Published Date: 2021-10-08 | Source: INCE|Community | Author: The Finance Ghost
Invicta has been through a period of consolidation recently, focusing on major business lines and putting together important restructuring deals in the Asian business.
The group has been built around a dealmaking culture, so I knew it would be a matter of time until we saw another deal in South Africa. One of the issues has been a lack of opportunities available that wouldn't present a challenge for Competition Commission approval. In certain business lines, Invicta will need to grow organically in South Africa.
The SENS for the latest deal (a 78% stake in Dartcom Group) talks about a strategy to "diversify from its industrial base in South Africa" which can be achieved faster through acquisitions than organic growth.
Dartcom Group is a distributor of communication and renewable energy technology equipment and solutions. This includes radio frequency technology, fibre-related solutions, site monitoring equipment and renewable energy solutions. Dartcom also manufactures fibre optic cables in South Africa under licence from Furukawa Electric Company in Japan.
The deal also includes two properties which are key to the company's operations. Unlike in the office market where companies can move location with relative ease, manufacturing players like to own their properties as the cost and complexity of moving can be enormous.
The idea is to leverage off the existing engineering services and product distribution platform built over the past decades. Invicta will now bring telecommunications, renewable energy and battery storage technologies into that mix.
Impressively, the deal is part-cash, part-shares. This is often a great sign for shareholders of the acquirer (Invicta), as it means the seller sees Invicta as a growth partner. Of the purchase price of R566 million for the operating business, only R50 million should be paid in cash to the sellers.
There's a sting in the tail though. Invicta needs to repurchase 5.2 million shares to issue to the sellers. If the company can't do that, then there will be a top-up cash payment based on an assumed value per Invicta share of R27.28.
Invicta has already sourced around 4.8 million of the shares, with a specific repurchase of 3.9 million shares needing to be approved by shareholders for an aggregate consideration of R109 million (well below the current on-market price for those shares). There are another 1.5 million treasury shares housed in an Invicta subsidiary, so I think it is highly unlikely that Invicta won't find the 5.2 million shares required.
The properties are worth R177.6 million and there is outstanding debt against them, so Invicta will pay a further R64 million in cash to buy the properties. There's also a small payment of under R0.9 million for the ICASA Licences.
In total then, Invicta is most likely on the hook for R115 million to the sellers plus at least R109 million to repurchase shares. The bulk of the deal value is settled through shares, which is a welcome return to form for listed companies doing deals in South Africa.
Dartcom only booked R14.2 million in profits for the year to March 2021 and has a net asset value of R226.8 million (both numbers exclude the properties). The trading performance was severely impacted by the pandemic and a "significant increase" is expected, so the forward multiple (based on FY22 profits) should be much lower than the trailing multiple.
The profit warranty is for Dartcom to deliver cumulative consolidated net profit after tax of at least R349 million over 3 years, so Invicta is putting on the pressure. If the performance exceeds this by more than 5%, there's a participation for the sellers up to a maximum payment of R72 million. If the result is at least 5% worse, then there is a clawback mechanism limited to a maximum of 40% of the deal value.
Furthermore, the sellers are locked in on 10 million of the shares they receive, which may only be sold in equal tranches over three years. Interestingly, the lock-in doesn't apply if there is a "significant deterioration in market conditions" that affect the price or earnings of Invicta's shares. That's a "sell now, fight later" clause if ever I've seen one, with plenty of room for debate. Nevertheless, it's an important mechanism to protect the sellers.
Invicta has committed to a cumulative dividend over three years of R5.15 per share. If there's a shortfall in that, Invicta will need to pay whatever the shortfall is on the shares received by the sellers. In total, this is a R85 million commitment.
There were proper brains on both sides of the table in this deal. It's wonderful to see. To further enhance your understanding of these types of deals, make sure you listen to the latest episode of Magic Markets which deals with such transactions (the timing of the show vs. this deal was incredibly lucky!)