The client is a privately held e-commerce company that was generating A$13m EBITDA. The Company was on a very steep growth trajectory and needed a further A$25m of funding to further expand their distribution capabilities and increase their inventory. The return on this investment was expected to be north of 30% with a payback period within 3 years. They could validate this based on data they held on cart drop rate for out of stock SKU’s.
There were broader market reservations about the impact of a Amazon entering the Australian and New Zealand markets resulting in indicative equity valuations being heavily discounted. The shareholders felt this discounting was grossly mis-founded. Moreover, they felt that with the visibility they had on earnings growth, that they were on track to list on the ASX within 18 months at a valuation that was at least double the indicative valuations they had received. This put the expected cost of equity somewhere between 50% and 100% IRR.
Their domestic bank was only willing to offer a facility around the A$15m mark as they struggled to place any value on the inventory and the fixtures/ fittings in their leased warehouse in Queensland. The shareholders had limited access to further internal funds and would therefore need to raise third party equity meaning the WACC of the A$25m would be somewhere around the 30% mark.
The alternative solution proposed was an Asian based credit fund who could lend as high as 4x EBITDA due to the Company’s stable and growing cashflow. The credit fund put forward a term sheet that had an all-in cost of funds of 12% that covered the full A$25m and also flagged further headroom to go above that if there were further growth opportunities. The net outcome is that the shareholders achieved a far lower WACC than the equity alternative and they did not need to relinquish any control over the company.
