Investcorp Europe I (NASDAQ:IVCB) has entered into a definitive agreement to combine with brand protection firm OpSec at an enterprise value of $426 million, or 1.9x its 2023E revenue.

London-based OpSec provides a wide range of services to companies to monitor and protect their brands and intellectual property both physically and digitally.

The combined company is expected to trade on the Nasdaq once the deal is completed in the second half of 2023.

Transaction Overview

Investcorp Europe I has about $199 million in its current trust having experienced 44.9% redemptions thus far. The SPAC’s sponsor has also agreed to provide a backstop worth up to $50 million that will be reduced to the extent that total proceeds exceed $100 million.

OpSec expects to add $20 million to its balance sheet through the deal after paying $20 million in transaction expenses. The transaction does not include a minimum cash condition.

The parties expect existing OpSec shareholders to own 75% of the combined company at close with committed capital from the trust and backstop amounting to 16% while the SPAC sponsor’s promote shares would convert to a 9% stake.

Investcorp Europe I has agreed to forfeit 2,555,100 promote shares (29.6%), 2,050,000 warrants (12.2%) and reimburse OpSec for any transaction expenses exceeding $20 million.

Half of the sponsor’s remaining promote shares are to be placed in escrow and will only vest if company stock trades with a VWAP at or above $12 for 20 of 30 trading days within 10 years of close.

Company shareholders have agreed to a nine-month lock-up, and OpSec is to be reimbursed for up to $3 million in expenses if the deal is terminated.

Quick Takes: This deal marks a return to the public markets for OpSec, which previously IPO’d in London in July 1998.

In 2010, it landed in the radar of Investcorp Technology Partners – Investcorp Europe I’s parent and backer. Investcorp invested $23.5 million in the company that year and about $33.3 million more the following year before taking the entire company private in two share purchases that ultimately valued the company at $23.2 million in 2016, according to Pitchbook.

Through a series of acquisitions, the company has since grown from about $88 million in annual revenue to $218 million in its 2023 fiscal year, which ends on March 31.

Before the takeover, OpSec had a core suite of products helping brands gird themselves against counterfeit attempts or intellectual property theft. The mix of bolt-ons and organic R&D have added services to its portfolio that include end-to-end licensing arrangements, digital content protection, and digital brand trust monitoring.

It is now eying new pillars of services in specialist packaging, consumer sentiments and digital services in the sports media specifically.

The bulk of OpSec’s annual revenue continues to come from managing IP portfolios for a variety of companies that include 19 of the top 25 consumer brands globally. But, it considers its market position stronger in enhancing brands with traceability and authentication technology as well as providing foil-based security features and cyber services to protect brands online.

These latter service categories make up about 44% of the company’s revenue and it views its government solutions and online content monetization categories as areas where it could improve its position relative to the competition. Those revenue streams make up just 5% and 8% of the company’s revenue, respectively, though.

Its existing mix has been profitable one way or the other, with the company logging 13% EBITDA margins in each of 2021 and 2022 for $26 million and $28 million. And, it expects margin growth to now accelerate with its acquisition this year of peer Zacco.

OpSec believes that deal will allow it to offshore a larger portion of its staff and digitize other parts of its business, expanding its EBITDA margins to 15% in 2023E and 17% by 2025E. By that point, it believes it will be able to convert 71% of EBITDA to cash after capex and other expenses.

As such, although this deal has been arrived at effectively within the Investcorp family, it is far from cash-out.

Investcorp Europe I in fact priced OpSec at a noteworthy discount to the median trading multiples in the various sectors that OpSec operates in. The deal’s valuation equates to 10.7x its 2024E EBITDA, while companies in the identity security category trade at a median of 14.8x, led by Equifax (NYSE:EFX) at 16.3x.

Physical identity security firms like Zebra (NASDAQ:ZBRA) meanwhile trade at a median of 12.4x and tech-enabled outsourcing peers at 11.8x. Many of these listed peers continue to have operational advantages to OpSec for now, however, with many of them expecting to turn roughly double OpSec’s EBITDA margin in 2024E.

Equifax has projected margins of 34.3% to OpSec’s 16.1% for next year while the outsourcing and physical ID sector peers project median margins of 23.6% and 19.6%. OpSec is still growing much faster than this group, however, expecting its revenues to expand 11.7% through the next two years while these listed peers nearly all expect single-digit growth.

Click here for the full investor presentation.

ADVISORS

• Investcorp Europe Advisors:
  • Shearman & Sterling LLP is acting as legal counsel
  • Citigroup Global Markets Inc. is acting as capital markets advisor
  • Credit Suisse Securities (USA) LLC is serving as financial and capital markets advisor
  • Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal counsel to Citigroup and CS.
• OpSec Group Advisors:
  • Proskauer Rose LLP is acting as legal counsel