DMGT sale of EDR prices in growth of ZERO
When DMGT acquired EDR twenty years ago, it must have seemed an exciting proposition, being described at the time as a “leading provider of geographical based environmental risk management information in the US”, particularly given the possible synergies with DMGT’s risk management and catastrophe modelling operations such as RMS.
Twenty years later however, revenues have risen by an average of only +4.0% CAGR (from $34m to $75m), albeit margins have been squeezed up to over 35%, and the disposal price of $205m suggests it doesn’t retain much in the way of growth credentials. That’s an exit EBITA yield of approx 12.7% (7.9x) or an OpFCF yield of probably over 9%, assuming the US new corporate tax rate of 21% and a 90% average FCF conversion. That means the business is either being priced as a zero growth activity, or the buyer is pricing in a lower base of profits or margins to pay for necessary re-investments to accelerate growth. Either way, the price (and earnings dilution) may be a disappointment for those pricing in a faster growth assumption into their models for not only DMGT’s professional information activities, but for other players in the sector who have followed similar expansion strategies over the past decades. This lack of transparency for investors on what is actually going on under the veneer of investor relations speak and consolidated results, makes it all the more clear why growth assumptions markets price into valuations will remain closely tied to actual delivery of organic growth from these groups.