For a small cap with negligible press coverage Empresaria plc equity has done well since January when mentioned here at 95p. It currently trades at 146.5p (midprice).

A day before this shareholder’s Easter break the firm announced its purchase of 60% of private German recruitment firm Headway Holding gmbh (with an option to take 100% later). Here the cliché “company transforming” is apt: Headway turns over the equivalent of about 70% of Empresaria’s sales; and in net asset terms (exc intangibles) is 15% larger. The price appears fair (x3.2 sales) given growth rates and the macro outlook in the new Empresaria’s two key markets of Germany and the UK (so long as it lasts, but that is another post).

As presented in the acquisition document the Headway accounts are generally sound and shed light on its operations, but are hardly comprehensive (no full group P&L or B/S - extraordinary). The dreaded category “Other” makes up 15% to 20% of the Headway totals depending which P&L line item is considered – and much more when it comes to B/S creditors. Even within the broken out divisions some items still glare in the absence of explicative prose: for example, the headwayjobcenter division's “Other operating expenses” mysteriously totals some 19% of sales. That is a boatload of sundries.

German GAAP rules emphasize prudence, substance over legal form and creditor protection rather than the exhaustive detail of US GAAP or the “true and fair” principle of UK GAAP. Part of the consequence of this is that no cash flow statements are included in the acquisition document (they are not obligatory for unlisted German firms) and can only be derived for the three largest divisions (about 80% of revenue). Unfortunately, this makes building a picture of how effective overall cash-management is difficult to assess.

Nonetheless, some observations can be made:
  • The headwaypersonal division is cash generative thanks (this cyle at least) to robust debt collection. Cash generation would have been markedly better but for large provisions for legal and compensation costs associated with a failure to employ "disabled individuals". It is not clear if these are one-off although that would seem a reasonable assumption.
  • headwayjobcenter has eaten cash at the operating level (partly funded through intercompany loans) in support of a doubling of turnover. The cash bleed of this one division is such that it has almost certainly made the entire group cash flow negative in 2006. Should Empresaria care to hire the scribe, he would happily draw on previous-life experience, immeadiatly review provisions and put a credit control team in place to chase debtors. Or flog the unit.
  • headwaylogistic has also grown the topline impressively and achieved positive operating cashflow in so doing. However, the level of intercompany loans it carries may suggest some lumpiness in its cash conversion through the year.
  • All three main divisions look likely to provide positive debtor-to-cash surprises should rigourous working capital initiatives be instituted.
  • Absence of full group statements hides, most notably, retained earnings. Derived owners equity, assuming retained earnings are zero, suggests a debt to equity ratio approaching 10. Realistically retained earnings is probably negative and Headway appears over leveraged,
  • The new group is forecast to have a debt to equity ratio of 1.7. Based on the incomplete data presented that looks a sporty number.

As for the acquisition finance, it is via a placement (an excellent sign, if academic studies are to be believed) 70% of which is to be paid in by 3 existing institutions and a new fourth one (Insight Investment, part of the bank HBOS plc). The 30% difference is taken up by the Chairman (Anthony Martin) and the CEO (Miles Hunt). Thus, at a stroke, key insiders maintain significant equity (>30%); the shareholder base has been broadened; and 15% of the proceeds are to go towards reducing the new group’s overall debt levels.

The deal is attractive; and the purchase ought to be approved by shareholders at the 30 April EGM.



NB: The author owns Empresaria equity.

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