Stealth Group Holdings (ASX: SGI), a prominent Australian distribution group, has announced its acquisition of Force Technology International Pty Ltd (Force), a leading distributor of consumer mobile accessory products in Australia. This strategic move underscores Stealth's commitment to expanding its market presence and enhancing shareholder value.

Strategic Rationale

Force Technology International Pty Ltd has established itself as a key player in the lucrative $2.2 billion mobile accessories market, boasting a robust distribution network encompassing approximately 3,310 retail reseller outlets across Australia. Notably, nearly half of Force's sales are derived from its proprietary and private-label products, highlighting its strong market position.

Under the terms of the acquisition, Stealth will acquire 100% of Force's shares for approximately $9.5 million, with additional incentives tied to performance targets in FY26. The transaction, valued at a multiple of less than 4.0x EV/EBITDA for FY23 and FY24F, will be financed through a combination of new equity issuance and assumption of Force's existing working capital finance facilities.

This strategic alignment with Force's distribution capabilities complements Stealth's focus on higher-margin, capital-light product ranges featuring proprietary, private-label, and exclusive brands. The combined entity will emerge as a formidable player in the distribution landscape, boasting a nationwide reach and diversified product portfolio.

Key Financials

Force Technology International is projected to achieve FY24F revenue of approximately $44.0 million, with normalized EBITDA of approximately 6%, excluding transaction costs. Post-acquisition, the combined entity is anticipated to achieve revenue of approximately $159 million and EBITDA of approximately $8.5 million for FY24, before accounting for synergies.

The transaction is expected to be accretive to earnings per share by approximately 43% in FY24F and 26% in FY25F, excluding synergies. Furthermore, the pro forma balance sheet remains robust, with leverage expected to reduce to 1.1x FY25 EBITDA post-synergies.

Meaningful synergies, estimated at approximately $1.2 million per annum, are anticipated to enhance operational efficiencies and drive incremental margin dollars through cross-selling and new brand introductions.

Deal Summary

The acquisition, effective as of June 1, 2024, is slated for completion before June 14, 2024. The purchase price of approximately $9.5 million will be funded through the issuance of new SGI shares and assumption of Force's existing financial facilities.

Moreover, an outperformance incentive may be payable to vendors in FY26, contingent upon Force's achievement of specified EBITDA targets. Post-acquisition, the vendors will collectively own 12.52% of the total shares of Stealth Group Holdings.

Leadership Commentary

Group Managing Director and CEO, Mike Arnold, expressed enthusiasm for the acquisition, emphasizing its strategic significance for both Stealth and Force. He highlighted the potential to leverage Force's distribution network and customer base, while providing new customer channels for both entities.

Arnold underscored the anticipated synergies from the acquisition, coupled with expanded customer channels and operational efficiencies, as drivers of enhanced value for Stealth and its shareholders. He affirmed the company's commitment to delivering robust returns and maintaining a competitive edge in the market.

The acquisition of Force Technology International Pty Ltd positions Stealth Group Holdings as a formidable force in the distribution landscape, poised for sustained growth and value creation in the dynamic consumer market.