my take on navitas's recent acquisition

My take on Navitas's recent acquisition, for what it's worth...

? Navitas is acquiring SAE for A$289 million, representing 8.75x estimated CY2010 EBITDA in other words they are buying additional earnings for less than what their own are valued at by the market, nice!

? The acquisition is expected to deliver high single digit adjusted EPS accretion in FY2011 on a full year pro forma adjusted basis (based on broker consensus estimates for Navitas) They expect the aquistion will improve their earnings immediately and not take years to develop into a profitable arm. Nice, let?s see if they can now back it up.

? The transaction will be funded by way of new debt facilities, a fully underwritten institutional equity placement and issuance of shares to the vendor

? Post acquisition, Navitas will retain a strong balance sheet with material additional headroom under new facility. They have taken out a line of credit for $200 mill and will be using $175 million to partly pay for the SAE aquisition

? Navitas will pay a deferred amount on any final audited EBITDA in excess of A$33 million in CY2010 at the same 8.75x multiple (in shares at the institutional placement price) If the earnings surprise on the upside from this acquisition they will pay more correspondingly.



Strategic Rationale

The acquisition provides Navitas with a number of benefits including:

? Expansion and diversification of earnings both in terms of geography and product offering Could be a good or bad thing

? A high demand complementary new product range that will augment existing Navitas offerings

? Further diversification of Navitas? global footprint and student profile in the key Australian, European, UK and US markets Navitas are already operating in overseas markets so I don?t see this as any great leap of faith

? Potential to leverage brand and curriculum

? Ability to leverage expertise to add value to marketing and student recruitment Comforting to know they are staying within their own industry and therefore field of expertise

? Attractive financial profile They are not buying a heavily indebted company





Financial Impact

The acquisition is expected to have the following impact on Navitas:

? High single digit adjusted EPS accretion in FY2011 on a full year pro forma adjusted basis (based on broker consensus estimates for Navitas)

? Positive overall effect on EBITDA margins

? Material revenue contribution from foreign currencies (EUR, GBP and USD) If our dollar stays put or falls then positive, if our dollar continues to climb then a negative, currency tends to even out in the long run so I?m not too concerned

? Maintenance of conservative gearing profile The debt to equity ratio may end up being as high as 80% depending on the success of the retail placement, which is high but it should be paid down quite quickly by the accretive earnings. I?d expect the dividends to stay much the same in 2011 as 2010, maybe a small increase only, in order to reduce the debt load quickly.





Acquisition Funding

The acquisition and transaction costs will be funded by a combination of:

? Debt: A$175 million in draw down on new facilities

? Equity: A$100 million from a fully underwritten institutional equity placement

? Shares to vendor: A$19 million They have effectively paid $294 million for this acquisition to hopefully gain additional earnings of $33 million, sounds fair if they can achieve it. From their track record I would back them to deliver.