Acquisition to move Mercia to trading profitability

Regionally-focussed specialist asset manager Mercia Asset Management has entered into a conditional agreement to acquire the venture capital trust fund management business of NVM Private Equity for a total maximum consideration of up to £25m in cash and shares.

The AIM-traded firm also announced its intention to conduct an accelerated bookbuild to raise £30m gross at a price of 25p per new ordinary share, to fund the initial cash consideration for the acquisition and provide further balance sheet growth capital.

It said the proposed acquisition related to Northern Venture Trust plc, Northern 2 plc VCT and Northern 3 plc VCT, which consist of around 60 portfolio companies with 17 listed, 27 private venture and 16 private equity.

NVM VCT Funds represented around £270m in assets under management, which would increase Mercia's total assets under management by more than 50% to about £770m.

The board said the total acquisition consideration of up to £25m would comprise an initial £16.6m, made up of £12.4m in cash and £4.2m in Mercia shares, with a three-year deferred contingent consideration of up to £8.4m, payable over the next three years, subject to certain conditions being satisfied.

It explained that the implied multiples assumed a maximum consideration of 3.5x revenue at £7.2m and 6.25x EBITDA at £4m.

The acquisition was expected to be earnings-enhancing, and would achieve trading profitability at the net income level in the first full year.

It would increase the group's liquidity to deploy into pre-qualified high-growth small to medium enterprises via its third-party funds under management, Mercia said, and would expand its universe of direct investment opportunities.

Looking at the placing to raise gross proceeds of £30m at a price of 25p per share, Mercia said the price represented a discount of 21.9% to the closing price of 32p per share on 2 December.

It said around £15m of the gross proceeds of the placing would be used to fund the initial consideration and related transaction expenses.

The remaining proceeds would be used for further balance sheet growth capital, enabling the firm to continue to invest the existing direct investment portfolio, as well as funding new direct investment opportunities that the board expected to deliver attractive returns in the future.

Mercia said the placing was being conducted via an accelerated book building process, which began immediately following its announcement.

“We are delighted to announce the conditional acquisition of the NVM VCT business, which is highly complementary to Mercia's existing activities and will cement our position as a leading provider of complete, connected capital to SMEs in the UK regions,” said Mercia Asset Management chief executive officer Mark Payton.

“By the end of the 2022 financial year, we have said that we will seek to grow assets under management to around £1bn, move the group to a profitable trading position ahead of balance sheet fair value movements and realised gains, and evergreen the balance sheet.

“The acquisition of the NVM VCT fund management contracts with a high quality team also transferring to Mercia, together with a promising portfolio of VCT investee companies greatly accelerates this strategic intent.”

Payton said the transaction moved Mercia to trading profitability as a group for its next full financial year, would grow assets under management to around £0.8bn, and provided sufficient funds to evergreen the balance sheet.

“The group's liquidity across its balance sheet and third-party funds immediately following this transaction will be about £250million, ensuring it is well placed to continue to support existing and new portfolio companies through the economic cycles.

“Mercia is making significant progress and our differentiated, scalable asset management business is well-positioned to generate significant near to medium-term value for our shareholders and stakeholders alike.”

At 1522 GMT, shares in Mercia Asset Management were down 9.69% at 28.9p.