Shares of market darling Catapult Group International Ltd (ASX: CAT) will be placed in a trading halt today pending a material acquisition and capital raising.
Catapult Group is a company that provides hardware and software used by elite sports men and women, as well as sports teams around the world. Providing real-time data, the tools help to monitor and measure the fitness and skills of athletes or assist with their training techniques.
The company has generated very strong sales growth which has helped to propel the shares higher. They have gained nearly 97% since the beginning of the year, compared to a 1.7% gain for the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO), and have more than tripled over the last 12 months.
The strong lift in share price does give Catapult a good opportunity to raise capital without diluting current share ownership too greatly.
Catapult Group will offer existing shareholders the opportunity to purchase shares via a fully underwritten non-renounceable pro-rata entitlement offer. The terms of the offer dictate that eligible shareholders (those on the register on Friday, 15 July) can buy 1 new share for every 10.65 shares they currently own (to raise $32 million), while there will also be an institutional component to the raising (to raise $68 million).
The issue price is still yet to be determined, although it will be between $2.70 per share and $3.30 per share. Compared to yesterday’s closing price, that would represent a discount of between 28.9% and 13.2%.
Who is Catapult Group acquiring?
In a separate announcement to the market, Catapult Group said it was acquiring XOS Technologies, Inc. (XOS) as well as Ireland’s PLAYERTEK.
XOS is a business located in the United States that provides innovative digital and video analytic software solutions to elite sports teams in the U.S., which seems like a good fit for a company like Catapult. Catapult believes this acquisition will strengthen its strategic positioning, whilst also generating significant potential synergies and allowing it to enhance its own product offering.
Management estimates suggest XOS will deliver approximately $34.3 million in revenue (based on current exchange rates), $27 million in annualised recurring revenue and $8.3 million in earnings before interest, tax, depreciation and amortisation (EBITDA) in the 2016 financial year.
On a pro forma basis, the acquisition would likely propel Catapult’s EBITDA into positive territory for the 2016 financial year, while more than doubling its sales. With an acquisition price of US$60 million ($80.1 million) for XOS, it suggests a transaction multiple of 2.4x revenue and 10x EBITDA.
Meanwhile, PLAYERTEK is a smaller acquisition but still strategic. The acquisition, which is subject to customary closing conditions, will cost just under $5 million with $3.6 million of that payable upfront. The remaining $1.3 million is payable in scrip consideration via the issue of 424,579 new shares being issued.
The product was commercially launched in June 2015, but has already been adopted by more than 140 teams in Europe.
Should you buy?
Before I continue, it needs to be noted that two of the group’s major shareholders (representing 61% of existing shares) will not participate in the entitlement offer. To be fair, they do have huge exposure as it is, but that is something investors should keep in mind before they decide whether to participate in the offer.
I should also point out that Catapult’s shares aren’t necessarily cheap, even with the discount of the entitlement offer being applied, which is something else investors need to consider.
In saying that, Catapult Group is a great business that could still have plenty of growth ahead of it. The acquisitions announced today could greatly enhance the product Catapult can offer to customers (and potentially create cross-sell opportunities), while it has also shown signs of breaking into the sub-elite level of sports teams around the world, which could be a lucrative market in itself.
Catapult’s valuation is one of the only things that has been stopping me from buying shares in the company itself and, so far, that appears to have been a grave mistake on my behalf. The shares aren’t cheap, but that doesn’t mean they won’t climb any higher than their current price tag so I would encourage investors to do their own due diligence into the shares.
Shares will remain in a trading halt for today and tomorrow and are expected to re-open for trading on Friday.
CAT Price at posting:
$3.80 Sentiment: Buy Disclosure: Held
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