One of the things that are notable in IFL's case, which is somewhat unusual for a company with an acquisition-led growth strategy, is management's apparent respect for equity capital.
Until the Shadforth acquisition, IFL's issued share capital has remained unchanged in the 7 years I have been a shareholder (I came to IFL via the merger with Australian Wealth Management in 2009).
At the same time, despite acquisitions being funded by debt, the strong cash generation ability of the company means that the company's balance sheet has been run with very little debt.
Net Debt/(Cash) @ Period-End ($m):
2009: -102
2010: -138
2011: -56
2012: 9
2013: 1
2014: 57 (Paid $77m in cash for Shadforth purchase)
2015: 29
Current: 57.3 (@ 30 Dec, 2015) [Excludes $42m of Other Financial Assets, such as Available for Sale Investments, so you could really argue the company is virtually debt-free today].
On the numbers I have modeled, at the right consideration multiple for StatePlus (say, a consideration of $900mn (various media sources have been quoting figures in excess of $800m, and up to $1.0bn), paying 9x EV/EBITDA on a post-synergy basis [*]), the deal could, at a stretch, be 100% debt funded.
Because of the cheap cost of debt these days, a 100%-debt based deal would be nicely EPS-accretive, by 16%, I calculate.
For balance sheet context, and as a starting point for discussion, such a 100% debt scenario would result in the company starting out with NIBD-to-EBITDA of around 2.7x which, while clearly not in line with the company's historical solvency ratios (which reflect a distinct hostility to debt), is still do-able, I feel, given the reliable and significant free cash flow capability of this business (OCF-to-Capex typically averages around 8 or 9x).
Put another way, on a 100% debt funded basis, EBITDA-to-Net Interest Coverage will be around 6.2x. Sure, its a bit tight, but not claustrophobic-ally so.
A more realistic 80% debt/20% equity funding mix, which - assuming shares are issued at a 10% discount to the last price - would require the issue of an additional 24.3m shares (equivalent to 8% of current issued capital).
In this case, NIBD-to-EBITDA would be a more manageable 2.2x and EBITDA-to-Net Interest would be about 7.5 times. EPS accretion would be around 12%, I calculate.
If the board drew a line in the sand at, say for NIBD-to-EBITDA to not exceed 1.5x, then this would require a 60% equity component (16% additional shares issued) and 40% debt. The accretion to EPS in this case becomes 8%.
(This last scenario approximates what I see is being mooted by the media, i.e. funding that involves a ~$300m equity raising)
Bear in mind that, given the number of unknowns at this stage of the process, this exercise is intended to be merely indicative of some potential outcomes.
[*] Note that a 9.0x EBITDA multiple implies $100m of EBITDA which, given StatePlus currently generates $75m of EBITDA, will require an additional $25m of synergies to be extracted by IFL. Given the scope and size of StatePlus, combined with IFL's track record at succesfully extracting synergies from the businesses it has acquired over the years, this looks like a most reasonable assumption.
IFL Price at posting:
$8.23 Sentiment: Buy Disclosure: Held
(20min delay)
