By Martín Palomar, André Assouline (HEC), and Ratish Singh, Luc Roberts (University of Warwick)
From an original bid of 250 pence per share back in December, Arrow Global’s four consecutive refusals have forced London-based Private Equity fund TDR Capital to rack the price up to 307.5 pence per share. The deal whereby TDR will buy out the British debt collection agency is set to be completed during the third quarter of this year, for £563m, which is a 33% premium to its closing price on February 5. Individual investors will get non-listed shares capped at 10% of total equity.
Arrow Global is a Manchester-based debt collection agency, founded in 2005 and publicly listed as ARW since 2013. Their main clients are companies and financial institutions from whom they buy secured and unsecured loans which they manage, as well as real estate portfolios. They are active throughout Britain as well as in continental Europe. The pandemic heavily hindered Arrow Global’s 2020 performance, leading it to a non-cash £134m first-half loss due to provisions for highly likely defaults on the debt they had bought -their main activity.
TDR hopes to enlarge Arrow Global’s fund management business by providing more and cheaper investment. According to the company, they will return to profitability by the second half of the year.
"We are excited to partner with [Arrow] to accelerate their strategy to build a market leading fund management business by providing the investment and support needed, all of which we believe is better facilitated as a private company." - Jonathan Rosen, Partner (TDR Capital)
Overview of TDR Capital LLP (Acquirer)
TDR Capital is a Private Equity firm founded in 2002 and headquartered in London. It has a very diversified strategy including diverse investments such as MCS Group, David Lloyd Leisure, Buffalo Grill, Asda, or even the Stonegate Pub Company. It has in total 3 portfolios totaling 129 investments since its creation. It has €8 Billion in committed capital across its 3 funds.
Founded in 2002, headquartered in London, UK
CEO: Manjit Dale
Number of employees: 46
LTM Revenue: £10.9M
Overview of Arrow Global Group Plc (Target)
Arrow Capital is a leading European investor and asset manager, which also operates as a fund and investment manager in order to be able to go for market opportunities. Mixing, like renowned groups worldwide such as Eurazeo, asset management, and private equity. It operates in 5 European markets (UK, Ireland, Netherlands, Portugal, Italy) and its main investments include companies such as Focum, Bergen, or Norfin.
Founded in 2005, headquartered in Manchester, UK
CEO: Lee Rochford
Number of employees: 2,522
Estimated LTM EBITDA: £ -37M (as 01/01/2020)
Estimated EV: £ 1.5B
LTM EV/EBITDA: N/A (Negative)
TDR Capital, holding a significant amount of dry capital in the low-interest-rate environment, can provide cheaper funding to Arrow Global’s acquisitions. This will be helpful considering that the company’s secured net debt now stands at more than 5x adjusted cash profits, estimated to fall to just 4x by the end of this year.
Arrow, with fewer key investors, will also be able to make these decisions in a more nimble manner. In the ongoing commercial fallout from the pandemic, this may help it capture key distressed deals throughout Europe. This aids the company’s present strategy of growing assets under management and increasing capital-light earnings while deleveraging at the same time.
Arrow’s £115m pre-tax loss in 2020 (including a £96m write-down of its estimated remaining collections) also necessitates patient investors who have experience in its business sector. TDR is an ideal fit with its prior investment and x3 exit of Lowell Group, a UK leader in the acquisition of non-performing consumer debt from a blue-chip client base. Similar opportunities for updated financing structure, expanding business capabilities, and operational efficiency exist at Arrow that the private equity firm can facilitate.
Risks and Uncertainties
With an estimated £430 billion of non-performing loans created by the pandemic, Arrow Global Group is likely to see strong earnings growth over the next three years, but certain long-term risks are present. The most evident is Arrow Global Group’s poor financial health, with net debt growing steadily over the past five years to currently standing at £1.36 billion, compared to just £757 million in 2016. The effect of this debt burden is highlighted by Arrow’s total liabilities being poorly covered by its operating cash flow, at 3.1%. Additionally, Arrow’s debt-to-equity ratio has more than tripled over the last five years, indicating the business’ operations are mostly financed through borrowings. Although this suggests the business may be positively impacted by the acquisition through extensive access to private capital which provides refinancing opportunities, these high debt levels will likely continue to be a source of risk for the business.
The transaction is subject to Arrow Global Group shareholder approval alongside the receipt of antitrust clearances. The uncertainty surrounding shareholder approval has been reduced by Fifth Street Station (9.2% stake) and Albacore Partners (4.3% stake) having given irrevocable undertakings to vote in favour of the deal, alongside other key shareholders totalling 16.7% of the issued share capital.
“In November 2020, in response to an increasingly attractive operating environment, the leadership team set out an accelerated strategy to enable Arrow to grow funds under management and increase capital light earnings while at the same time deleveraging. This strategy was well received by our clients, customers and investors, and is fully supported by TDR Capital.” - Jonathan Bloomer, Chairman (Arrow Global)