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Has eXeed paid too much for Renaissance distribution?

10 Jul 2012

A number of factors come into play when valuing a business. Explains an independent report arranged by Renaissance from well known accounting firm Kordia Mentha to value it's distribution business.

The report is sober reading and explains a difficult history with the division under considerable pressure for quite some time. The report identifies it's key issues as:

  • Exclusivity – A major change occurred in 2010 when the company lost its exclusive distribution arrangement with Apple. Ingram Micro was appointed as an alternative distributor in New Zealand and the vendor started supplying directly to Dick Smith and JB Hifi from Australia.
  • Margins – Between 2001 to 2006 the margin’s being achieved from the wholesale supply of Apple product were significantly higher than now. For the financial year 2012 the company was budgeting 5.8% gross margin. This comes from increased competition as well as price pressure from Apple and is a full 1% lower than achieved in the Financial Year 2011.
  • Credit Limit – Historically the division maintained a $23 million credit limit with Apple. This was reduced in October 2010 with the addition of Ingram Micro to $9.5 million and was set to reduce to $6 million shortly if the proposed sale to eXeed didn’t proceed.
You may think that these extreme headwinds and the impending credit limit decrease would mean eXeed is buying a fire sale asset at a bargain price. On this front Kordia Mentha anticipated that the business was worth between 2.5 x and 4 x earnings (EBITDA). In the end Exeed has paid the full 4 x earnings for the business. Which is surprising.

From extrapolating the division’s budgeted $1.2 million profit for financial year 2012 and using the valuation reports statement that eXeed is paying 4 x earnings, one could assume the transaction is worth north of $4.8 million. But deep in the paperwork one discovers that Yoobee will not be buying its Apple product from eXeed. Instead it has inked a direct supply agreement with Apple Australia. In the report this is pointed out and a discount has been applied because eXeed will not have the benefit of the margins from supply to Yoobee stores. The sale price is therefore more like $2.8 million plus stock. This is broken down to $2.3 million in goodwill and $510,000 in fixed assets.

Let’s hope the clever minds of Justin & Andrew at eXeed can extract the synergies and value they’re clearly anticipating from the acquisition

Good luck to them!

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