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Why Appen is raising $300 million for its Figure Eight acquisition

This morning data analytics and language services group Appen Ltd (ASX: APX) announced it is to raise $300 from existing shareholders to fund the acquisition of San Diego-based Figure Eight Technologies Ltd for US$175 million plus additional performance-based payments up to US$125 million.

In other words the final bill could be a chunky US$300 million (A$426m), with the upfront consideration (US$175m) to be funded by a capital raising at $21.50 per share at a 11.8% discount to the last exchange traded price of $24.37.

The performance-based payments will be funded by new debt facilities to be “drawn down at the time of payment in March 2020”.

The upfront payment has been priced at 5.7x Figure Eight’s fiscal 2018 revenue which is about standard for a seemingly unprofitable software-as-a-service (SaaS) business, with Figure Eight expected to contribute positive EBITDA (excluding synergies) by the second half of 2020.

Investors also have to factor in the anticipated earn out payments in 2020 to get a full sense of the deal’s value, with Figure Eight reportedly growing revenues at a compound annual rate of 50% between 2015 and 2018 to $42 million.

The last time Appen completed a significant acquisition in Leapforce it transformed the company, but this deal does not look as significant on face value.

It also places the business higher up the risk curve given the sales multiples, seeming unprofitability, and fact that Figure Eight with just $42 million in annual revenues will need to produce plenty of growth to justify its price tag.

A couple of other points to note about the deal include the idea that Appen’s management appear to have timed it well, raising capital at $21.50 per share after a red hot share price run that has seen the stock nearly double since December 2018.

It’s likely management had their eyes on Figure Eight prior through 2018, but waited until they could raise the same amount of money by issuing half the amount of new shares they would have needed to just back in December 2018.

Also, it’s worth noting that retail investors have only been offered $15 million of a $300 million raising, which is next to nothing given the company has about $2.6 billion of issued equity.

In other words retail investors are likely to be heavily scaled back in applying for shares, although in fairness they have little to complain about given the superb returns delivered to shareholders over the last 5 years.

Another popular founder-led business attempting an acquisitive strategy in the tech space is WiseTech Global Ltd (ASX: WTC), while Xero Limited (ASX: XRO) also recently bought Hubdoc Ltd for up to US$70 million and is on the record as being interested in more deals.

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Motley Fool contributor Tom Richardson owns shares of Appen Ltd and Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Appen Ltd, WiseTech Global, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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