Impax looks to have secured an acquisition which delivers key components of its longer term strategic growth plan in one fell swoop, while minimising execution risk, and enhancing EPS and dividend cover.
It has agreed to acquire 100% of US based Pax World Management LLC for US$52.5m initially, plus up to US$37.5m in contingent payments payable in 2021, subject to performance. This combines complementary businesses with aligned strategies and business cultures, and a successful partnership for over a decade on the design and management of the US$511m Pax Global Environmental Markets (GEM) Fund.
The acquisition extends Impax’s profile as a specialist manager in a rapidly growing niche. Scale benefits are predicated on enlarged product range, coverage, strategies, client base and marketing reach, rather than cost savings or rationalisation. It plans to run the investment teams independently (with some exchange of ideas for best practice) and progressively build collaboration, and more rapidly integrate some support functions.
We see two key attractions to this acquisition. The first is readily quantifiable, the second less so but potentially, the more valuable.
Firstly, Impax has agreed a keen purchase price based on underlying revenue/EBITDA run rate, below its valuation just prior to the announcement, without assumed benefits from cost savings or synergies. On that basis Pax will enhance EPS in the first full year, by above our forecast if Impax’s higher share price holds as it will result in less dilution, and the acquired entity continues to perform in a vibrant market. Pro-forma AUM for the enlarged group at end August 2017 was £10.3bn (US$13.4bn), vs £7.25bn for Impax alone (up 61% in the first 11 months of FY17).
The second benefit lies in the longer-term potential delivery of a step-change in AUM growth rates and profitability. The existing partnership helps make Pax a known quantity with a similar business culture, complementary products, services and market profile. We still expect progressive distributions despite the use of cash/debt towards this transaction, with potential for strong positive cash generation to compensate. Despite strong gains, IPX shares still seem attractively priced relative to prospects: