), is to be satisfied by the payment of $5.5 million in cash and the issue of 5,804,049 new Cello ordinary shares of 10 pence each (“Ordinary Shares”).

Cello is also pleased to announce the conditional placing (the “Placing”) of 5,333,333 new Ordinary Shares (the “Placing Shares”) at a placing price of 52.5p to raise £2.8 million before expenses. The Placing Shares have been placed with new and existing institutional investors.

The Board believes that the Acquisition will be earnings enhancing in the current financial year and continues the Company’s stated strategy of expanding its healthcare activities, particularly in the US.

Highlights

Consideration

    Initial Consideration to be satisfied by the payment of $5.5million cash and the issue of 5,804,049 new Ordinary Shares
    Additional payments aggregating up to $3.5 million may be payable in April 2014 subject to performance conditions, to be satisfied in a mixture of cash and new Ordinary Shares.  50 per cent. will be payable to the Seller, DVC Worldwide, LLC, as deferred consideration and the balance will be payable to management
    The cash element of the Initial Consideration will be funded through a combination of the net proceeds of the Placing and use of the Company’s existing banking facilities

    Operational

      MedErgy is a successful US-based healthcare communications consulting company. It was founded in 2002 by its current Chief Executive, Julia Ralston, and other current members of the senior management team
      Key services provided by MedErgy include strategic consultancy, scientific communications, and medical education and clinician learning
      Experienced and stable management team, who are all expected to remain with the Group following acquisition
      Strong financial track record with consistent organic growth since its inception, good EBITDA margins and good revenue visibility
      Long term relationships with blue chip client base

      Acquisition benefits

        Accelerate Cello’s expansion as a leading healthcare research and communications business
        Further growth in the important and attractive US market
        Greater exposure to, and enhanced ability to service, international clients

        Mark Scott, CEO of Cello, commented: “MedErgy will accelerate Cello’s expansion in healthcare research and communications and increase our exposure to international client briefs. The fit with our existing business is excellent and the growth prospects for the combined Group are exciting.”

        Julia Ralston, CEO of MedErgy, commented: “We are very excited about the opportunity to assist in growing Cello’s healthcare business and we are delighted to be part of a bigger organisation that enhances our ability to support our existing and future global clients.  The synergies and fit will benefit both our clients and the MedErgy team.”

        Cello Group plc
        Mark Scott, Chief Executive
        Mark Bentley, Group Finance Director
        020 7812 8460

        Altium
        Ben Thorne
        Paul Chamberlain
        Nick Burt
        020 7484 4040

        College Hill
        Kay Larsen
        Rozi Morris
        020 7457 2020

        Altium Capital Limited (“Altium”) (which is authorised and regulated in the United Kingdom by the Financial Services Authority) is acting solely for Cello Group plc in connection with the Placing and is not acting for any person other than Cello Group plc and will not be responsible for any person other than Cello Group plc for providing the protections afforded to customers of Altium Capital Limited or for providing advice to any person in connection with the matters described in this announcement.

        1. Introduction to MedErgy
        MedErgy specialises in consulting to pharmaceutical clients, with a focus on communicating the evidence needed by healthcare audiences to stay abreast of ongoing developments with regards to therapies and medical conditions. Its services are divided into three core areas – strategic consultancy, scientific communications, and medical education and clinician learning. MedErgy acts for a wide range of blue chip, US and international pharmaceutical and healthcare groups, including Johnson & Johnson, Boehringer Ingelheim, Pfizer, Bayer, Allergan and Genzyme.

        The business was founded in 2002 by its current CEO, Julia Ralston, and other members of the senior management team with private equity backing. MedErgy currently employs approximately 50 people and is based in a single office in Yardley, Pennsylvania, with an additional presence in London.

        MedErgy has demonstrated strong compound organic growth since its inception. MedErgy has no debt and is strongly cash generative. For the year ended 31 December 2010, MedErgy recorded net revenues of $9.0 million and profits before tax of $2.3 million (unaudited). As at 31 December 2010, MedErgy had gross assets of $6.0 million.

        MedErgy has maintained long term relationships with its clients and enjoys low client turnover. It typically begins each financial year with over half of its revenues fully contracted, and typically no more than 20 per cent. of unidentified revenues at the start of each year. This trend has continued in 2011 to date.

        Every member of the executive team has been with Medergy for over six years, and the average tenure of the 12 most senior staff is seven years. There has been no recent material staff turnover in the senior team. The entire senior team of MedErgy will remain with the enlarged Group following completion of the Acquisition.

        2. Background to the Acquisition

        Two core components of Cello’s growth strategy are the continued development of its healthcare and pharmaceutical business and further expansion into the important and attractive US market. The Acquisition is highly complementary to this strategy.

        Management believes that the healthcare and pharmaceutical sector is particularly attractive and benefits from a number of favourable trends:

          ageing populations;
          an increasingly global healthcare market;
          greater market access and reimbursement hurdles;
          highly scientific advances resulting in improved diagnostics and new treatments, particularly in areas of high unmet need; and
          the high costs and risks associated with product development and ongoing pipeline pressures to successfully commercialise a product.

          The increased exposure to the US market resulting from the Acquisition, together with MedErgy’s high quality client base, is also expected to create significant opportunities for the enlarged Group to sell its services on an increasingly international basis.

          The expertise and experience of MedErgy’s existing senior management team is expected to be of significant benefit to Cello, enabling the Group to develop further its position in the US market by accessing additional blue chip clients, and generating additional business opportunities in international markets.

          MedErgy will form part of Cello Group Inc., a wholly owned subsidiary of Cello. MedErgy will work closely with Cello’s existing US businesses to strengthen the Group’s presence with major pharmaceutical clients. It will also work closely with Cello’s UK-based health businesses to replicate the health communications expertise of MedErgy in the UK.

