Why the Trimantium GrowthOps’ acquisition of AJF will probably fail

A combination of high costs, related-party transactions and a rich valuation are fuelling market scepticism about what was to be one of the year's most intriguing agency acquisitions and tech floats, argues Mumbrella's Paul Wallbank.

When it was announced back in November that AJF Partnership and several smaller agencies, would be rolled together for a float on the ASX by the previously low-profile Trimantium GrowthOps, it looked like a new chapter for one of Australia’s biggest independent agencies.

But a closer look at the prospectus reveals a web of conflicts that make me question whether the venture will be successful, even in the increasingly unlikely event that a float – which has already been delayed twice – goes ahead.

The structure of the deal would see AJF Partnership, creative agency Khemistry, branding agency Voodoo Creative and other digital service companies be brought together under the Trimantium GrowthOps brand.

This would be funded by an ASX float (ASX: TGO) which would raise $70m. According to the prospectus, the float was due to take place by mid-December, with the listing due to go live on the ASX on December 19. The owners of these agencies would be paid half in cash and half in shares in the new company.

The structure is not dissimilar to that of Photon Group. Co-founded in 1999 by adman Siimon Reynolds and media veteran Tim Hughes, Photon went on a disastrous $150m acquisition spree over the following five years acquiring Australian agencies including BMF, Naked, CPR and Bellamy Hayden before almost collapsing in 2012 and being reborn as Enero.

On a business level, Trimantium GrowthOps’ idea of offering clients an integrated marketing, technology and management service makes some sense. Founder and managing director Phillip Kingston described to Jessica Amir of the Financial News Network his rationale last November.

“We’ve brought together three critical disciplines. Management consulting and change management, technology services and operations, and creative services and innovation so that we can offer our clients an end-to-end operational growth partner,” he explained.

The choice of Financial News Network for an interview is telling of the conflicts in the deal. Financial News Network’s main shareholder is the Sequoia Financial Group, of which an entity associated with Kingston has a relevant interest, with approximately 3.79% of the voting shares.

The name Sequoia is an iconic one for followers of startup culture. The US-based Sequoia Capital is one of Silicon Valley’s most successful investment companies, having backed ventures including Apple, Google, Oracle, PayPal, YouTube, Instagram and many more.

However, when I called Sequoia Capital to ask if it had any connection to the Kingston-aligned Sequoia Financial Group, the on-the-record answer was a firm “absolutely not”.

One link that the Australia Sequoia does have though, is with its wholly-owned stockbroker arm D2MX, which is the “lead manager” of the Trimantium GrowthOps float and will receive $1.9m should the IPO be successful. However, there is no underwriter for the float, meaning there is no guarantee behind the offer.

Although the prospectus is unusually vague about how much profit and revenue each agency will bring to the group, it does reveal that AJF Partnership is key. According to the prospectus, based on the last financial year, 40% of the new group’s revenue comes from AJF alone.

AJF boasts clients including the likes of Officeworks, Holden, Lion and Coles Liquor.

The AJF founders

Founded nearly 13 years ago by Andrew Fabbro, Andrew Foote and Adam Francis – who all coincidentally share the initials AJF – the agency is widely seen as one of Australia’s most-respected independents and describes itself as one of the largest.

Rounding out GrowthOps’ proposed marketing and advertising services are Brisbane production agency Khemistry and Canberra-based comms and design consultancy Voodoo Creative.

Combined, the group’s total head count would amount to 261 across its agencies, which would all rebrand under the Trimantium GrowthOps name.

The wisdom of dumping the brand equity of the AJF brand is just one of the many questions to be asked about the deal.

However, investors have not so far bought Kingston’s vision, with the deadline to participate in the ASX float now pushed back until January 31, most likely because of a tepid investor response to the float.

As investment blog 10foot Investor puts it:

“My opinion is that Trimantium Growthops appears overpriced and risky, and I will be avoiding it.”

