Poor economic conditions present consolidator with more acquisition opportunities
Towergate can still grow in sluggish economic conditions despite a fall in broker and network revenues causing the consolidator to miss one of its main operating targets in 2011, chief executive Mark Hodges said.
Towergate’s stated aim is to grow earnings before interest, tax, depreciation and amortisation (EBITDA), which it considers the best proxy of ability to generate cash to pay interest and invest in growth.
However, like-for-like EBITDA fell slightly in 2011 to £152.4m from £153.6m in 2010. On a statutory basis, the company’s loss after tax worsened to £75.5m from £14.2m.
While the current financial climate was in part to blame for Towergate missing its target, Hodges said: “The economy will have an impact, but I would like to think we can grow the business even if it is economically challenging out there.”
The lack of EBITDA growth in 2011 came amid mixed operating performance at Towergate’s main operating divisions. EBITDA growth of 11% at Towergate Underwriting and 6% at its Paymentshield unit were offset by a 1.5% drop at the retail unit, Towergate’s biggest division, and a 4% decline at the network division.
Hodges said that the retail and network divisions had faced similar difficulties of reduced business.
Towergate faces pressure to grow EBITDA because it is predominantly financed by debt, which means it has a large annual interest bill. In 2011, the interest bill was £118m, of which £93.2m was payable in cash.
Acquisitions are the cornerstone of Towergate’s growth strategy. The company has bought nine brokers this year and is conducting due diligence on listed Lloyd’s broker Cobra, with a formal offer due by 28 May.
Hodges added that, excluding Cobra, Towergate has an acquisition pipeline representing £400m of gross written premium.
He said that, while stunting organic growth, the economic environment could present more acquisition opportunities. “The harder it is in the economy, our acquisition pipeline and our ability to buy businesses that create value for us in the future potentially increases, because people will reassess their own businesses and what they want to do with them,” Hodges said. “If the economy goes backwards, it is not all bad news.”
Talking points …
● Will the small broker acquisitions that Towergate is targeting be enough to drive revenue growth and EBITDA?
● In the absence of an IPO, how will the group refinance when its debts become due in 2017?
● To what extent will a shift to IFRS reporting improve Towergate’s bottom-line?