Comment: High stakes at the Towergate deal table

With Towergate chairman Peter Cullum reportedly hammering out an agreement to sell off a stake in the business, can he keep his new private equity partners happy and still walk away with a tidy sum on flotation?

The consolidator is believed to be securing £200m from the sale of a stake to private equity house Advent International, which will dilute Cullum’s shareholding.

The deal is the first step towards a £600m-plus bond refinancing that paves the way for flotation, slated for 2013.

So, two years from now, what kind of market capitalisation – effectively, the price of the company – will Towergate be looking at?

The best-case scenario: £1.6bn

Imagine the economy is coming back to real strength, investor confidence is high and the consolidator has added some good acquisitions to bolster revenues.

By then, Towergate’s earnings before interest, tax, depreciation and amortisation (EBITDA) could be £200m, meaning it’s just about within the acceptable investor range of three times its £600m debt.

With projected interest payments of £40m, the earnings figure comes down to £160m. Towergate could achieve a multiple of anywhere between six and 10 times on flotation, pricing the consolidator at up to £1.6bn. However, a more conservative value in good conditions is £1.2bn.

That leaves Towergate on a stable footing, with enough in the tank to continue on its acquisition strategy and even start thinking about international expansion. That’s a story that will attract investors, and could see Towergate emulate the success of publicly listed JLT, the pin-up boy for aspiring broker floaters.

The worst-case scenario: £550m

However, the economy could still be dragging in two years' time, meaning Towergate’s revenues would struggle to climb and investor confidence would be low. If the consolidator’s EBITDA was, say, £150m, minus £40m interest payments, earnings would be £110m.

Multiples will be lower, given the depressed economy, and there could be concerns over earnings to the debt levels. So multiple the earnings by five, say, and you have a business with a market capitalisation of £550m. Both Cullum and the private equity partner would receive poor value for their shareholdings in such circumstances.

Everything to play for

That’s two very different and extreme scenarios, using purely indicative numbers.

But there are other factors at play: for example, if Giles were to successfully float before Towergate, that could boost investor confidence in the business model.

For Cullum & co, it’s going to be a nail-biting two years.