# Diploma PLC to acquire European Fluid Power platform

- Link: https://www.directorstalkinterviews.com/diploma-plc-to-acquire-european-fluid-power-platform/4121123782
- Published: 2023-07-13T07:21:36+01:00
- Author: Emily Johnson

**Diploma PLC** (LON:DPLM), the value-add distribution group, has announced the 
acquisition of Distribuidora Internacional Carmen SAU (“DICSA”), a market-leading
distributor of fluid power solutions into the European aftermarket for an initial
consideration of ca. £170m (€200m).

·     **A high quality business**: DICSA has significant customer value-add based
on quality product, breadth of range, technical service, and speed to market. This
customer proposition has driven a long track record of double-digit organic growth
at attractive margins.  

·     **Strong strategic fit**: the acquisition adds to our established positions
in the US and UK, expanding our aftermarket fluid power capability and accessing
key strategic markets in Continental Europe. DICSA is based in Spain with good exposure
across Europe, particularly France and Germany. With small market shares in these
significant economies, the differentiated proposition can continue to drive strong
growth.

·     **Attractive valuation**: the initial consideration of £170m represents a 
multiple of 9x 2023 EBITDA. The acquisition will be earnings enhancing and exceed
cost of capital from day one, and the business will be accretive to the Group’s 
organic growth and margins. There are also material revenue and cost synergies with
our existing fluid power businesses in the UK and US, accelerating the journey to
20% returns over the next three to five years. 

**High quality fluid power aftermarket business in Continental Europe**

The acquisition of DICSA builds on Diploma’s established track record of driving
future organic growth through acquisitions at excellent returns and fulfils the 
key characteristics we seek:

·     **Fluid power product capability:** DICSA is a value-add distributor of a 
diverse range of hydraulic hoses, fittings and components, a product set with which
we are familiar, and similar to that offered by our UK Aftermarket Seals business,
R&G.

·     **Attractive aftermarket business:**  this is a model we like which, together
with a highly diversified customer base, has underpinned DICSA’s resilience.

·     **Quality value-add business:** similar to our other fluid power businesses,
DICSA’s market-leading reputation and value-add is based on breadth and availability
of product; technical capability; and speed to market. This is reflected in strong
operating margins of over 20%.

·     **Impressive organic growth track record, exciting potential:** the business
has delivered long-term organic revenue CAGR of 11% and has significant headroom
for continued growth in fragmented markets.

·     **Access to white space in Europe:** DICSA is present in key European markets
including Spain, France and Germany. The business has significant potential for 
further development in all European markets.  

·     **Excellent management team:** a highly experienced management team, led by
Daniel Carmen, have successfully grown the business for over 30 years. We are delighted
that Daniel and his team will remain with the business under Diploma’s ownership,
based at DICSA’s existing headquarters in Zaragoza. 

**Compelling financial rationale**

For the 12-month period ended 31 December 2022, DICSA generated revenue of €87.7m
and adjusted EBIT of €20.2m. Gross assets at the end of the period were €78.9m.

The acquisition will be accretive to Diploma’s organic growth and margins. DICSA
has achieved long term organic revenue CAGR of 11% with EBIT margins of more than
20%. It will be immediately EPS accretive, adding ca.5% to EPS growth during the
first full year of ownership, and will cover its cost of capital from the outset.
We are also excited to accelerate performance and returns with revenue and procurement
synergies between DICSA and our existing businesses:

·    cross-sell existing product from our UK Aftermarket business, R&G, through 
DICSA’s platform into Europe;

·    accelerate DICSA’s growth in the US, leveraging our Seals North American Aftermarket
platform; and

·    deliver consolidated procurement synergies.

The initial consideration of ca.£170m has been paid in cash, funded from the Group’s
recent equity raise and existing debt facilities. In addition, up to ca.£19m is 
payable based on DICSA achieving stretch profit targets in 2024 and 2025. We remain
disciplined and our balance sheet is strong, with flexibility for continued investment;
year-end leverage is expected to be ca.1.0x, assuming no further acquisitions. We
expect Group ROATCE to remain strong, at around 18%.

The Group has also separately issued its Q3 trading update today for the nine months
ended 30 June 2023.

> **Johnny Thomson, Diploma’s Chief Executive said: **
> “I am delighted to welcome Daniel and our new DICSA colleagues to the Group. They
> have created an exceptional value-add business with a very strong market reputation.
> We know and like the fluid power aftermarket model and DICSA satisfies a key strategic
> priority: accessing large European markets. The business is already generating
> strong performance and there are significant opportunities to enhance returns 
> by working together across Europe, the UK and the US. This deal continues our 
> strong track record of acquisitions that drive organic growth at great returns.”

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