DWF Group Acquisition of Mindcrest Inc


DWF Group (LON:DWF) is to acquire leading legal and managed services business Mindcrest Inc. The deal is expected to deliver ‘significant synergies’ within its existing business and provides a platform on which the Group can rapidly grow its Managed Services offering, which we see as a key differentiator of the DWF model. Total consideration of £14.2m includes cash (£7.7m) and shares (£6.5m) with the Group also assuming £1.6m of net debt on completion. DWF is hosting a Capital Markets Day later today where it will present further detail on its Managed Services and International Strategies as well as todays deal.

  • About Mindcrest: Mindcrest offers legal and managed services including litigation support, contracts, compliance and legal analytics for large international corporate clients. It is headquartered in Chicago and employs 360 people, largely based in Pune, India with additional offices in New York and London. In the year to December 2019 it generated sales of US$12.1m (£9.2m) and normalised EBITDA of $1.2m (£0.9m).
  • Transaction details: Consideration of US$18.5m (£14.2m) consists of initial cash consideration of $2.4m (£1.8m) and shares of $8.5m (£6.5m) payable on completion with a further $7.6m (£5.9m) in deferred cash consideration to be phased over a period of six months. The Group will also assume US$2.1m (£1.6m) of net debt on completion. This equates to an EV of 17.6x trailing 12-month EBITDA of $1.2m (£0.9m) prior to recognising significant synergies, estimated to generate annual cost savings of £2.9m by FY22. Assuming full synergies are realised this equates to 4.2x FY22 post-synergies EBITDA. Share consideration is subject to lock-in period of two years with a 24-month clawback on post-tax cash paid to Mindcrest management in the event they resign.
  • Change to forecasts: Based on conservative assumptions discussed in detail over the page, we believe the acquisition will be EPS neutral in FY21 as work is transitioned to the new model and earnings enhancing in FY22 with EPS +3.0% versus our prior forecasts. Today’s acquisition significant accelerates the Group’s managed services strategy, enhances bid quality and widens the Group’s product offering. We believe there is strong and clear potential for the Group to covert the enhanced managed services capabilities this deal brings into new revenue opportunities that could exceed our forecasts.
  • Valuation: Trading on FY20 P/E of 12.3x falling to 8.6x in FY21, with a prospective yield of 5.7% DWF is the only main market listed legal services business offering international diversification. As highlighted in our last note (Multiple Attractions, published 21 January 2020), DWF Group has significant latent capacity which we believe it can translate into meaningful fee income growth which should drive medium term margin expansion.
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