Own Hub24 (ASX:HUB) shares? Here’s what the Class (ASX:CL1) deal could mean for the company

Here’s what the Class acquisition could mean for Hub24.

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Hub24 Ltd (ASX: HUB) has recently announced the acquisition of Class Ltd (ASX: CL1).

The offer was so good, that the Class board of directors have already unanimously recommended that Class shareholders vote in favour of the offering.

Hub24’s offer

If the transaction goes ahead, Class shareholders will receive 1 Hub24 share for every 11 Class shares held as well as a cash amount of $0.10 per Class share.

Based on the closing price of Hub24 shares on 15 October 2021, the total consideration implies a value for Class of $3.11 per share. This represented a premium of 71.6% to the last trading price of Class and a 76.8% premium to the one-month volume weighted average price of Class shares.

Spheria Asset Management, which owns around a fifth of Class, has confirmed it intends to vote in favour of the offer.

Why is Hub24 interested in Class?

Hub24 said that this deal would bring together two highly complementary businesses with aligned culture and values. Both companies are “strategically focused” on the delivery of solutions that support professional advisers to implement investment, tax and strategic advice.

Management believe there are opportunities for growth by delivering increased efficiency and product capability for existing and new customers.

If the deal goes ahead, Class will operate as a Hub24 business unit with its own leadership team under the Class brands with continued investment to deliver on its multi-product software as a service (SaaS) service strategy.

Hub24 believes it will materially accelerate the company’s platform of the future strategy.

It has been calculated that the deal could add compelling shareholder value, adding 8% to earnings per share (EPS) in FY23 (excluding revenue synergies and one-off implementation costs) and it will diversify revenue streams for both businesses.

The expected cost synergies are expected to be around $2 million per annum. The FY22 transaction costs are expected to be around $4 million to $5 million. Estimated implementation costs of $6 million are expected to be incurred over FY22 and FY23.

What is the Class business?

Class is described as a market-leading self-managed superannuation fund administration software provider with a 29% share of the SMSF admin software market.

The ASX fintech share is currently going through a 3-year strategic transformation to expand its core SMSF offering into a multi-product SaaS provider. Class continues to invest in technology development to enhance the customer proposition.

Class has a growing customer base with over 7,700 customers, made up of accounting practices, financial planning practices, administrators and institutions.

Hub24 noted that Class’ revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) continue to grow. Over the last three years, the compound annual growth rate of revenue has been 18% and EBITDA’s compound growth has been 10%.

After merging the two businesses, the combined business will have pro forma revenue of $162.7 million, made up of platform fees (62% – from Hub24), technology solutions (4% – from Hub24), software subscriptions (29% – from Class), document sales (3% – from Class) and ‘other’ (1% – from Class).

Is this a good deal?

The broker Morgans thinks that the Hub24 share price is a buy, with a price target of $34.20.

Morgans thinks the price may be a bit high, but the broker still thinks that Hub24 has a good long-term outlook.

Should you invest $1,000 in Hub24 right now?

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Hub24 Ltd. The Motley Fool Australia owns shares of and has recommended Class Limited. The Motley Fool Australia has recommended Hub24 Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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