Absolute Capital Management Holdings has acquired TCA Group Limited, which provides capital introduction and investor relations services to fund managers.
The acquisition creates significant group distribution capability for ACMH's funds and consolidates a significant part of its third party introduction fees within ACMH.
The maximum consideration payable by ACMH is EUR 15.7 million, to be satisfied wholly by the issuance of new ordinary shares and subject to a range of performance criteria. The maximum consideration represents a multiple of 4.5 times TCA's target EBITDA in 2006 and 2.9 times its 2007 target.
Commenting on the acquisition ACMH's Chairman and Chief Executive Officer Sean Ewing said: 'This is a logical and highly beneficial transaction for ACMH, as it will be immediately earnings and margin enhancing. Strategically it will bring in-house sales, marketing and distribution capabilities that were previously outsourced. TCA also has the ability to grow aggressively through existing and future relationships with other managers. Acquiring TCA is the first of a number of bolt-on opportunities we are pursuing.'
John Lowry of TCA said: "We are very pleased to be joining the ACMH team. The hedge fund industry has changed significantly over the last few years with a growing requirement for managers to have a clear understanding of the evolving demands of an increasing investor base. As our business has developed dramatically alongside ACMH, there is significant logic to combine our complimentary businesses. As well as now acting in-house for ACMH, TCA will continue to identify and raise capital for other talented investment managers, and will examine a range of related opportunities from manager seeding to innovative product manufacturing and distribution across the globe."
The acquisition will be financed wholly through the issuance of new ordinary shares in ACMH in up to five tranches as follows:
|Initial consideration||2,500,000 ordinary shares allotted and credited as fully paid|
|Earn out 1||Up to 1,500,000 ordinary shares allotted and credited as fully paid based on target EBITDA of TCA of EUR 3.5 million for the year ended 31 December 2006|
|Earn out 2||Up to 1,500,000 ordinary shares allotted and credited as fully paid based on target EBITDA of TCA of EUR 5.5 million for the year ended 31 December 2007|
|Deferred payment 1||On the third anniversary of the acquisition such number of shares in ACMH equal to EUR 2 million|
|Deferred payment 2||On the fourth anniversary of the acquisition such number of shares in ACMH equal to EUR 0.5 million|
The Earn out consideration shall be allotted in full provided actual EBITDA is equal to or exceeds 70% of the thresholds shown above. If Actual EBITDA is below 70 per cent of the thresholds the allotments will, subject to the absolute discretion of ACMH, be pro rated accordingly (such that if actual EBITDA were 69 per cent of the threshold the allotment will be 69 per cent of the corresponding number of shares shown above).
The deferred payments are conditional on the continued employment of key executives of TCA and will be calculated by reference to the average middle market price for an ordinary share for the 20 consecutive business days ending two days prior to the date of issue of the respective shares.
Assuming all performance criteria is met and the earn out consideration becomes due in full the maximum consideration for the acquisition, based on the closing price of an ACMH ordinary share the day prior to this announcement, is EUR 15.7 million.
Application will be made shortly for the admission to AIM of the 2,500,000 initial consideration shares. The former shareholders of TCA have provided an undertaking that, in aggregate, up to a maximum of 500,000 of the initial consideration shares may be sold or transferred in the 12 months following completion. The remaining initial consideration shares are subject to a 12-month lock-in arrangement.
Consistent with ACMH's strategy of aligning the long term interests of key employees with those of its shareholders the majority of remuneration in respect of TCA staff will be performance related. Key employees of TCA will participate in bonus pool arrangements similar to those already in place within ACMH. The level of the bonus pool will be subject to prior approval by ACMH's remuneration committee.
Background notes: At 31 December 2005, TCA had introduced assets with a value of EUR 294 million to five fund managers. At 30 April 2006 this had increased to EUR 447 million in respect of six fund managers. Historically TCA has been the largest introducer of assets to funds under the management of ACMH.
TCA, which is domiciled in the Cayman Islands, has outsourced fulfillment of certain functions, which include due diligence on fund managers, portfolio analysis and investment allocation recommendations, to Tara Capital SA ('Tara'), a Geneva-based company. The terms of the arrangement are formalised in an agreement dated 21 March 2006, which provides for Tara a fixed monthly fee for services provided to TCA to receive a monthly fee for services provided to TCA.
The senior executives of Tara are John Lowry and Cyril Delamare, with five other employees engaged in support roles. The agreement between TCA and Tara is terminable on 30 days notice. However, if such termination occurs prior to the fourth anniversary of the acquisition of TCA by ACMH, John Lowry and Cyril Delamare have undertaken to enter into service agreements, in a pre-agreed form, with TCA.
TCA is not required to have its accounts audited or to file them at the Register of Companies in the Cayman Islands. The following financial information on TCA has therefore been extracted from unaudited management information. In the 12 months ended 31 December 2005 TCA generated operating profits of USD 3.1 million from income of USD 4.3 million. Operating profit is stated after a payment to Tara of USD 0.7 million. At 31 December 2005 TCA had net assets of USD 4.3 million, including share capital of USD 50,000.
TCA has declared a pre-sale dividend of EUR 4.25 million payable to its former shareholders. TCA will pay this liability during 2006 as the corresponding assets and liabilities are realised. As such the principal assets acquired by ACMH are the goodwill associated with the business of TCA and its entitlement to future commissions in respect of assets previously introduced by TCA to fund managers, including ACMH.