By Peter Frankl.

We now have the answer to this question as a result of publicly listed law firm DWF acquiring 400-person law firm Rousaud Costas Duran (“RCD”). 

The partners of RCD will be selling their equity at close to 1.4 times their annual revenue. This will be made up of upfront cash, DWF shares and a cash earnout. 1.4 times is subject to them receiving the full earnout component.

Upfront cash is the equivalent of 21% of partners’ annual revenue and DWF shares is the equivalent of 77% of their revenue. The earnout represents the remaining 42%. The deal has a large weighting towards the current and future value of DWF shares and the dividends they generate. 

DWF is listed on the London Stock Exchange. RCD is a leading Spanish law firm. 

RCD is comprised of 40 partners. RCD’s reported revenue for the 12 months ended 31 December 2018 was €35.7m (£31.6m or A$58m). On average each partner is responsible for revenue of A$58m / 40 = A$1.45m.

DWF reduces partners’ direct remuneration so that it can be replaced with dividend distributions and potentially share value growth.

The pro forma EBITDA of RCD was €8.1m (£6.8m) (adjusted to DWF’s partner compensation policy). That is an EBITDA percentage of 8.1 / 35.7 = 22.7%.

RCD’s gross assets at 31 December 2018 were €15.9m (£14.3m). As part of the transaction, the Group will be assuming €5.6m (£4.7m) of net debt (including amounts payable to RCD shareholders of €2.5m (£2.1m)).

DWF will acquire RCD for up to €50.5m (£42.5m or A$82m) in shares and cash, of which €7.4m (£6.2m) is payable in cash at completion with up to €15.5m (£13.1m) in deferred or contingent cash consideration.

The transaction is expected to complete prior to 31 December 2019 (the “Acquisition”). Initial consideration consisting of €7.4m (£6.2m) in cash and €27.6m (£23.2m) in newly issued DWF shares will be paid at completion (the “Initial Consideration”). An additional cash consideration of up to €15.5m (£13.1m) will be partly deferred and partly contingent on performance.

Therefore only 15% of the deal is upfront cash. 55% is in DWF shares and the balance 30% is potential earnout cash.

The strategic acquisition will significantly expand DWF’s international capabilities via offices in Madrid, Barcelona and Valencia and provide access to an extensive network of connections in the Iberian Peninsula and Latin America.

RCD, which will bring 40 new partners and c. 400 people in total, is one of the fastest growing firms in Spain and operates in the same sectors as DWF with a focus on similar capabilities.

The transaction will be DWF’s largest acquisition to date and is expected to be accretive to adjusted earnings per share in the first full financial year post completion. With significant capabilities and sector alignment and a shared focus on innovation, the transaction brings opportunities for potential natural synergies.

The Consideration Shares are subject to a lock-in period of five years, with shares released in tranches during the lock-in period dependent upon individual sellers remaining with the Group (“time tranches”) and meeting performance targets (“performance tranches”). Both time and performance tranches are due to be released upon announcement of the Group’s preliminary annual financial results for the periods ending 30 April 2020 to 30 April 2024 and a final time and performance tranche is due to be released following determination of performance for an eight month non-statutory financial period ending 31 December 2024.  The lock-in includes leaver and claw back provisions which are similar to those entered into by other partners of the Group.