I really hope that buying Arotech for $100M isn't the cards for Virtra.
Paying $100M for $15M of incremental earnings seems reasonable on its face (purchase price of 6.7x earnings), except for the fact that:
1. It's likely much harder than you think to transform a business that loses money to one that produces 15% after-tax margins (translates to 24% pre-tax margins), especially after you jettison one of their more meaningful, existing product lines.
2. Virtually all of the $100M would need to be financed
3. You likely wouldn't be able to shield the incremental income from taxes since the $1.7M of NOL's that the company had at the end of 2016 have likely dissipated by now.
Assuming Virtra uses $3M of its cash balance and finances the rest of the purchase via debt with a 5% interest rate, you end up with the following (assuming 15% pre-tax margins, which is far more realistic than 15% after-tax margins).
$15M of incremental pre-tax earnings x (1 - 38% tax rate) = $9.3M incremental after-tax earnings
$97M x 5% interest rate x (1 - 38% tax rate) = $3M after-tax interest costs
$9.3M - $3M = $6.3M
So, you've actually paid $100M for $6.3M of incremental earnings = 15.9 times earnings. On top of its, you've significantly increased the risk profile of the company by adding $97M of debt to the balance sheet.
If the company financed the purchase with equity, that would be even worse. You'd have to issue 46.2M additional shares, which would represent over 73% dilution to existing shareholders. Yikes.
If you fully tax Virtra's pre-tax earnings thus far in 2017, you end up with $1.32M of after-tax earnings in 6 months. Double that and you get $2.64M for the full year. With an enterprise value of $31.3M, Virtra currently trades at 11.9x fully-taxed after-tax earnings.
If you pay $100M for Arotech, you end up with $9.94M of after-tax earnings for the year. But your enterprise value jumps from $31.3M to $131.3M ($3M less cash and $97M more debt on the balance sheet). Virtra would then trade at 13.2x after-tax earnings.
A transaction with these terms doesn't seem to pencil.
