SLM will announce today that it has sold its Business Process...

SLM will announce today that it has sold its Business Process Outsourcing division for a consideration of $375m, effectively representing an multiple of 7.5x on FY12 EBITDA.

For context, the price SLM will received for BPO is almost exactly the current market cap of SLM, and about 60% of its Enterprise Value.

I expect SLM results this morning will show that BPO probably generated $46m EBITA out of Group toal of $96m in FY12, pre-corporate overheads. That equates to about 45% of pre-corporate EBITA.

Post corporate overheads that have been adjusted for an allocation to the BPO division, I estimate that BPO's contribution is around 57% of EBITA.

In other words, SLM has received 60% of its EV in exchange for around 57% of its earnings. That's an OK deal, I feel, but nothing to get overly excited about.

While it dramatically removes any capital raising discount that might have been hanging over the stock (pre-this deal, NIBD-to-EBITDA was 2.6x), it leaves the company with an inferior quality earnings stream (Targeted Media [the catalogues business] and Customer Contact [call centres]).

However, the resulting valuation metrics are significantly enhanced by this deal, more than offsetting the lower quality earnings profile.
Specifically, EV/EBITDA falls to 4.2x following the sale of BPO, compared to 5.9x before, FCF yield on Market Cap rises to 12.6% from 7.5% and FCF yield on EV jumps to over 20% from 8.5% pre-deal. [*]

All in all, this is a significantly value-accretive deal, and while the market will almost certainly approve of it, the thing that worries me is that this morning's announcement is silent on the scope and/or prospect for returning the $140m in net cash (or part of it) that will be sitting on SLM's balance sheet once the deal is settled. Note that SLM has 40cps in excess franking credits.

So it becomes a bit of a "Trust Us" exercise, as the company's management seeks to deploy the surplus capital into the digital space, probably by acquiring something. I'm not sure they can guarantee not overpaying for acquisitions in the digital economy. My experience is that almost all acquirers tend to destroy shareholder value.

[* I haven't worked out the extent of the value accretion from this deal based on the P/E multiple because the company has not disclosed how much D&A is attached to the BPO business.]

Cam