Kingston’s Trimantium Capital would hold around $30 million worth of shares in the company following the float, making him by far the biggest shareholder, as well as CEO of the new company. Previously, he’s had a chequered career in technology ventures having abandoned an IPO of a previous business and a falling out with the high-profile Spaceship tech superannuation fund over high fees.

The Melbourne-based entrepreneur was reportedly also involved in talks regarding a 2016 blockchain venture with the Winklevoss twins – best known for suing Mark Zuckerburg over the founding of Facebook – and a 2015 venture fund investing in Chinese and Israeli startups.

Of Trimantium GrowOps’ management team, managing partner Paul Mansfield has the most credibility, having built his Brisbane-based Weblinc into one of Australia’s most successful cloud computing companies before selling it to Atlanta-based Cloud Sherpas in 2012 and becoming the US company’s APAC head until the business was sold to Accenture in 2015.

Like many in this deal, Mansfield will be well rewarded for his expertise, receiving over $500,000 in cash from the float through his connections with Khemsitry and enterprise cloud integrator 3wks, one of the other companies being acquired, along with being the beneficiary of a trust currently holding 8% of Trimantium’s stock.

Trimantium GrowthOps' leadership team; Dustine Pang – CFO, Kait McCann – head of investor relations, Paul Mansfield – managing partner, Phillip Kingston – managing director, Dominique Fisher – non-executive chairman.

GrowthOps’ leadership team: Dustine Pang (CFO), Kait McCann (head of investor relations), Paul Mansfield (managing partner) Phillip Kingston (managing director) and Dominique Fisher (non-executive chairman)

Another key member of the management team is chief financial officer Dustine Pang. According to his LinkedIn profile, Pang was CFO of mortgage industry offering eChoice for nearly seven years until midway through last year.  eChoice went into voluntary administration in November.

The other companies being acquired in the deal include IT consultancy Digital Moshi, app developer jtribe, technology supplier KDIS and leadership development and executive coaching provider Institute of Executive Coaching and Leadership (IECL). All of the acquisitions depend upon the float being successful.

From speaking to brokers, I understand that agency shareholders have seen their companies valued at a multiple of about 8.5 times their net profit after tax and amortisation (NPATA).

This may help explain why owners were willing to sell to such an intangible venture – more typical in the ad industry would be a five or six times multiple. However, they will have also had to weigh up that only half of the purchase price will come in cash, with the rest in shares, which as previous sellers to Photon would know, could of course see their value fall dramatically by the time they were allowed to sell them.

Trimantium’s attempt to raise the $70m from ASX investors rests on its hopes to persuade them that once rolled together, the companies will be worth a multiple of 14.5 times estimated 2018 earnings. This seems optimistic to say the least.

The biggest winner on the deal – if it happens – would be Kingston. A trust represented by TGO Holdings – consisting of the current shareholders of Trimantium Capital – will get 20.6% of the company on completion. If the sellers hit their targets, and stick around for the next three years, the 20.6% will eventually be watered down to 14.2% as the additional shares are released.

Trimantium Capital – of which Kingston is listed in the prospectus as the “majority shareholder” – will receive an additional $618,000 as consideration for the KDIS business which is part of the overall deal.

And Trimantium Capital would also receive a further 6.9% of the shares in its own right.

Apart from a high valuation, potential management conflicts and high costs, there are a number of other technical problems with the GrowthOps float which are detailed in the 10foot investor blog – not least of which is that the Trimantium GrowthOps name will be licensed from Trimantium Capital, which is not part of the float.

The biggest worry for investors though is that Trimantium GrowthOps management doesn’t appear to have previously demonstrated the skills to integrate the disparate businesses it is bringing together. Without that integration, there seems to be little point in the acquisitions other than justifyin the float.

While it should goes without saying that Mumbrella does not offer financial advice, what’s clear from the Trimantium GrowthOps proposal is that it is a high-risk, high-cost deal. How it will work for the agencies being acquired remains to be seen, but given the history of similar ventures such as Photon and even Blue Freeway in the mid 2000s, it seems a case of seller beware.



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