Transaction Capital (TCP), operator of credit-orientated alternative assets, with divisions that include SA Taxi and Transaction Capital Risk Services (TCRS), this week announced the conclusion of an agreement to buy a 49.9% stake in car-purchasing platform, WeBuyCars. On Thursday’s (10 September’s) conference call, TCP outlined more detail around the deal and below we highlight a number of points that stood out for us:
- Only a 49.9% stake in WeBuyCars was on offer at this point and TCP said it would have bought a bigger stake if that had been made available. We note that there is a put option in terms of which a further 10% can be “put” to TCP after one year and a call option in terms of which TCP can lift its stake to 74.9% at the end of year-three.
- The purchase consideration of R1.84bn is a PE multiple of about 10x. This for a business that has grown revenue and profit at a CAGR of 62% and 58%, respectively, over the past 3 years and by 30% and 32% YoY, respectively, over the last year. On the face of it, we believe that it is a good price for a business which should be accretive to TCP’s growth IF it can sustain this level of growth. WeBuyCars is selling about 70,000 vehicles p.a. in a 1.2mn fragmented, second-hand car market, so it does not look like it faces much risk of becoming ex-growth for a while yet.
- It is largely a cash deal, which TCP is funding out of surplus capital that it has been holding at the corporate centre, as well as tapping into its credit capacity.
- In an industry made up of “stock-holders” (car dealers mainly) that hold cars on their balance sheets and “non-stockholders” (mostly online platforms) that just advertise cars for a fee/commission, WeBuyCars is a hybrid, doing both. It is strict about managing the turnover of vehicles and it is not providing any finance itself, so it seems to be a business with relatively high cash conversion, which is self-funding. Its FY20 profit after tax attributable to net assets was R357mn. Based on what TCP said about the enterprise value (EV) and what it has paid, it looks like there is very little debt in this business, which ties in with the self-funding story.
- However, the synergies between the two companies are a rather grey area. We would have thought that TCP would be seeking to start building a lending book through this business (currently, only about 15% of cars sold take up finance and insurance options) but that does not seem to be the immediate plan. Typically, traditional banks are not prepared to finance cars older than about 5-6 years so there is certainly an opportunity here, which TCP does acknowledge but it is not the plan initially.
- It sounds like there were a lot of suiters for this stake and WeBuyCars chose TCP based on ‘the good cultural fit, expertise in interpreting big data through technology in TCP’s debt collection business and its expertise in specialised finance.’
We are cautiously optimistic about the deal. When TCP initially listed, one of the main areas of pushback from investors was that they could not see the synergies between a business comprising of a microlender (TCP owned Bayport at that stage), a taxi finance business and a debt collection business. TCP sold out of Bayport soon after listing, perhaps lending some credence to those concerns. This history is probably worth keeping in mind when looking at this deal – TCP has capitalised on what looks like an interesting opportunity, despite it not clearly plugging neatly into its existing competencies. Fortunately, TCP appears to have paid a reasonable price for a business which is both profitable and has a well-established track record. Investors should also take comfort from the fact that it is not rushing into trying to provide finance through WeBuyCars. Much like it appears to be doing with its offshore expansion, TCP seems happy to proceed cautiously.
The market reacted positively to the deal with the TCP share price up c. 14% (to Thursday’s close) since it was announced.
