Acquisition of Frontier Development Capital Limited

Mercia is delighted to announce that it has acquired the entire issued share capital of the central-Birmingham headquartered Frontier Development Capital Limited (“FDC”), for a total consideration of up to £9.5million plus net cash.

FDC is a leading, regionally focused lender to SMEs, with c.£415million of funds under management (“FuM”). The acquisition is expected to be immediately earnings enhancing. FDC has successfully built loan portfolios totaling c.100 companies, predominantly located across the Midlands and the North of England. As well as its Birmingham head office, FDC also has offices in Manchester and Bristol, two of Mercia’s existing office locations.

FDC typically makes commercial loans from £2.0million upwards, whilst Mercia’s existing lending parameters are between c.£200,000 and £1.0million. Combined, Mercia’s lending team will now comprise 41 staff managing c.£531million of FuM, of which 28 are experienced, regionally based lending professionals.

This strategic acquisition is for an initial consideration of £5.5million, satisfied in cash and funded from Mercia’s own liquid resources, plus an amount equal to FDC’s net cash position (subject to certain adjustments) as at 30 November 2022 and estimated to be approximately c.£1.5million. In addition, deferred consideration of up to £4.0million in cash will be payable, contingent upon the achievement of future revenue and net new institutional third-party fundraising targets for the two years to 30 November 2024.

FDC was majority owned by its senior management team and other staff, all of whom are remaining with the enlarged Group.

Strategic Rationale

Mercia’s specialist asset management acquisition strategy is centred on two principles: 1) more of the same, principally profitable asset classes that the Group already understands and is managing, and 2) adjacent asset classes which would be complementary to Mercia’s existing ones. Overarching these two principles are people, culture and the opportunity for further organic growth in the future.

Mercia identified FDC as a highly complementary fit following a detailed review of a number of possible acquisition opportunities during the last 12 months, across its key specialist asset management areas of focus. The Directors believe that the acquisition of FDC offers a number of strategic benefits to the Group, including:

• Significantly expands the Group’s profitable assets under management (“AuM”) to c.1.4billion, and takes the Group within reach of one of its two Mercia ‘20:20’ goals. At the time of announcing its Preliminary Results for the year ended 31 March 2021, the Group reported that it had largely achieved its previous three-year strategic goals one year earlier than planned. Mercia therefore announced its new strategic plan, Mercia ‘20:20’. The new twin objectives are to grow AuM by an average of 20% per annum over the three year period to 31 March 2024, and to deliver average pre-tax profits of £20.0million per annum over the same three-year period. The start point for its three-year, 20%, annual AuM growth target, was c.£940million on 1 April 2021, growing to c.£1.6billion by March 2024. The addition of FDC’s c.£415million of FuM therefore takes Mercia to within reach of its £1.6billion target, with 18 months still to run. Mercia currently expects the remaining c.£200million of targeted AuM growth to be achieved by organic means. Whilst not ruling out one further acquisition between now and 31 March 2024, none are in active negotiation.

• Strengthens Mercia’s position as a leading, regionally focused and proactive supporter of SMEs. The addition of FDC’s regional footprint and 24 staff to Mercia’s own established regional presence and 120 staff broadens Mercia’s ability to support fast growing SMEs throughout the UK, and is consistent with its long established ‘Complete Connected Capital’ offering of venture, private equity, debt and propriety capital.

• Collaboration between the complementary expertise and deal flow networks of both FDC’s and Mercia’s successful lending teams, should result in additional lending opportunities for both teams across the UK. With FDC’s 24 lending and support staff based in Birmingham, Manchester and Bristol focused on lending opportunities from c.£2million upwards, and Mercia’s own team of 17 lending and support staff based in Leeds, Preston and Hull focused on lending opportunities up to c.£1million, there is no overlap and therefore significant opportunity for both teams to work closely together and share opportunities outside of each other’s core scope.

• Positions the enlarged Group ready for further organic FuM growth opportunities. A key aspect of Mercia’s acquisition criteria is adding businesses where the enlarged group is better able to target future organic growth opportunities, as and when they arise. Since acquiring Enterprise Ventures Group Limited in March 2016, its FuM has grown organically by c.£150million, and the VCT fund management business acquired in December 2019, has similarly grown its FuM organically by c.£66million. The addition of central-Birmingham based FDC strengthens the Group’s ability to present its regional lending credentials, as and when new mandate opportunities arise.
  
  
• Acquisition is immediately earnings enhancing and supports Mercia’s strategy of growing its adjusted operating and pre-tax profits¹. FDC is a profitable and cash generative business. For the year to 30 November 2021, FDC generated revenues of £5.1million and profit before taxation  of £1.3million. Its net assets were £1.7million. The business has a good pipeline of current lending opportunities.

 This statement is not intended to constitute a profit forecast for the current financial period or for any future period. In addition, this statement should not be taken to mean that the earnings per share of Mercia will necessarily match or exceed the historic reported earnings per share of Mercia.

Mark Payton, Chief Executive Officer of Mercia, commented:

“We’re delighted to be able to announce the acquisition of Frontier Development Capital, which represents an important strategic milestone for Mercia, as we drive towards our ‘20:20’ objectives. Sue Summers and her team have built an outstanding and highly regarded UK lender and the acquisition will bring complementary capital, capabilities and reach across the UK’s regions, whilst also seeing our AuM grow to c.£1.4billion.

 “Having worked closely with FDC over the past few months, during the due diligence and integration planning phases, we also know that we will be integrating a business with a culture that is aligned to our own, including an investment approach underpinned by partnership and a belief in the long-term potential to be found in the UK’s regions. We welcome all FDC staff into #OneMercia and will be helping accelerate their growth through access to our networks, knowledge and broader footprint.”

Sue Summers, Chief Executive of Frontier Development Capital, added:

“Mercia has long been a business we’ve admired. Our shared passion for helping some of the UK’s most exciting SMEs to thrive through supportive capital, makes Mercia the natural partner of choice as we look to continue the growth we have experienced since launching in 2016.

Furthermore, Mercia’s reputation and reach will be highly additive to both our future fundraising efforts and identification of potential lending opportunities. Mercia has established itself as a go-to provider of capital across the UK regions, and we’re excited to be part of their vision to be the first choice for investors, investees and employees.”