When considering merger and acquisition (M & A) deals at an SME level, it can be instructive to look to larger deals involving listed companies simply because there is significantly more information disclosed than would be the case with a deal between two private companies. This information may give pointers as to the deal multiples and deal structures that can reasonably be achieved. One such deal is the recently announced acquisition of Global Group (a medical recruitment specialist) and Impellam an acquisitive listed group.
Impellam’s CEO made the following announcement to their investors:
“Global Group was acquired for an initial consideration of £17.3m and assumption of debt of £7.1m. In addition there are £4.4m worth of guaranteed deferred payments payable over the next 2-3 years and contingent earn out payments of up to £8.4m dependent on the performance of the Irish and Australasian businesses over the next 2-3 years. Key members of the management team including shareholders Justyn Randall and Ronan Corrigan will all remain with the business and be responsible for accelerating the growth of the business in Australasia and Ireland. Global Group achieved an adjusted unaudited EBITDA of £5.5m for its year ended 31 March 2015.
The acquisition was financed through an extension of the Company’s existing term loan with Barclays Bank plc. Global Group’s invoice discounting facility with ABN Amro Bank plc of £11m will remain in place and will continue to fund the Global Group’s working capital requirements under Impellam’s ownership.”
Looking at some of the parts of that announcement in a bit more detail:
“Global Group was acquired for an initial consideration of £17.3m and assumption of debt of £7.1m. In addition there are £4.4m worth of guaranteed deferred payments payable over the next 2-3 years and contingent earn out payments of up to £8.4m dependent on the performance of the Irish and Australasian businesses over the next 2-3 years”
In essence the Enterprise Value (EV) which, if you like, is the value attributable to both equity holders and debt holders) here is somewhere between £28.8m and £37.2m. The reason for the uncertainty being “earn out” payments which will be geared toward achieving specific future performance targets, so, clearly, may or may not be paid in full.
£7.1m of the EV belongs to holders of debt – I suspect this is mostly the ABN Amro Invoice Discounting facility – leaving £21.1m to £30.1m as being available to the equity holders, of which 70% was paid upfront. Some flexibility has been offered by the sellers on the remaining 30% – it’s possible that Barclays’ provision of additional debt necessitated a portion of the consideration to be deferred.
“Key members of the management team including shareholders Justyn Randall and Ronan Corrigan will all remain with the business”
Messrs Randall and Corrigan are aged 39 and 45 respectively, which from the buyer’s perspective is really in the right age group. A management team approaching retirement age would create doubt as to the energy levels and longevity of any continuing involvement. It appears that together, Randall & Corrigan owned just under 60% of the equity of Global Group. It would likely have been a full exit for the other shareholders who seem not to have been part of the management team.
“Global Group achieved an adjusted unaudited EBITDA of £5.5m for its year ended 31 March 2015.”
There are a couple of reasons why EBITDA is a measure of profitability that is often cited in M & A deals. It is a good indication of a company’s cash generation, and it removes parts of the P & L account that may vary significantly under different ownership – for instance taxation charges for large international groups are pretty opaque issues as is widely reported, and the way the company is financed may change (for example, debt facilities that create interest charges might be repaid).
On this occasion reference is made to an adjusted EBITDA figure – this is likely to relate to costs that will not feature under the new ownership – perhaps the combined business can be accommodated in existing premises thereby creating a saving, or there may be costs that relate to the shareholders who aren’t staying on post deal which will now cease.
Ignoring the earn out part of the deal for a moment, the EV/EBITDA multiple implied is 5.2, but more realistically (and bringing in the earn out based value) the multiple is somewhere between 6 and 7.
So, what might we learn from this deal?
Global Group were clearly specialists in their area, and had themselves grown quickly both organically and by acquisition in recent years, operating in UK and International markets. They appear to have reacted quickly to changes and opportunities in their markets and invested heavily in technology and marketing. Ambition and agility are probably the key words to take from this.
The strength of the management team and their willingness to stay on will have been fundamental to securing the value for all of the shareholders, and flexibility on deal structure will also have helped.
If you would like to discuss your exit planning and maximising the value of your exit, please get in touch with corporate finance director, James Price, or your normal UHY contact.