RWS Holdings (AIM:RWS) – whopping acquisition significantly earnings enhancing

The world’s leading provider of patent translations, international patent filing solutions and searches has announced a significant acquisition that is expected to be immediately and significantly earnings enhancing.

 The AIM quoted Group has acquired Corporate Translations Inc (“CTi”) for a cash consideration of US$70 million. Based in Connecticut, USA, with 140 employees, CTi is the world’s leading life sciences translation and linguistic validation provider. The Company was founded in 1990 specifically to cater for the growing demand for high quality translation services in the life sciences sector and is now a recognised leader in successfully managing complex translation projects on behalf of the world’s top pharmaceutical and biotech companies and their Clinical Research Organisation (CRO) partners. It enjoys a preferred supplier relationship with many of its key customers, with extraordinary penetration of the blue chip life science community.

As CTi’s customers operate in highly regulated and audited industries, they place a premium on high quality translations being delivered to specific deadlines, which in turn underpins CTi’s attractive margins. RWS already focuses on the life sciences sector both through its patent translation and filing solutions and with its separate Medical Translation Division which includes the linguistic validation specialist PharmaQuest, a company acquired in 2013. The greater scale of CTi, combined with the existing specialist RWS divisions will immediately transform the Group to a world leading position in life sciences translations and linguistic validation and further enhance its competitive standing amongst the largest specialist translation companies in the world, especially in IP support services.

The acquisition of CTi is expected to be immediately and significantly earnings enhancing, with the US$70m consideration to be paid based on CTi reporting an EBITDA of not less than US$7m for the year ended 31 December 2015. CTI’s latest audited financial statements, for the year ended 31 December 2014, showed revenues of $23m and adjusted EBITDA of $4.8m.

The acquisition will be funded by $25m from internal cash resources (RWS had net cash of £30m at 30th Sept 2015) and US$45m through a five year loan provided by Barclays. The co-founders of CTi, will retain their current positions for up to a year, to allow the enlarged Group to benefit from their significant knowledge and experience as they integrate the business into the enlarged Group.

They are certainly paying what looks like a hefty price for CTI but many have been concerned how the Group’s growing cash pile could be best utilised and this acquisition appears to deliver on many fronts.

Forecasts for the year ending September 2016 were previously for pre-tax profit of £22.1m and eps of 8.0p. One senses a minimum 10% earnings upgrade is probably anticipated following the acquisition moving the earnings number closer to 9p.

UPDATE – Broker forecasts

The house broker has actually raised their EPS forecasts by 20%.
Financial Year moves to 9.6p from 8.0p, with 2017 raised to 10.1p from 8.4p.

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