GB Group — Accelerating growth with Acuant acquisition

GBG announced on 18 November that it had conditionally agreed to acquire Acuant, a US provider of identity verification and identity fraud prevention solutions. At the same time, it announced an institutional placing (on a cash box basis) and a retail placing to partially fund the acquisition.

Acuant was founded in the US in 1999 and is headquartered in Los Angeles. The company has 209 employees globally (c 130 in technology), with R&D functions in the US, the UK and Israel. The team has particular strength in data science, biometrics and platform design and build and the company holds more than 30 patents in the fields of digital identity and identity verification.

The company has more than 1,000 customers, with 84% of revenue from the US, and 42% via channel partners (a much higher proportion than GBG). These partners help Acuant serve some verticals that GBG is not very active in and are hard to target with direct sales, namely automotive and transport, healthcare and life sciences, and government and security (border control in particular). Acuant counts as customers six of the top 10 US banks, three of the top 10 US mobile network operators, more than 40% of auto dealers and the top three car rental companies.

The company operates in three areas: Acuant Compliance – know your customer (KYC), know your business (KYB), transaction monitoring and sanction screening services; Acuant Verify – document verification, biometric identity verification and data-centric identity verification; and Acuant Identity – provides eDNA, ProfileID and My Digital ID Verifiable Credential solutions that create digital identities to risk score individuals on an ongoing basis and to provide credentials that can be used across different organisations.

We understand Acuant Verify is the largest part of the business, with document verification the major revenue generator. Acuant has a substantial document library (c 6,000 documents covering 200 countries/territories) to support this business.

GBG sees the following benefits from the deal:

GBG typically acquires to get access to product, datasets, technology and international customers. This deal ticks all four boxes. Exhibit 1 shows the market context for the product areas addressed by GBG and Acuant. Looking at the black boxes which cover the different application areas:

From a technology perspective, Acuant has developed various features that were on GBG’s roadmap, which should accelerate GBG’s product development by two years. It also gives GBG access to talent that is tough to find in the current market, for example in data science and mobile technology. Acuant has developed an orchestration layer that provides a single customer interface to all solutions. This means individual products do not need to be integrated on a single platform and customers can still access them all quickly and easily. Customers can define consumer journeys themselves, bringing together the solutions they require for each use case. Acuant has also developed a SaaS-based version of GBG’s on-premise fraud products. This opens up the addressable market for fraud products to customers looking for cloud-based deployment. AcuantGO has been developed as a no-code identity verification solution, making adoption easier for customers. Acuant’s 6,000-strong document library is substantially larger than that held by IDScan and should help accelerate growth of IDScan’s business.

With 84% of revenue generated in the US, Acuant will deliver additional scale in the US, which already made up 36% of revenue in FY21 due to the IDology acquisition in FY19. On a pro-forma basis, the company expects the US to contribute 43% of revenue.

Acuant and IDology already partner in the US and the company expects to bring the two businesses together. IDology is strong in data-driven identity verification whereas Acuant is stronger in document verification and fraud prevention. This gives GBG the ability to provide a more integrated service to US customers. Overall, combining GBG’s product portfolio with Acuant’s will give the group a more complete product range for expansion in Europe and APAC.

Acuant has a well-developed channel strategy that GBG can take advantage of. Acuant will also be able to take advantage of GBG’s global datasets.

There is the immediate opportunity in the US to cross-sell between GBG and Acuant customers. GBG’s sales team could also sell Acuant products in EMEA and APAC. With Acuant expected to be able to drive revenue growth of 25% per year, the combined group should see accelerated revenue growth. As highlighted above, the technology already developed by Acuant should allow GBG to focus on product enhancements as opposed to improving user interfaces or deployment methods, which in turn should help it to accelerate revenue growth.

GBG is buying Acuant for a cash-free, debt-free enterprise value of $736m/£547m. This will be funded as follows:

The placing shares are expected to be admitted to AIM on 23 November and the rollover shares on 29 November.

