Churchill VII (NYSE:CVII) has entered into a definitive agreement to combine with private equity firm CorpAcq at an enterprise value of $1.58 billion, or 10.3x its 2023E adjusted EBITDA.

Altrincham, UK-based CorpAcq is a long-term corporate acquirer with a portfolio of 41 enterprises primarily in the industrial sector.

The combined company is expected to trade on the NYSE once the deal is completed in late 2023 or early 2024.

Transaction Overview

Churchill VII has about $592 million in its current trust after seeing 57.9% of shares redeemed in a May extension vote and it has not yet supplemented this with additional outside financing.

Assuming no redemptions, CorpAcq would add $129 million to its balance sheet through the deal after using $158 million to redeem existing preferred shares and footing $55 million in expenses.

The company also plans to use up to $250 million to cash out existing shareholders in a secondary offering depending on how much capital is available after public SPAC shareholder redemptions. Churchill VII must maintain at least $350 million in cash available in order for the deal to close.

CorpAcq also plans to refinance an existing $257 million term loan facility alongside this transaction and it estimates it would cost it about $100 million to buy out the remaining minority stakes in its subsidiaries that it does not currently own.

Churchill VII has agreed to forfeit 15,000,000 promote shares (43%) and subject a further 12,100,000 (35%) to earnout terms. Of these, 7,400,000 are to vest if the combined company trades at or above $11.50 for 15 of 60 trading days and 4,700,000 if it holds at or above $15 under the same terms.

Quick Takes: If ever one is looking for signs of the state of the SPAC market, the activity of the Churchill SPACs is about as good as any bellwether.

Led by CEO and Chairman Michael Klein, the Churchill SPACs have always been able to distinguish themselves by the size of their trusts. Among SPACs that have completed or announced a deal and appear on track to close, Klein’s vehicles represent three of the top five SPAC raises since 2011.

When the SPAC market was hottest, Churchill IV raised over $2 billion in total proceeds at IPO in July 2020 and a $2.5 billion PIPE for its $11.75 billion combination with Lucid Motors (NASDAQ:LCID) announced in February 2021.

Far from straying from SPACs, so much money wanted to go into Klein’s Lucid transaction at the time that the SPAC’s stock soared to $63 on the deal rumors alone and the parties had to cut the PIPE at $15 per share.

Fast-forward two and a half years and Churchill VII has shown itself to not be immune from the redemptions bug. The SPAC dangled an LOI with a target in December to get an auto-extension but still lost more than half of its trust when it had to go to investors for an extension in May.

The result is a target with a pro forma enterprise value only about 14% larger than the $1.38 billion that Churchill VII raised at IPO. And, to compensate for redemptions to date, Klein’s sponsor team may wind up permanently parting with 78% of their promote shares (although its path to earning 35% of them back is easier than standard terms).

But, Churchill’s latest target is also emblematic of the times. CorpAcq is not some purveyor of exciting new technology that could take the world by storm if only it could get some factories built, some technical kinks worked out and a customer base established.

CorpAcq is a buyout shop that itself is only looking for bankable business activities to chase. Its portfolio generated $129 million in adjusted EBITDA in 2022 from $826 million in revenue for 16% margins.

It has built out its network by focusing on small and medium-sized enterprises (SMEs) and now has 41 portfolio subsidiaries in the UK. These range in sector from consumer goods to manufacturing, infrastructure and energy.

Many of these subsidiaries have been able to cross-sell products to clients or present internal synergies between operations. CorpAcq is also not looking for quick flips as it still has portfolio companies that were originally acquired in 2007.

It believes this makes it a more attractive acquirer for founder-led businesses that want to continue to manage the companies albeit with more support and synergies. Another criteria that has driven its M&A processes has been to pull in companies that have strong potential for generating internal dividends for the company and it would seek to be a dividend stock as a public company.

But, for all of these points of differentiation from typical private equity practices, its approach has still involved leverage and the company has accrued $453 million in total debt. But, it expects the cash brought in by this transaction to drop its net leverage from 2.6x to 1.8x.

Still, it is valued in this deal at 10.3x its 2023E adjusted EBITDA, which is a reasonable discount to listed US diversified industrial peers and an even steeper discount to its peer European M&A firms with a similar approach. The former of these groups trade at a median EBITDA multiple of 13.2x while the latter trade at a median of 16.5x.

These M&A shop peers are operating with lower debt loads ranging from 1.2x to 2x net debt and many have also posted stronger EBITDA growth. But, CorpAcq leads this group in return on invested capital (ROIC) with an 18% rate versus an 11% to 15% spread among its peers.

Click here for the full investor presentation.

ADVISORS

• Company
  • Reed Smith LLP served as legal counsel
• SPAC
  • Citigroup Global Markets Inc. served as capital markets advisor
  • Weil, Gotshal & Manges LLP served as legal counsel
• Duff & Phelps rendered a fairness opinion to the board of directors of Churchill VII in connection with the proposed transaction.