Loan from Macquarie Bank will cover £4.2m cash payment to shareholders

Alto Intermediary will take on debt to fund its acquisition of broking group Cobra.

The cash payment to shareholders under the deal – a maximum of £4.23m – will be funded by a debt facility from Macquarie Bank, the final offer document reveals.

Alto’s offer for Cobra of 20 pence a share values the entire company at £7.3m. However, because some shareholders have opted to receive shares in Alto rather than cash, the maximum cash payment Alto will have to make is £4.23m if the offer is fully accepted.

In addition to funding the cash portion of the deal, £1.25m of the Macquarie debt will be use to fund the purchase of loans extended to Cobra Network members by Burrford Limited, a company set up by Cobra.

The offer document says Cobra has received acceptances from shareholders representing 90.07% of Cobra’s outstanding shares. Of this, shareholders representing 49.1% of the shares have opted to receive cash and holders of 41.87% of the shares have opted for Alto shares.

In the offer document, Alto warned shareholders opting to receive shares instead of cash: “Alto is taking on additional debt to finance the cash consideration payable under the offer.

“The increase in borrowings increases the gearing of the enlarged group. While increased gearing can result in enhanced returns to shareholders if profitability improves beyond the cost of the debt, the gearing increase also magnifies losses if performance is poor.”

Personal loans

Alto was set up by Cobra chief executive Stephen Burrows for the sole purpose of buying Cobra. He, along with Cobra board member Dominic Wainford and Cobra chief financial officer David Stanley, are directors of Alto.

Both Wainford and Stanley have chosen to receive Alto shares, rather than cash, for their Cobra shares. Burrows will receive Alto shares for 2 million shares of his Cobra holding, but £1.35m in cash for the other 6.75 million.

Under the terms of the Macquarie loan, Burrows will have to use the £1.35m to pay off existing personal loans. Burrows has given a personal guarantee of £750,000 under the funding arrangements which he will only get back once Alto has made payments of £1.35m.

Alto said that apart from the increase in debt, the business of Alto would not differ materially from Cobra after the acquisition.

Operational review

Following the closure of the deal, Alto will immediately implement an operational review of Cobra, which it expects to lead to a management restructure and cost cuts. This will include the resignation of the non-executive directors.

“Otherwise, it is intended that the Cobra Group will continue to operate in much the same way as it does at present,” the offer document said.