Capital Economics Sells Stake Valuing Business at £70 million

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Capital Economics, Ltd., a London-based economics research firm, received a capital infusion valuing the firm at £70 million (US$112 million) which is significantly above the original asking price of £50 million.  Although Capital Economics has not yet released its 2014 financials, the valuation seems to reflect the high profitability of its business.

LDC, the middle market private equity arm of Lloyds Banking Group, is purchasing a minority stake for an undisclosed sum which values the firm at £70m.  As we reported in August 2013, Capital Economics had reportedly hired Quayle Munro to put the firm up for a sale with an asking price of £50 million.  The sale attracted 25 potential bidders.

Capital Economics plans to use the proceeds to hire more staff at its overseas offices in Toronto and Singapore, and is considering opening an office in Australia.

Capital Economics was founded in 1999 by Roger Bootle, a former HSBC chief economist.  The company’s macroeconomic research covers developed and emerging markets, and the firm reportedly has 1,500 firms subscribing to its research.   Bootle owned 68% of the firm prior to LDC’s investment.

For the fiscal year ending April 30th 2013, Capital Economics had revenues of £15 million (US$22.5 million) and a profit after tax of £4.6 million (US$7.5 million), representing a juicy margin of over 30%.  Revenues were up nearly 13% from the previous year’s £13.3 million.

We suspect that the valuation is founded on an EBITDA multiple rather than a revenue multiple, reflecting the high profitability of Capital Economics’ business.  The firm’s 2013 pre-tax profits were £6 million ($9m), which represents an 11.7x multiple on 2013 EBITDA.

By comparison, Euromoney’s US$112 million base purchase price of Ned Davis Research in 2011 was approximately 10 times NDR’s 2010 pre-tax profits.  The maximum purchase price with earn-outs over the succeeding two years was $173 million, representing an EBITDA multiple close to 15x.  The amount actually paid by Euromoney was likely somewhere in the range of an EBITDA multiple of 12x, comparable to Capital Economics’ valuation.

The challenge for Capital Economics will be to maintain its high margins as it adds more staff and expands its business internationally.  Presumably many of the new hires will be salespeople.

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