Middle Market: Three Private Equity Bidders in Citation Auction Second Round Despite Middle Market Pipeline Slowdown; Debt Multiples Pitched Above 7x

 

Three private equity groups are working on the acquisition of U.K.-based Citation Group as the auction for the compliance and services company moved into the second round of bids, sources said. The HG Capital-owned group hired Deloitte to put together a debt package working off a pro-forma EBITDA of £35 million.

The company is looking for financing upward of £250 million to support the buyout and have been seeking to get funds above the 7x mark to refinance Alcentra’s incumbent structure, sources said.

The first round of Citation’s auction was on Feb. 24 and concerns over the coronavirus outbreak have slowed down the second phase of the process, sources said. Uncertainty as to which banks and lenders are still open for business in the current context may delay the process further.

Many debt providers are expected to take a step back to reassess due diligence around subscriber contracts with UK-based SMEs which may suffer from Covid-19, sources said.

Citation benefits from continuous revenue streams, low churn, high conversion rates, and a loyal subscriber base, sources said. It could be one of the few credits to reach the finishing line, sources commented.

A number of middle market auctions have stalled or been pulled over the last week as a result of volatility from coronavirus and plummeting oil prices, as reported.

Gensmile and education group Oxford International’s sales were put on ice as a result of volatile market conditions, as reported by Reorg.

Enterprise value calculations are up in the air as investors trawl through due diligence to assess the long-term impact of recent market de-stabilisers, sources say.

The M&A pipeline may stagnate for up to six months leaving some sectors at risk of becoming distressed, according to sources. A spate of credits in the aerospace, automotives, casual dining, construction, travel and high street retail sectors could disappear in a matter of months, according to middle market insiders.

Citation provides subscription-based HR, employment law, and health & safety solutions to 16,000 SMEs across the UK. It has 900 employees, according to its website.

HG bought Citation from ECI in 2016 for £185 million with Rothschild putting together the debt package. Recent growth is in large part attributable to a series of bolt-on acquisitions including Solution Host Group and Safety Management in 2018 and Southall Associates Limited in 2019.

The Manchester-based group reported LTM revenue to December 2018 of £40 million and cash flows of £9.6 million, according to Companies House.

Citation was founded in 1995 and current CEO Chris Morris was brought in by ECI.

All parties declined to comment.