EUO announced the long-awaited finalization of the purchase agreement between itself and SICPA for the sale of Global Fluids International S.A. as well as an exclusive long-term supply, maintenance and support agreement. Highlights of the deal include:
Cash consideration payable to the Company by SICPA on closing of $16 million (less the $250,000 deposit received by the Company and $286,000 in transaction payments, and assuming that, on closing, GFI has positive working capital of $1,000,000), subject to a working capital adjustment and settlement of loan amounts owing by Eurocontrol to GFI. The loan outstanding to former GFI shareholders is about $1 million (see note 13 of the company's Q2 financial statements). The cash/working capital amount on the pro forma balance sheet after the deal is closed is estimated to be $17 million, or 19 cents per share.
Post-closing earn-out payments equal to 5% of the net revenues earned by GFI from contracts entered into by it following the execution of the Purchase Agreement and during the period ending six years from the closing of the transaction, with a minimum guaranteed of $1.5 million per year for the six years earn-out period. The total payment will be least $9,000,000. Discounting those guaranteed cash flows at 10% annually leads to an NPV of $6.53 million, or 7.3 cents per share.
Additional post-closing payments equal to 5% of the net revenues earned by GFI from contracts signed during the fourth through sixth years following closing paid until the third anniversary of such contracts.
The strategic relationship with SICPA is intended to allow Eurocontrol to accelerate the fulfilment of its current objective of growing Xenemetrix's existing business through its ongoing support of GFI's business, on an exclusive basis, in the field of oil and gas marking and monitoring under the Supply Agreement.
GFI has an annualized run rate of about $6 million in revenue so the $1.5 million guaranteed payment is 25% of that. Clearly SICPA signed this deal with the expectation that the growth rate in the business will be extremely high considering its ability to procure contracts in government security and GFI's expanded logistics offering. SICPA is a private company which doesn't report financials so it can be anyone's guess as to their expectation for this subsidiary but given that revenue for the company is in the billions and this marks its expansion into the Petromarking business, $200 million in total revenue for GFI in six years is achievable:
Assuming a 15% discount rate on the royalty in excess of the $1.5 guaranteed minimum payment over the next six years, that leads to another 18 cents per share of value. The Gold Report has updated its 1-year target on EUO to $0.50 based on $0.26 of value in the cash component of the deal, $0.18 in the potential excess cash flows from the expanded GFI business and a nominal $0.06 in value for the company's remaining two subsidiaries. Clearly Xenemetrix is worth more than $5M in value considering the exclusive agreement it will have with GFI, but given the extremely low valuations attributed to TSX Venture stock right now, it is best to be conservative when valuing speculative businesses.
A three year target has been removed since The Gold Report believes that it's likely that EUO will get bought out before it has a chance to reach $1.50 in value. What makes the EUO story so compelling is not so much it's upside, which is estimated to be at least 3 times its current stock price, but it's very limited downside. EUO is getting an upfront cash per share amount in excess of its market cap of $15 million. The TSX Venture has been so brutal for traders that they are sensitive and very weary of chasing stocks that are near their 52-week highs. EUO has had an amazing 2015 and is up 175% this year so it has been subject to profit taking, but this deal ensures that EUO will only have more to rise from here.
