SME-financing business CML Group (ASX: CGR) has unveiled a material acquisition courtesy of a buyout of Classic Funding Group (CFG) for $11 million – a company it has been eyeing for the past 2 years. The purchase is to be funded by a new A$25 million facility and CML’s existing equity on balance sheet.
CML will initially require $18 million to purchase CFG’s shares, made up of $11 million for the entirety of its shares and another $6 million as a “goodwill” payment.
A further $7 million has been allocated for the replacement of mezzanine debt provided by a related party to CFG.
The acquisition is still conditional on consent from CFG’s funder in order to transition its warehouse facilities to CML, although the deal is expected to be completed by mid-October 2019.
In addition, given the fact that the deal is yet to be formally completed, CML vowed to publish updated earnings guidance at its annual general meeting scheduled for November 2019.
Classical Funding Group is an Australian-owned financial services company with a track record that spans over 25 years.
In that time, the company has provided asset finance solutions to a broad range of customers within the equipment finance and invoice discounting market niches.
CML said that the acquisition will accelerate its active strategy to gain market share in the expanded service offerings that it has developed in-house and launched over the last 2 years.
More specifically, the acquisition will quintuple CML’s invoice discounting funds and is set to add 40 clients and more than $400 million of annual invoice turnover compared to CML’s existing loan book of $6 million, a portfolio of 7 clients and around $100 million in turnover.
Larger, stronger and more earnings accretive
As a company, CML provides finance to small and medium-sized businesses (SMEs) and its primary service is what’s known as “factoring” or “receivables finance”.
Via its factoring facilities, CML provides an advance payment of up to 80% of a client’s invoice to help their business overcome the cash pressure of delivering goods or services in advance of payment from their customers – which is typically between 30 and 60 days.
Other services include trade finance to assist clients finance purchases, as well as equipment finance to assist SME’s with capital expenditure on items required to operate their businesses.
According to financial details published by CML, the addition of CFG’s client base and experienced staff will bring forward CML’s strategy to build volume in invoice discounting, but also, expand its equipment finance unit.
CFG’s current loan book is currently worth more than A$100 million, which, when added to CML’s will add “critical scale” to its business and take funds advanced from $20 million to over $120 million.
In a market update, CML announced that following a “record earnings result” in the current financial year, CML’s business continues to perform strongly with record new business volumes for invoice finance achieved in July 2019 and record volumes achieved for equipment finance in August 2019.
By acquiring CFG, CML also forecasts the combined entity to be earnings per share accretive in the next financial year with “additional synergy benefits to be delivered in 2021”, the company said.
“We are confident that the acquisition will stimulate our business even further and have been looking at Classic Funding for some time. Following an extensive due diligence process, we are confident that the synergies will be easily achievable,” said Daniel Riley, chief executive officer of CML Group.
Mr Riley added that “having shown that we can build these businesses from a standing start and having also demonstrated the ability to acquire and integrate invoice factoring businesses we are comfortable that today’s announcement will enable us to fast track our expansion and drive shareholder value as we have demonstrated over the last 5 years.”
Share price and dividend boost
As a result of this morning’s announcement regarding its material acquisition, CML Group shares responded strongly by advancing 18% up to $0.495 per share, thereby valuing the company at around A$100 million by market capitalisation.
In a further boost for shareholders, CML is also planning to pay out a dividend of $0.014 per share later this week with an ex-date of 13 September and a payment date of 8 October 2019.