Trakm8 acquires Box - a good deal?

This week TRAKM8, a company that I have mentioned several times on my blog, announced a proposed reverse takeover of BOX TELEMATICS, one of the UK leading providers of fleet management systems. The acquisition comprises an initial cash consideration of £3.5m plus the repayment of a Director's loan of £750,000.

The acquisition is being funded from TRAKM8's cash reserves, a new debt facility of £2.5m and a subscription by the Directors for new ordinary shares at a price of 22p to raise £720,000.  They will also raise £1.35m through a placing at 22p for additional working capital purposes.

Is this a good deal for TRAKM8's  existing shareholders?

On the face of it, it looks like an outstanding deal.

Firstly, BOX brings with it £8.4m in revenues and profit before tax of £850,000 (2012). The combined group will boast revenues in excess of £13m (based on 2012 figures) which I would expect to rise substantially in future years. I'm not going to guess at profit, but suffice to say, with the enhanced business opportunities and cost savings for the enlarged group, I would expect profits to be very healthy indeed alongside strong cash flows.

The market reacted very positively to the deal and the share price leapt up over 40% on the news, but even at 29.25p per share the combined group has  a market cap. of just £8.5m, and looks a snip at that price to me.

Both groups have a very strong and healthy recurring revenue base, and TRAKM8 will also have access to BOX's manufacturing and assembly facilities which should help to improve margins for the combined group. In 2012 TRAKM8's gross margins had improved to 72%. In addition BOX brings with it a Blue Chip client base.

The enlarged group will further benefit from synergies, cross-selling  opportunities and scale advantages.

I like TRAKM8's management and believe that they have secured an excellent acquisition here to enhance their organic growth. The Director's take relatively modest salaries whilst seemingly always purchasing shares above the market price, indeed the current placing with institutions and Directors was at a small premium to the share price before the announcement.

They also have a substantial amount of 'skin in the game' and hold around 55% of the enlarged group's share capital. Such a large stake would make me nervous in certain circumstances, but the great thing about this company is that the Director's have consistently shown that they act in the best interests of all shareholders.

Finally John Watkins, Chief Executive Officer had this to say about the deal:-

"The acquisition of BOX is a significant milestone for Trakm8, bringing strong financial and strategic benefits as it will enable us to exploit the growing demand for vehicle telematics in a fragmented market place.

 

"We have been delighted by the positive reaction to acquire this profitable and complementary business and furthermore are pleased to welcome a number of high quality UK institutions to our share register."

 

As ever, no advice is intended or given.