Tim Mueller’s Transaction Analysis: New IT M&A Deals March 1

Novitex and SourceHOV Agree to Merge, Become Exela Technologies

Financial Information*

  • Enterprise Value: $2.8 billion
  • EV/EBITDA: 7.3x

Transaction Facts

  • Earlier this week, SourceHOV, Novitex, and acquisition company Quinpario Acquisition Corp. 2 (Nasdaq: QPAC, QPACW, QPACU) announced that they were combining to form Exela Technologies.
  • The transaction is expected to close during Q2 2017, creating a $1.5 billion revenue managed services giant with EBITDA of $385 million.
  • Financing for the transaction will come through a combination of new debt financing ($1.35 billion), rollover equity ($806 million from SourceHOV and $306 million from Novitex), and $311 million of cash from Quinpario.

Scale Remains Key Differentiating Factor

Go Big or Go Home: This transaction is one of superlatives – it creates an industry leader with 3,500 customers in 55 countries spanning multiple verticals. As reported by CRN, it will serve the top five healthcare payers, the top ten US banks, and nine of the top ten US insurance companies.

Buying Diversification: The scale does more than simply achieve growth – it also creates a more diversified revenue stream. While currently over a third of Novitex’s revenue comes from its top 10 accounts, Exela’s top 10 accounts will contribute less than 20 percent of overall revenue.

Following a Familiar Pattern: SourceHOV, formed through a merger between SourceCorp and Lason in April 2011, is itself a serial acquirer. Thanks largely to its multiple acquisitions, its revenue grew tremendously with Lason reporting $159 million in 2010 and SourceHOV collecting an expected $900 million in 2016.

The Private Equity Playbook: This transaction is also familiar as a demonstration of the increasing role private equity plays in the channel. SourceHOV is majority owned by home office HandsOn Global Management and its affiliates, while Novitex is owned by funds managed by affiliates of Apollo Global Management (NYSE:APO). Both entities are positioned to reap the rewards of the the combination through rollover equity, including at least $37.5 million in cost synergies, margin and revenue growth opportunities, and strong recurring revenue and free cash flow conversion.

A Feather in the Cap: This transaction is an impressive development befitting SourceHOV founder Surinder Rametra, founder of Sun Computer and IT visionary who elevated the company’s position in the supply chain.

IT Exchangenet was not the advisor in this transaction.

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