The deal gives Ardonagh additional firepower for M&A

By Saxon East 

Ardonagh has roared. And loudly. 

The consolidator had been quiet on M&A after the Swinton acquisition in 2018. 

Now chief executive David Ross has a £300m acquisitions warchest following Monday’s mega-refinancing. 

Team hires and London market acquisitions are now possible. Watch this space. 

Leverage question 

Market watchers will wonder how Ardonagh will manage its debts, close to £2bn, especially in light of the Fitch downgrade.

Looking through Ardonagh’s lens, here is the logic of the refinancing explained.

Leverage is key issue rather than debt.

The most obvious and simple metric is the ratio of earnings (EBITDA) to debt.

The deal takes Ardonagh’s multiple past seven - with expected EBITDA of £275m against debt of £1.8bn.

Before the refinancing, it was the in the x5 region.

This may appear high, but it is in line with a several major US brokers.

The multiple will decrease in coming years due to: 

  • The £300m in acquisitions increasing earnings 
  • Continued organic growth
  • The efficiency drive significantly decreasing the operating costs 

Other beneficial factors are: 

  • Some of the debt is in the form of payment in kind notes, meaning interest on debt is rolled up and paid off at a later date. 
  • Ardonagh’s cash conversion - ability to translate incoming revenue into profits - stands at 90%

The last point is important. Under Mark Hodges the cash conversion was much lower, leading to a cashflow crisis. 

Importantly, Ardonagh should not have difficulty servicing its interest payments, ending up around £150m, and managing operating costs. 

The risks to Ardonagh are long-term, such as markets experiencing turbulence creating difficulty for refinancing in the future.

The UK market could also experience regulatory or competitor disruption.  

In conclusion, the leverage of Ardonagh appears high. 

But this is how the model works across the globe: private-equity backed companies with consistent cashflow are highly-leveraged. 

The investment idea is that companies can manage the interest payments, while taking advantage of fragmented markets to consolidate via a buy-and-build model - eventually being sold for a high return on investment to another bidder. 

As for as private equity is concerned, they don’t come much better than brokers.

Brokers have consistent cashflow and relatively small capital expenditure.

Compare that to a high street retailer, which has unpredictable and seasonal footfall, and unsold stock it has to aggressively discount, or say, a factory with complex machinery that needs replacing every ten years. 

In comparison, brokers are headache-free for private equity. 

Furthermore, American private equity view the UK as having an open market, cheap currency, common English language, politically stable and robust legal system. 

In the UK broking market, private equity have enjoyed successes, some failures, but one thing is for sure: the part they play in distribution ownership just keeps on getting bigger and bigger.