I am back to the more detailed articles! Today’s is a more interesting one for myself as I am going to do a preliminary assessment of the RCA acquisition ALPP announced in mid-December 2021. The reason I say preliminary is, well, the company hasn’t really been folded into ALPP yet and I can’t judge its actual performance yet! I am also relying on some info the CEO mentioned in a video interview outside of an SEC filing.
As such, this is very preliminary, but it should give you a “back of the napkin” level of analysis on the acquisition. Also, I’m hoping this will help investors and potential investors with understanding how to wrap your ahead around assessing and valuing any of ALPP’s future acquisitions. I hope to come out with these for many of ALPP’s past, and current, acquisitions.
Now, onto the article!
For those of you that don’t know, ALPP purchased a myriad of LLC’s which all form the collective business “RCA”. I’m not even that old, but I know RCA. Growing up, my piece of garbage TV I played video games on, likely manufactured in the 80’s, was an RCA brand. So, I initially got a nice chuckle out of this acquisition.
There’s a ton of background in this company, so I suggest you read the 8K and the CEO’s interview with Proactive a few weeks ago. But they points you need to know are that this company is in the electronics business and is classified as a Stabilizer and a Facilitator. As a Stabilizer, expect the company to have steady revenues, medium to low growth, modest profits, and nice cash flow. On the Facilitator side, I expect this company will be partnering with some of ALPP’s other business lines, but what those are I don’t know yet.
According to the 8K released on December 15, 2021, ALPP’s purchase consideration was as follows:
- Cash: 14,000,000
- Notes: 2,000,000
- Stock: 4,000,000
- Warrants: 1,000,000 (the warrant was to purchase 1m worth of shares, but let’s say the call option is worth 1m as well for simplicity’s sake)
- Total: 21,000,000
The stock and warrants are a bit tricky, but the company valued them at 4m and 1m at the time of the acquisition, so that’s what we have to go with.
First off, this was a cash heavy deal which is sort of out of the norm for ALPP, but not unheard of. Generally, when I see a cash deal in the OTCs, it usually means that ALPP thinks they have something great and don’t want to share in the spoils by handing out shares in exchange for the acquired company.
Think of it this way, if you buy a risky company with stock, if it goes bust the old owners go down with the ship with you (assuming you restricted their shares). If all goes well and makes the company a fortune, now you have to share with these freeloaders! In general, but not always, cash acquisitions signal a more bullish sentiment on the acquired company. But there are still tons of stock sale deals being done that end up being huge successes.
I do not have a breakdown of the purchase price allocation for this acquisition, and I likely won’t until we get the 10k. So, I don’t know the book value of any assets, debt, etc. acquired, and the allocation to Goodwill. I suspect the company, given its ownership structure of like five different LLCs and individuals, was not levered to the brim with debt. Likely just a healthy amount, but we’ll see!
For now, then, we must focus on the operating performance the CEO described in that video interview. He said the business generates about 40m in revenue and about 10-11% in net margin. That means profit net of interest and taxes as well, the very bottom line. So 40m in net revenue and 4m in net profit.
Did ALPP Get a Good Deal?
This is an extremely tough question to ask given the limited amount of info we have. However, we can work with what we do have to assess the acquisition and see if ALPP was at least within the ballpark with their purchase price.
With a strong cash flowing, steady company like RCA, a solid valuation metric is just a simple discounted cash flow (“DCF”) analysis. Let’s work through our assumptions.
The first step in a DCF Analysis is to understand your net outflow at the acquisition time, or T0 (T naught). We already know the payment was about 21m (let’s just assume it was all cash before some valuations expert comes in and says they paid 5m in warrants and stock… this isn’t the Goldman Sachs Investment Banking Division…).
So, our net outflow was 21m, right? Not necessarily. ALPP likely incurred other ancillary costs like legal fees, accounting fees, valuation expenses, etc. Let’s just make up something conservative like 1.5m.
That brings our initial net outflow to 22.5m.
Net Inflows – Assumptions
Now that we know the initial outflow, we can discuss the various inputs to the model. I’m also going to keep them conservative as one must do when we’re dealing with so much unknown.
Our key assumptions are:
- Discount Rate – This is our expected return on the RCA investment given its level of risk. The general market discount rate is usually around 10%. But since we’re getting into small businesses, let’s bump that up to 17.5% as these businesses are much riskier.
- Net Revenue Growth – Given that RCA is a stabilizer, let’s give it a modest 6% net revenue growth.
- Net Profit Margin – the CEO said 10-11%, but let’s call it 8% just to be safe.
- Non-Cash Items – in a DCF Analysis, you have to add back non-cash items like depreciation. Remember, we want to know final cash flow to the business. Let’s call it 1m per year growing at the revenue growth rate of 6.0%.
- Time Period – Unless we’re talking about developing a pharmaceutical, I like to analyze acquisitions over a ten-year period. So, let’s use ten years.
Now that we have our assumptions, let’s make a model!
Below is a screenshot of the full model.
To help you mobile users read it, see below a streamlined version.:
Now, for those unfamiliar with a DCF Analysis, what we want to see is an NPV greater than 0. A positive NPV means that we have earned more than our required return of 17.5%. Therefore, an NPV of 0 would indicate we earned exactly the required return (discount rate).
What these model results mean is that, according to this model, ALPP has done a nice piece of business by acquiring RCA. And that’s even with my stingier model inputs! Even just from hearing the numbers in my head before popping them into the model, I knew it was going to give a good answer.
To put this in perspective, assuming these conservative assumptions hold roughly true, which we all know isn’t guaranteed, ALPP has just invested in a steady business that will pay for itself in a little more than four years and will generate extremely good risk adjusted returns well into the future. This money can then be reinvested into new acquisitions, funding Drivers like the drone business, etc.
All in all, this should be very exciting for ALPP investors! I’m not even an investor and I got excited modeling this out.
As with the usual cautions, this is not financial advice, etc. But most importantly, what each reader needs to remember is that this model is very contingent on my inputs. I kept my inputs on the conservative side on purpose. But you could be even more conservative than I was and end up with an answer that isn’t good for ALPP.
For example, lowering revenue growth to 3% gives us a negative NPV. Raising the discount rate to 20% would also bring us below zero. So please, please, keep that in mind.
All of that being said, I kept it pretty conservative, so I think my analysis still carries some weight.
All in all, this appears to be a GREAT acquisition by ALPP. Even with some more conservative model inputs, we still end up at a favorable result for the company. Also, for current investors, if you believe in management, you should even be factoring the effect of ALPP’s management in optimizing the business and making it perform even better.
While these modeling exercises aren’t perfect, we can at least perform a reasonable valuation exercise which shows ALPP being in the general vicinity of a fair price. But only time will tell how well they did! In the meantime, have some fun with it, run your own models, and as always, do your own research. Because (I’ll slip in for like the 10th time) this isn’t financial advice 😊.
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A FINANCIAL INTEREST, LONG OR SHORT, IN $ALPP. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.