          3. Principal terms of the Acquisition

          Initial Consideration

          The Initial Consideration paid in connection with the acquisition of MedErgy is to be satisfied by the payment of $5.5 million in cash and the issue of 5,804,049 new Ordinary Shares. Approximately 88 per cent. of the Initial Consideration will be paid to DVC Worldwide, LLC (as Seller of 100 per cent. of MedErgy) and approximately 12 per cent. will be paid to management, including Julia Ralston, CEO of MedErgy.

          Mark Scott has a 0.08 per cent. beneficial interest in DVC Worldwide, LLC. Mr. Scott has undertaken to donate the entire amount of his proportionate share of the Consideration, as and when received by him, to the Kevin Steeds Lymphoma Fund.

          The ordinary shares must be retained by recipients for twelve months from the date of issue of the Ordinary Shares. In addition DVC Worldwide, LLC has agreed to retain 15.2 per cent. of the Ordinary Shares issued to it as part of the Initial Consideration for a further six months beyond the initial twelve month period.

          Deferred Payments

          Up to $3.5 million will become payable in April 2014 subject to the achievement of certain performance conditions. 50 per cent. of any amount payable will be payable to the Seller as Deferred Consideration and 50 per cent. will be payable to MedErgy management. The Deferred Payments may be settled in a mixture of cash and Ordinary Shares at the discretion of the Company, subject to a maximum of 75 per cent. of the Deferred Payments being payable in Ordinary Shares and a minimum of 25 per cent. in cash.

          Ordinary Shares issued as part of the Deferred Payments will be issued at the average Cello share price over the twenty dealing days immediately preceding the date of allotment of those shares.  The Ordinary Shares must be retained by recipients for twelve months from the date of the issue of the Ordinary Shares.

          Net current assets

          Net current assets of $0.5 million are to be delivered by MedErgy to Cello on completion, failing which there will be a clawback of the Initial Consideration on the basis of $1 for every $1 of shortfall.

          4. Background to and reasons for the Placing

          The Company is pleased to announce that Altium, which is acting as Broker and Nominated Adviser to the Company for the Placing, has on the Company’s behalf conditionally placed 5,333,333 Placing Shares at a price of 52.5 pence per share with certain institutional investors to raise approximately £2.8 million before expenses, on a reasonable endeavours basis. The Placing is not underwritten.

          The net proceeds of the Placing will be used to fund part of the Initial Consideration in connection with the Acquisition.

          The Placing Shares will represent approximately 7.4 per cent. of the diluted share capital of the Company following the Placing and completion of the Acquisition. The Placing Shares have been conditionally placed by Altium, subject to the terms of a Placing Agreement between the Company and Altium.

          At the Cello Annual General Meeting held on 17 May 2010, the Company’s shareholders granted the Company the authority to issue up to 5,876,219 ordinary shares on a non pre-emptive basis. Accordingly, the Placing will not be subject to further shareholder approval.

          The Placing Price represents a 13.2 per cent. discount to the closing mid-market price of 60.5 pence per Ordinary Share on 14 March 2011 (being the latest practicable date prior to the date of this announcement).

          The Placing is conditional, inter alia, on the Placing Agreement not being terminated in accordance with its terms and Admission occurring no later than 8.00 a.m. on 21 March 2011 (or such later date as the Company and Altium may agree, being no later than 8.00 a.m. on 30 March 2011). One of the conditions of the Placing is the Conditional Closing (subject only to satisfaction of the Initial Consideration) of the Acquisition.

          The Placing Shares will be issued credited as fully paid and will rank pari passu in all respects with the existing Ordinary Shares of the Company, including the right to receive and retain all dividends and other distributions declared, made or paid after Admission.

          Allan Rich and Mark Scott, respectively the Company’s Chairman and CEO (the “Related Parties”) are each subscribing for Placing Shares pursuant to the Placing (the “Related Party Subscriptions”).  Each of the Related Parties is a ‘related party’ of the Company (as defined in the AIM Rules for Companies) by virtue of their directorships in the Company. The Related Party Subscriptions are, accordingly, treated as ‘related party transactions’ under the AIM Rules for Companies. The Board of Directors of the Company (excluding the Related Parties), having consulted with Altium in its capacity as nominated adviser to the Company, consider that the terms of the Related Party Subscriptions are fair and reasonable insofar as the Company’s shareholders are concerned. The number of Placing Shares placed with the Related Parties and their resultant shareholdings following the completion of the Placing and the Acquisition, assuming the successful completion of the Placing and the Acquisition is set out below:

          Allan Rich – Existing holding 474,959 – % of existing issued share capital 0.8% – placing shares subscribed for 476,190 – resultant share holding 950,785 – % of enlarged issued share capital 1.3%

          Mark Scott – Existing holding 754,010 – % of existing issued share capital 1.2% – placing shares subscribed for 20,709 – resultant share holding 774,719 – % of enlarged issued share capital 1.1%

          5. Admission, settlement and dealings

          Application will be made to the London Stock Exchange for Admission of the Placing Shares to trading on AIM. It is expected that Admission will become effective and that dealings in the Ordinary Shares to be issued as part of the Initial Consideration and the Placing Shares which are to be issued on Admission will commence at 8:00 a.m. (London time) on 21 March 2011, at which time it is also expected that the Placing Shares will be enabled for settlement in CREST. Immediately following Admission and completion of the Acquisition, the Company will have 72,545,036 Ordinary Shares in issue.

Contact Us

Dianna Hillier

Dianna.Hillier@cellohealth.com

Phone 020 7812 8468

Address

Cello Health plc

Queens House

8-9 Queen Street

London

EC4N 1SP

Registered Office

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8-9 Queen Street

London

EC4N 1SP

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in England no.05120150