The table below shows how the share capital splits out before and after the placing and acquisition.

In the tables below we show Acuant’s revenue profile and its profitability in recent years. Acuant’s year-end is 31 December and GBG has produced revenue data for the 12 months ended 30 September 2020 and 2021 to more closely match GBG’s reporting schedule (GBG’s H122 covers the six months to 30 September 2021). GBG has converted Acuant’s financials into IFRS from US GAAP and only has these data up to July 2021.

Acuant revenue grew 18% in CY19, 12% in CY20 (we assume growth was depressed by the pandemic) and 22% in the 12 months to September 2021 (LTM). This masks the growth in subscription/transaction revenues of 39% in CY19, 34% in CY20 and 40% LTM. On-premise revenue includes one-off licence fees and service and hardware revenue. GBG expects Acuant to generate revenue growth of 25% in the medium term.

GBG notes Acuant has a negative working capital profile and typically 100% cash conversion. The most recently available data (12 months to July 21) show Acuant had an operating margin of 19.9%, which compares to GBG’s operating margin of 26.6% in FY21 (inflated due to COVID-related cost savings) and forecast margin of 23.5% for FY22e.

GBG expects to generate synergies worth an incremental £5m to operating profit in FY23. It expects the deal to be neutral to EPS in FY23 after these synergies. The company expects targeted group revenue growth to increase from its previous 10-12% range to 12-14% and for the adjusted operating margin target to increase from the previous 22–23% range to 23–24%. We have updated our forecasts to include Acuant from the start of December (all included in the Identity division) and to reflect the placing. While gearing post the deal is expected to be 2x, we expect this to reduce rapidly over the forecast period.

The price paid values Acuant on an EV/sales multiple of 12.7x LTM revenues and 63.7x LTM EBIT (applying y/e July 2021 margin to y/e September 2021 revenue). This compares to GBG trading on an EV/sales multiple of 7.6x LTM revenues (H221+H122e) and 28.8x LTM EBIT before the placing. With Acuant expected to grow at c 25% per year in the medium term, we also compare the multiples on an FY23e basis:

On our revised forecasts and using the current share price for GBG of 750p, Exhibit 6 shows GBG’s valuation versus IDM, IAM and CS peers. GBG is trading at a premium to its IDM peers on all metrics, but at a discount to the IAM and CS groups, which contain more companies in a faster growth phase and in many cases are not yet profitable.

We note there has been an active M&A market for identity technology companies over the last four years, with Relx’s Lexis Nexis Risk Solutions business buying four business (TruNarrative, at c 26x CY20 revenue, Emailage, IDAnalytics, ThreatMetrix, 4x CY18 revenue), TransUnion buying Neustar (5x FY21e revenue) and Iovation, and Mastercard buying Ekata (mid-teens revenue multiple). Valuation multiples have ranged widely, depending on the level of maturity, growth and profitability of the target. We note that venture capital funded businesses in this space (Jumio, Onfido, Socure, Trulioo) have been receiving increasing levels of funding. Only last week, US-based Socure raised $450m at a $4.5bn valuation, having raised $100m at a $1.3bn valuation only eight months earlier. The company reported that ARR grew 126% y-o-y in Q221 and H121 bookings were 220% higher year-on-year. Precise financial data are hard to come by, but in an interview earlier this year, Socure’s CEO stated the target was to hit annualised recurring revenue of $100m this year, valuing the business at 45x CY21e ARR.

Our reverse DCF (6.5% WACC, 3% perpetuity growth after 10 years, explicit forecasts to FY24), implies the share price is discounting organic revenue growth of approximately 8% from FY25–FY31, assuming a stable EBIT margin (in line with management’s policy). This growth rate is lower than the double-digit rate GBG has targeted for some time and considering that Acuant is expected to grow faster than the original GBG business, this appears low. Increasing the WACC by 1% to 7.5% would reduce the value to 563p per share. Increasing the revenue growth rate to 12% from FY25, the bottom of management’s new 12-14% range, would increase the value to 950p per share.