It looks as if Reach4Entertainment (R4E) has made a great acquisition and as a long suffering shareholder I suppose I should be happy and say that we can all look forward to sunlit uplands. And maybe we can but I think I must be honest with you and come clean. On Wednesday I was made an insider and was told by a man who was inviting me to take part in the placing at 1.2p that he had been assured by Dowgate (the retained broker) that £3.75 million had already been committed and Reach was looking for £4 million – did I want in? I am a bit sick of Reach and its once a year placings so said no as I already own more than enough shares via FIML. Now we are told that the company had raised just £3 million...
I put it to you that with Nigel Wray and Herald standing most of that (and management putting in a paltry £130,000) the placing did not raise what was intended and Dowgate was lying to folks ( or at least using a different definition of "committed" to the one you and I would use). I suppose that all is fair in love and war and the AIM Cesspit but when Reach tries to shout about what a triumph this all is, forgive me if I do not rush to add PR spinners, the morally bankrupt Yellow Jersey of Frontera (FRR) infamy, and the other advisers to my Christmas card list. It is just one of those episodes that dulls my faith in humanity and reduces my excitement about the world of investing. Where is the world of my word is my bond? And the shortfall is why CEO Mark Bouyan has had to provide a £500,000 loan (at 5%) to help seal the deal.
As to the deal, Reach is paying £3.94 million for Sold Out which for 25 years has done for live events what Dewynters does for theatres. We are told that “it has established a strong reputation in its field and built a portfolio of high profile clients, which includes S.J.M. Concerts, AEG Presents, Live Nation and Cirque Du Soleil. Its services include campaign development, media planning and buying, events, partnerships, design and creative, broadcast and digital media production; all of which will bolster r4e's group offering. In the financial year ended 31 May 2018, Sold Out delivered gross profit of £4.1 million, adjusted EBITDA of £1.7 million and profit before tax of £1.3 million.”
So in essence Reach is paying a PE of 4 but there is a defcon taking the total sum to up to £10 million payable over two years, so really this may well be a PE of 9. It is not a bad deal but it is not, I suggest, a brilliant one. The issue is how much synergy can Reach extract from the two, complimentary groups? The retained broker Dowgate runs with numbers showing not a massive amount of synergy and calendar 2019 EBITDA of £3 million and PBT of £2 million rising to £3.8 million and £2.7 million. Those expecting synergies might add a quarter of a million to 2019 numbers and perhaps three times as much to 2020 numbers. So on a standard tax charge 2020 PTP might be £3.5 million and PAT £2.8 million in 2020. This is a growth stock with no debt so is a PE of 12 unreasonable? No? That gives you a one year target market cap of £42 million or 3.36p per share. Therefore though this episode upsets me we retain our stance of BUY at up to 1.45p with a target to sell of 3p+. Now, for heaven’s sake, I urge Reach to focus on organic growth and sack someone over this episode which has sorely tested my patience.
Filed under: R4E, Neil Woodford, Proton NEX IPO, InfraStrata, Independent Oil & Gas, AIQ, Fusion Antibodies
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