Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

It looks an 'Essentially' costly deal!

Essentially Group, the AIM listed sports marketing and media group, announced the acquisition of two leading agencies this week, Frontiers and Athletes 1. I see that it even received some nice coverage in the FT-well done the PR boys!

Frontiers is a sports marketing business specialising in cricket and Athletes 1 is one of the leading cricket athlete management agencies in the world-I never really thought of cricketers (self included) as Athletes!

Frontiers generates income from Cricket Sponsorship, Other Sport Sponsorship, Corporate consulting and Event management. Cricket sponsorship sales predominantly relate to contracts to sell in ground advertising/sponsorship for the perimeter boards of all English Test Match Grounds-a very nice little number.

For the year to 30 June 2006, Frontiers had audited turnover of £4.0 million and audited profits before tax of £0.4 million (£352,000 to be precise). Net assets as at 30 June 2006 were £0.4 million.

Athletes 1 operates an international sports management business with a strong focus on athlete representation, sponsorship and rights management within professional cricket. Clients include Anil Kumble, Ricky Ponting, Liam Plunkett, Jon Lewis, Mark Butcher and Graham Thorpe.

For the year to 31 August 2006, Athletes 1 had unaudited turnover of £1.2
million and unaudited profits before tax of £0.2 million. Net assets as at 31 August 2006 were £0.02 million. So it sounds to me like a really a small player.

I had an opportunity to participate in the placing supporting this deal (it was EIS qualifying so there was even some added incentive there) but shied away as I had the impression that the acquisitions, notably the Frontiers deal, were proving too costly.

As reported the initial consideration was £8.2million, with deferred consideration of up to £4.1million, depending on earn-out targets. Although some of the deferred in respect of the Athletes 1 deal doesn’t actually appear to be very deferred to me!

I understand that the acquisitions are expected to be earnings enhancing for the year ended 31st December 2007 and the Frontiers business in particular has great visibility, but it looks to me as if Essentially has paid through the nose for it.

Frontiers represents the largest chunk of the initial consideration of £7.9 million. Of this, £6.5m is in cash of which £5.2m is going to Pacific Investments, Sir John Beckwith’s private equity investment group. When has a private equity group ever sold out on the cheap! All the deferred consideration would be payable to management and not Pacific.

Despite the visibility, £6.5m initial sounds a lot for a business that has generated pre-tax profit of only £266,000, £164,000 and £224,000 in each of the years ended June 2004, June 2005 and June 2006 respectively. In support of the high price paid, the nature of the contracts with the Test grounds means that the group receives a lot of cash up front so operating cash flow is excellent andclearly a key attraction.

For the year ending December 2008 profit after tax for the Frontiers unit is estimated to leap to something in the region of £600,000 which goes somewhere to supporting the price. However, given the performance over the past 3 years I’m not sure how profits are going to leap so dramatically.

I think Essentially were desperate to do this deal to really beef up there business. It’s tough out there on the market for the tiddlers (even private investors prefer something a little bigger) and few seem to really worry about good old fashioned organic growth preferring to go for a business changing acquisition or two (or 10 or so in the case of SMC!).

The expenses of this tiny deal were incredibly £900,000 or just over 16% of the raising-wow that sounds a lot!

Although I did very nicely over the last 18 months through my holding in Formation Group, the other AIM listed sports agency, I’m never that keen on these small sports agency businesses where personal relationships between the client and the individual consultant are surely absolutely key. It’s not simply a matter of your business walking out of the door every night but rather your business operating on almost a virtual basis! Frontiers model appears to be different although the other businesses in the group appear to meet my virtual model.

Anyway, good luck to Essentially. I’m not too keen on the name (why do so many sports agencies have such stupid names, the biggest of the lot IMG has a nice simple name) but I hope all the acquisitions knit together as planned.


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