Photon to be debt free after agreeing to sell Field Marketing & Retail Agencies for $146.5 million – keeps star performers BMF, BWM and Naked

Photon Group Limited (ASX:PGA) today announced the sale of its Field Marketing & Retail Agencies division to Navis Capital Partners for cash consideration of $146.5 million in a transaction that, when completed, will leave Photon debt free.

Photon’s chief executive officer, Jeremy Philips (left), said that following completion of the transaction, the company would be greatly simplified, with 14 agencies, and would have an excess cash balance of at least $15 million.

Says Philips: “At the beginning of the 2011 financial year, Photon was an eclectic mix of 45 highly uneven business units in five divisions. The company carried an entirely unsustainable debt load of $450 million.

“During the course of the past year Photon has been transformed through this transaction, other divestments, a recapitalisation, and a corporate restructure. We have now transformed Photon into an unleveraged, focused, transparent company, with leading Australian and international agencies including Naked, BMF, and BWM.”

Under the agreement, Photon will sell its five Field Marketing & Retail agencies – Demonstration Plus, Club Sales & Marketing, Powerforce, Ausrep, and REL- as well as two closely-related businesses – Artel and Retail Insight.

This price of $146.5 million represents a multiple of 7 times the last 12 months EBITDA.

Including this transaction, over the past year, Photon has sold 13 businesses for a total of $233 million consideration at an average of 7.5 times trailing 12 months EBITDA.

Photon chairman Brian Bickmore said the board and management had set out a very clear strategy during the year to reduce debt and simplify Photon’s structure.

“We have repeatedly made it clear we would not be involved in a fire sale of Photon’s valuable assets. The CEO and his management team have achieved a dramatic turnaround in the past year from the company’s previous unsustainable debt load,” Mr Bickmore said.

Adds Phillips: “On behalf of the company, let me thank Field Marketing and Retail Agencies head Craig Hart, the heads of the businesses, and the entire team in the division for all of their hard work and dedication, particularly the efforts over the last year to introduce a consistent culture of collaboration, efficiency and professionalism across the division. Craig Hart will become chief executive officer of the entity that will own these agencies after completion.”

The business is being purchased by a fund advised by Navis Capital Partners, South East Asia’s largest private equity business, with over US$3 billion under management and seven offices across Asia. Philip Latham of Navis said: “We are extremely excited to be partnering

Craig and his management team in growing Australia’s largest field marketing operations and are keen to pursue an expansion strategy across South East Asia, China and Asia”.

The net proceeds from the sale (after any working capital adjustment and transaction costs) will be applied to debt repayment and is expected to result in an excess cash balance of at least $15 million. These divestments are expected to result in a further non-cash loss on sale to be recognised in the first half of FY2012 of approximately $32 to $37 million.

The sale, which is subject to certain customary conditions, is scheduled for completion on 30 November 2011. Although Photon is expected to have an excess cash balance following completion, the company is keeping in place a $16 million debt facility until 31 March 2013.

The facility will be undrawn following completion of the sale. The company does not currently intend to make any substantial acquisitions in the near term.

Photon will use its debt facility or excess cash balance to fund the remaining capped cash deferred consideration payments of $15 million over the next two years. In accordance with the terms of the deferred consideration restructure that Photon completed in September 2010, the EBITDA targets for any further capped deferred consideration payments under Tranche 3A and 3B are reduced to adjust for the impact of divestments.

Accordingly, the EBITDA target for Tranche 3A payments are expected to be reduced to approximately $53.5 million and the EBITDA target for Tranche 3B payments will be reduced to approximately $63.5 million. The leverage target remains unchanged at 2.25 times.