Arrow/Lowell - valuation
All,
TDR have been after Arrow since early December and the latest hike in offer price almost. The latest iteration now values the company £100m or 6% higher than the first bid at nearly £1.8bn EV - including portfolio financing. To explain four iterations of bids to arrive at this point we need to isolate the poco from the propco.
OpCo Profitability - top-down:
To measure the profitability of a debt purchaser we tend to overlook one good old-fashioned metric that guides us in most other sectors: EBITDA. Not Cash-EBITDA, but an average EBITDA over several periods is not a bad indication of what value is actually generated. Subtract CapEx and we can reasonably well compare one debt purchaser to another without diving endlessly deep into their portfolio specifics, which can vary quite significantly.
Compared to Lowell:
- Arrow’s Pre IFRS16 EBITDA has been around £120m in 2018/19, putting the entire operation at 15x pre-pandemic EBITDA - not off the charts, but even in today’s world a multiple a fast growing Steinhoff Pepco is hoping to achieve for instance.
- Lowell by comparison was refinanced - including E600m of fresh equity - at £2.9bn on a pre-pandemic EBITDA of £180m or 16x. Presumably Permirea paid up to retain control of an existing deal and for the sheer size of the company.
Option 1) 10% Opex reduction
- Permira’s equity in Lowell makes up some 20% of EV and presumably TDR are not looking to finance the entire acquisition from their own capital for long. If TDR want to earn 25% on their 20% top slice of Arrow, at a 15x multiple, then they must consider the company to be worth £2.1bn by end of 2023 or to earn £140m in EBITDA, provided that multiples remain constant and that debt does not grow. (The latter is not a reasonable assumption, but let’s keep it for the hypothetical case.)
- Both companies have been struggling to cover interest bill for years - like most other debt purchasers and the “economies of scale” argument has yet to deliver. The only other way to raise EBITDA is then to finally cut costs - in Arrow’s case of 10% of Opex.
Option 2) The TDR affiliate transaction
TDR are not a cost cutting sponsor however. Looking back at Algeco, they could however have plenty of fun buying portfolios elsewhere and then introducing those via affiliate transactions, leaving everyone else in the dark.
However, with everyone else gearing up to take advantage of the forthcoming “buyers market” it seems unlikely that debt collectors will become sustainably CF-positive any time soon. We certainly would not do any more than flip any associate Arrow primary issue.
Wolfgang
________________
E: wfelix@sarria.co.uk
T: +44 203 744 7003