In
June 2014, US alternative finance company DFC Global (DLLR) agreed to be bought
out by private equity firm Lone Star Funds for 1.3 billion dollars. The company
made 280 million dollars in EBITDA, or earnings before interest, taxes,
depreciation, and amortization, in 2012, and at least 200 million dollars in
EBITDA in each of the three years before the transaction. Thus, the deal was
done at a price of somewhere between 4.6 and 6.5 times EBITDA. In an
environment where companies generally trade at double digit multiples of
EBITDA, this deal was unquestionably a bargain for Lone Star.
The
purchase of DFC Global was a particular bargain because the company was not a
declining enterprise that might deserve such a cheap multiple. In the company’s
last investor presentation before the buyout, management trumpeted annualized
revenue growth over the past nine years of over 15%, and annualized adjusted
EBITDA growth of over 11%. It is noteworthy that such growth came despite a
major slump in the company’s operations in 2013. That slump was caused by
regulatory difficulties for the alternative finance industry in the United
Kingdom, where DFC Global is the country’s largest pawnbroker. In its
presentation, management argued persuasively that these difficulties were only
temporary and that the company had significant long term growth prospects in
the UK and the rest of Europe.
