Tesa Group Expansion Capital (roll-up), November 2004 Background Tesa employs skilled (ie. tradesmen) and unskilled blue collar workers and on-hires them to clients that operate in light industrial (eg. food processing, viticulture) and heavy industrial (eg. engineering, construction, mining) industries. Craig Ransley, Managing Director, established Tesa in 1999 in Hobart, and then proceeded to expand operations into Melbourne and Sydney. The labour hire market was (and still is) undergoing consolidation and Ransley identified an opportunity to acquire several strongly growing businesses that have blue chip client bases. At exit Tesa had operations along the Eastern seaboard of Australia and its head-office was located in Newcastle, NSW. Investment rationale Advent was attracted to the Tesa investment opportunity for the following reasons: Fragmented industry with multiple acquisition targets of a homogenous nature. The combination of such businesses yielded strong synergies; The ability to make acquisitions at EBIT multiples of attractive price/earnings multiples; Dynamic and disciplined MD with significant experience managing and acquiring labour hire businesses; Strong industry growth and favourable regulatory outlook for labour hire; Tesa's relatively high EBIT/sales margin of approximately 5% (compared to 3% generated by its larger competitors) was driven by strong client relationships, focus on higher margin skilled tradesmen rather than unskilled labour, and a strong safety culture that kept OHS costs low; Dominant supplier of labour hire workers to underground coal mines in the Hunter Valley; Strong cash flow generative business that could be leveraged with debtors finance; and Good prospects for an exit via trade sale to a larger player or IPO.

Advent’s role

When Advent first invested, Tesa was generating approximately $18m of revenue and $0.8m of EBITDA. At exit, after the acquisition and integration of eight complementary labour hire businesses, Tesa was generating more than $180m in revenue and $8m of EBITDA on an annualised basis.

Advent funded the initial three acquisitions and provided a means for shareholders in United Mining, the largest business acquired, to sell down 50% of their shareholding.

Post investment Advent acted as a sounding board to the MD on acquisitions and was a strong influence in corporatising the business. Advent was also involved in interviewing candidates for key executive positions such as the CFO and State Manager.

Advent created a strong sense of accountability at board level which helped to focus management’s attention on improving gross margins and reducing working capital. It also worked with Tesa to identify acquisition targets and introduced corporate advisors and due diligence accountants to assist the MD with acquisitions.

Key challenges were:

• Acquiring high quality businesses of more than $30m turnover at EBIT multiples of less than 4.5 times. As the labour hire industry consolidated, it became harder to acquire good businesses at these multiples;
• Integrating the acquisitions within a relatively short timeframe;
• Recruiting high quality State and branch managers.

Exit

Tesa was sold to Skilled Engineering in August 2006. Advent encouraged Tesa management to form a relationship with Skilled over the 12 month period leading up to exit and it was this relationship that led to Skilled making an attractive offer to shareholders.

Advent's IRR on its investment was approximately 40%, delivered primarily through a combination of organic growth and arbitrage between the PE multiples of the acquisitions and the eventual exit multiple for the whole Tesa Group.

www.tesa.com.au