Former McKinsey Consultant and New Zealand based venture capitalist Lance Wiggs analysed the deal after the purchase sum became known, and said that "from what I can see I believe this was a really bad deal."
Although details on the deal between Ethos Capital and ISOC are unusually scarce, Wiggs argued that at least US$1 billion and maybe as much as US$2 billion were left on the table.
"The price of US$1.135 billion might sound like a lot of money, but it’s not.
Last year ISOC made US$44m from PIR, which is a 4 per cent return on US$1.135 billion.
However the forecast for next year is US$55m, so the yield is 4.8 per cent. They sold the company for a bond rate," Wiggs said.
Wiggs said that with the forecast return at US$55 million and with a ten per cent annualised profit increase the returns would be "off the charts" even if costs rose at the same rate.
After the sale of PIR concludes, Wiggs expects the new owners of PIR to "not just the wholesale prices up by ten per cent a year but also pull all the other fees and costs levers hard.
This would result in much greater than ten per cent profit growth; however, even at 10 per cent per annum, after a decade the new owners would be collecting US$142 million a year making debt servicing and repayment not an issue, Wiggs pointed out.
At US$142 million a year with ten per cent growth, PIR could be sold, perhaps for as much as US$4 to US$6 billion.
"It's the deal of a lifetime - a seller like ISOC doesn't come along that often," Wiggs said.
Wiggs said he felt for the directors of PIR and ISOC as this sort of deal is hard even for highly paid and experienced directors of multi-billion dollar listed companies.
The VC suggested that ISOC should stop the deal and get legal and banking advice before continuing and publish a detailed account of the transaction.
Not doing so could mean a lawsuit against ISOC, PIR and the individuals involved in the deal could materialise.
"There are plenty of litigation funding PE firms out there, and I am sure some are looking this over already," Wiggs said.
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Although details on the deal between Ethos Capital and ISOC are unusually scarce, Wiggs argued that at least US$1 billion and maybe as much as US$2 billion were left on the table.
"The price of US$1.135 billion might sound like a lot of money, but it’s not.
Last year ISOC made US$44m from PIR, which is a 4 per cent return on US$1.135 billion.
However the forecast for next year is US$55m, so the yield is 4.8 per cent. They sold the company for a bond rate," Wiggs said.
Wiggs said that with the forecast return at US$55 million and with a ten per cent annualised profit increase the returns would be "off the charts" even if costs rose at the same rate.
After the sale of PIR concludes, Wiggs expects the new owners of PIR to "not just the wholesale prices up by ten per cent a year but also pull all the other fees and costs levers hard.
This would result in much greater than ten per cent profit growth; however, even at 10 per cent per annum, after a decade the new owners would be collecting US$142 million a year making debt servicing and repayment not an issue, Wiggs pointed out.
At US$142 million a year with ten per cent growth, PIR could be sold, perhaps for as much as US$4 to US$6 billion.
"It's the deal of a lifetime - a seller like ISOC doesn't come along that often," Wiggs said.
Wiggs said he felt for the directors of PIR and ISOC as this sort of deal is hard even for highly paid and experienced directors of multi-billion dollar listed companies.
The VC suggested that ISOC should stop the deal and get legal and banking advice before continuing and publish a detailed account of the transaction.
Not doing so could mean a lawsuit against ISOC, PIR and the individuals involved in the deal could materialise.
"There are plenty of litigation funding PE firms out there, and I am sure some are looking this over already," Wiggs said.
read more (it news au)
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