Sub-Sahara Capital's Deal for Metro Peech & Browne
Originally published on X (formerly Twitter) and imported directly as is.
Sub-Sahara Capital just closed a deal for Metro Peech & Browne.
Let's unpack the details of the deal and the winners and losers.
Part 1 is on Sub-Sahara Capital Group, who I think was a big winner.
Sub-Sahara Capital Group (SSCG) is an investment firm often associated with Innscor due to a close working relationship, despite not having common shareholders.
Importantly, SSCG controls the wholesaler Gain Cash & Carry, while also maintaining other diverse investments.
The wording in the press may make you think SSCG has bought Metro Peech & Browne (MP&B) as a whole, but in reality, SSCG has just bought the assets of Metro Peech and will transfer them to a Special Purpose Vehicle (a separate company created to manage financial risks).
This is an important difference, as it means SSCG gets all the nice stuff (the assets), and none of the bad stuff (the liabilities).
The below is structure of the deal.
My initial thinking is that this was a smart move by SSCG.
By buying MP&B to add onto Gain Cash & Carry, they become even more influential with more branches, buying power, and overall market influence, especially with suppliers.
At $5.2m, it looks like SSCG got a good deal since they effectively bought the business at the fair value of the assets.
However, a business is more than just a collection of assets. Putting the systems and processes to coordinate those assets is what makes the business.
This is why typically, when an acquisition takes place, there is a premium paid over the value of the assets.
In 2022, the average premium paid in M&A deals was 54% and so SSCG is probably pretty happy to pay just a 5.6% premium.
I also put the MP&B projections for the next 5 years in a DCF valuation model. Initially I got a confusing value of $85k, however after my assumptions were rightly challenged I updated the model which gave a value of ~$14m.
This means one could say MP&B is worth $14m vs the $5.2m that they have paid but I wouldn't read too much into the exact numbers as its subjective. The report had a value of $7.8m.
But it does confirm that SSCG have probably bought MP&B at a good price.
I also think that even though the deal already looks pretty good for SSCG, the current projections maybe on the conservative side.
In 2017 MP&B had $224m in revenue, if we assume a 50% exchange rate premium that's about US $150m.
The projections have $129m revenue in 2028 with a profit margin of 1.6%. Sounds conservative. I wouldn't be surprised if they hit $150m by 2028 with margin above 2%.
It would also makes sense for SSCG to have been conservative when providing projections.
If you are negotiating a deal to buy an asset, you don't want it to seem like you are going to make so much money.
Even the the ancient scriptures says so 😄.
So, I think SSCG won on the deal but there probably weren't many alternatives.
There are also some losers. If MP&B increase revenue by $50m, someone will lose market share.
What about the creditors and employees? Will Spear Capital recover any amounts?
There is too much to unpack. Will need a Part 2 coming soon on the potential losers in the deal.
This analysis is based on the information I have. I could be missing some details or just be wrong. What do you think?
Please comment and let me know what you think.
One final point. I reposted this to be as accurate as possible even if the details may not have change the narrative. The below are the key facts that were updated from the pervious thread. Thanks!
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