Marlowe Plc Unlocked
A re-evaluation of Marlowe Plc following announced disposal of GRC assets.
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I originally published Marlowe Plc as a break-up value play in July last year, following the news that management, supported by founding shareholder Lord Michael Ashcroft, was considering disposing of its Testing, Inspection and Certification (TIC) division for a reported ~£650m, or ~120% of MRL’s market cap at the time.
As I’ve covered in two subsequent updates since then, while a disposal of the TIC business never materialised, management’s strategic review remained ongoing as confirmed in the H1 FY24 Interim Results release in November. Yesterday morning the results of this review were finally revealed with the announcement that MRL has agreed to sell certain assets within its Governance, Risk & Compliance (GRC) business to UK PE firm Inflexion for an enterprise value of £430m, or 16.2x cash EBITDA (EBITDA net of capitalised software development costs, a typical metric used by PE in software deals).
The salient points from the announcement are as follows:
The headline EV of £430m translates to net cash proceeds of £405m, which equates to ~98.5% of MRL’s entire market cap prior to yesterday’s announcement, or £4.19/share (as of the time of writing, MRL’s share price has risen ~23% to £5.23/share, so the cash consideration is now ~80% of MRL’s post-announcement market cap).
MRL is selling “certain GRC software and services assets” that sat within its GRC division, which generated revenue of £85.8m and EBITDA of £31.4m in FY23 - these accounted for ~44% and 61% of GRC division revenue and EBITDA respectively, and 18% and 38% of total MRL group revenue and EBITDA respectively for FY23.
MRL will retain its TIC division and its Occupational Health (OH) business that previously sat within the GRC division, which generated combined revenue and EBITDA of ~£380m and £51m respectively in FY23.
The strategic focus for management post-divestment of the GRC assets will be to drive organic growth and complete the integration of previous bolt-on acquisitions, with the unwind of restructuring costs relating to historic M&A activity to drive stronger FCF generation.
The headline 16.2x cash EBITDA multiple being paid for the GRC assets equates to an accounting EBITDA multiple of 13.7x, a ~12% discount to the median 15.5x multiple paid in comparable private market transactions identified in my original analysis.
Of the £405m in net cash proceeds, management intends to clear all of MRL’s outstanding debt (~£230m) and return at least £150m to shareholders, equating to ~£1.55/share or ~30% of the current share price (as at the time of writing).
In addition, once restructuring/integration of recently completed acquisitions has been completed, management may allocate residual proceeds to further bolt-on acquisitions in due course.
As part of the sale, MRL CEO Alex Dacre will leave the company and transfer with the divested assets to lead that business under Inflexion ownership. As such, MRL has begun a search for a new CEO to lead the remaining MRL business.
After a period in which MRL’s share price has languished amid investor disappointment that no TIC deal occurred last year, market reaction to this unexpected GRC sale announcement has been very positive, with MRL’s stock surging ~40% initially, before settling down at £5.23 (+23%) as at the time of writing.
My view is that the sale of the GRC assets is the right decision by management, as it indicates they have taken on board shareholder concerns following last year’s failed TIC sale process, and are unlocking value for shareholders that the public market refuses to recognise.
Furthermore, the shift in strategy towards organic growth and FCF generation also makes sense, and indicates management are actively addressing the prevailing bear argument for the stock, regarding weak free cash conversion due to continued restructuring costs under the previous M&A roll-up model, which had further penalised the stock price.
It is also pleasing to see my break-up thesis play out, albeit a little differently than originally envisaged. In my original write-up, I summarised MRL as follows:
MRL is a highly asymmetric value situation that comes with the a live, event-driven catalyst with management reportedly in the process of pursuing a break-up strategy to unlock value.
While I previously expected the value-event catalyst to be a sale of the TIC business this sale of GRC assets constitutes a break-up of the company nonetheless, and will unlock substantial value for shareholders. I also believe there is potential further upside from an eventual sale of the remaining TIC/OH business in due course.
At the current share price, I estimate the remaining MRL business is being valued at an EV of ~£473m on a PF basis (after retiring all outstanding debt and a distribution of $150m to shareholders), implying a ~7x PF valuation multiple (as outlined below).
Furthermore, the result of this divestment will be a repositioned MRL as a debt-free, UK-market leading TIC services business with a strong recurring revenue profile and a greater focus on FCF generation. As such, I believe the MRL RemainCo is a very obvious take-private candidate for PE in due course for two reasons:
At a ~£473m EV, it is too small and too niche to remain a public company, or for public market investors to really care about; and
Its debt-free balance sheet and financial attributes make it readily bankable in a take-private transaction.
So with that context, let’s examine what the upside for MRL’s equity is from here, aside from the ~£1.55/share capital return that shareholders can expect on completion of the GRC assets being sold…