This article was republished from a post on the Invest Before the Street blog
One of the more advanced topics we teach in our Invest Before the Street course is how to Pro Forma a company’s financial statements for any acquisitions, divestitures, or even changes in the capital structure.
Doing a little bit of math could have showed you the opportunity in Relevium Technologies a few months back, and netted you a 178% gain in the process.
What does Pro Forma mean?
The term Pro Forma is used to describe how a company will look after an event like an acquisition or divestiture has taken place. Usually you’ll see this mentioned when someone is trying to understand how a company will look after an acquisition.
So when Relevium Technologies announced it was acquiring BioGanix, is was time to Pro Forma the financial statements.
Relevium was basically a shell company that had no real business operations, but was looking to make an acquisition. I had set up a news alert on them so I can take another when they made an acquisition.
Sure enough on December 22, they announced this:
This was a company with less than a $2 million market cap, acquiring a company with US$1.3mm of EBITDA. Obviously I was intrigued.
After an annoucement like that, the stock was surely to be halted for awhile, so I had some time to do a bit of research.
Who Is BioGanix?
First and foremost, we need to understand the company being acquired. If we do a simple Google search, we can find their website pretty easily:
More importantly, it’s pretty clear they are in the business of selling supplements, a very competitive space.
Just take a look at some of the competing products on Amazon here.
Specifically, we can see most of their best sellers are related to weight loss:
I can tell you from first hand experience, most of these products you can find just about anywhere, and there’s nothing proprietary about them.
Not a good sign for the business, but there’s likely still an opportunity for some information arbritrage on the stock.
Breaking Down the Press Releases
Now let’s get into the numbers of the first press release:
The first press release shown above contained a number of important things:
- The purchase price
- The company being acquired
- The company’s EBITDA (likely to be inflated)
- Part of the proposed financing
- The conversion price of the debt financing ($0.1396 notably higher than current share price)
- The fact that the financing is NOT finalized
Then a few weeks later, we get another press release:
Now it’s crunch time.
The stock halt will be lifted tomorrow and we got a bit more info.
More importantly, the press release also mentioned the acquisition had not been approved by the TSX yet. Keep that in mind.
How To Pro Forma Relevium’s Financials with BioGanix
We have Relevium’s EBITDA (although we have no clue how ‘adjusted’ that number is).
We know what part of the financing will be.
Now we need to get an idea of what Relevium’s expense level will look like. We can do this by pulling up their last financial statement:
We can assume their expenses will run at about $160k a quarter or $640k a year, giving us a pro forma EBITDA of $1.05mm:
(Note the $1.3mm of EBITDA was USD so you have to convert to CAD at a $1.3 CAD/USD rate)
Now that we have a pro forma EBITDA number, we need to come up with a few different financing scenarios for what the company’s capital structure and valuation might look like. I decided to use these four:
The first two scenarios assume the debt financing previously mentioned, and the rest funded from a private placement.
Seeing as they raised money in August at $0.10, I’d assume they’d do the same again. Since they need US$4.25mm for the acquisition, and they already have US$1.55mm coming from debt, they’ll need another US$2.7mm from a private placement (about $3.5mm CAD).
Therefore, we can assume they’ll need to raise 35 million shares in the first two scenarios, and will probably offer half warrants at $0.15 like they previously did.
Scenarios 3 and 4 assume they are able to raise all debt at 8%, although this is more unlikely.
Since we don’t have a clear picture of what profit will look like (they only gave us EBITDA), we can use a EV / EBITDA multiple to value the company. Based on the industry they are in, and the assumption that they are probably growing at a decent pace, we can assume a 10x multiple on the conservative side, and 15x on the higher side.
You can take a look at some average multiples for different industries here.
So what does the valuation look like when we put it all together?
As you can see, valuations range of $0.13 to $0.23, with somewhere around $0.15 being the more likely value, which makes a lot of sense with the conversion price at $0.1396.
Here’s the issue, the day before the halt was lifted we had these things to consider:
- The transaction was still not approved by the TSX
- The financing was NOT finalized
- We had no clue what BioGanix’s financials actually looked like
- We had no idea how inflated that $1.3mm EBITDA number was
- We had no idea if BioGanix was growing or declining
There were still some pretty obvious issues here, and