The family of Limerick-based entrepreneurs Hugh and Finola O’Donnell stands to reap the largest benefits from the majority takeover announced in recent days for high-tech electrical contractor H&MV Engineering in the county.

London private equity firm Exponent said this month it would buy out all non-management shareholders. Meanwhile, H&MV’s chief executive PJ Flanagan and the company’s chief operations officer John Stokes “will remain significant shareholders, re-investing alongside Exponent and the rest of the management team,” Exponent announced.

According to details released by the Competition and Consumer Protection Commission, which has yet to approve the deal, a subsidiary of Exponent will acquire the entire issued share capital of Edison Voltage, the top holding company for the H&MV Engineering group. Any re-investment by company executives would occur subsequently as part of a new capital structure.

The combined stake of related companies MACX3 Services Ltd and Novus Technical Services Ltd is the largest in Edison Voltage. MACX3 Services is the vehicle of the O’Donnell family, holding investments in several businesses including Novus.

Hugh O’Donnell rose to the top at energy engineering firm Kentz before growing his own business in the same market under the Novus banner with partners including former Kentz colleagues Mike Murphy and Kevin Moroney. 

O’Donnell supported the late 2018 management buy-out of H&MV led by Flanagan and Stokes out of a previous period of private equity majority ownership, that time under MML. The deal resulted in MACX3 and Novus obtaining a combined majority of voting rights in the business. Novus chairman O’Donnell became a director of Edison Voltage and remained so until last October. 

Now the two companies are set to sell their shareholding to Exponent, which carry an ultimate stake of 38.4 per cent in H&MV for O’Donnell’s family members Finola, Shane and Patrick. 

Other associates of O’Donnell’s set to benefit through their shareholding in Novus are its chief executive Mike Murphy, who indirectly owns 7.5 per cent of H&MV; Novus chief financial officer Kevin Moroney (1.8 per cent of H&MV); and Novus operations director Chris O’Connor (0.9 per cent of H&MV).

Among H&MV management, Flanagan and Stokes each have a share of just under 25 per cent in the business, including a small number of E and F class shares with no voting rights but incentive distributions attached.

Finally, H&MV business development director Enda Molloy currently holds 1.4 per cent of H&MV’s ultimate share capital.

Valuing a steadily profitable business

What are these shareholders selling to Exponent for an undisclosed amount – and how much is H&MV’s business serving data centres, renewable generators and utilities really worth? Financial data from its top holding company Edison Voltage gives a clue. 

Edison Voltage is valued at an enterprise value of €37.7 million using a discounted cash flow model, or €69.9 million using an Ebitda multiple.

Enterprise value is the value of the equity and the debt held by the firm. It shows all the claims against the operating business.

The Ebitda multiple comes from the average Ebitda multiple for publicly traded European electrical equipment companies, multiplied by Edison Voltage’s most recent Ebitda. 

The discounted cash flow (DCF) model attempts to value the business from the ground up. It takes the company’s forecast profits, and then discounts them back by all the risks that are attached to the business.

The risks attached to the business include those that are specific to the currency (will there be inflation?), the country (will there be a military coup?), the industry (how sensitive are profits to a slowdown in the economy?), the amount of reinvestment required (does it need continual capex to generate earnings?), the tax rate, the amount of debt used by the company, and the nature of the buyer (public market or private?)

The nature of the buyer is the single most consequential one. If the buyer is buying the business on the public markets, she gets the privilege of being able to ignore company-specific risk (like the risk that Edison Voltage’s products get overtaken by technology). The reason public investors get to ignore this very-large category of risk is that they’re diversified: they have a portfolio of shares in many companies. The chance of someone going wrong in one is offset by the chance of something going right in another.

That’s a big reason why the discounted cash flow model values Edison volt at slightly more than half the Ebitda multiple. The discounted cash flow doesn’t ignore firm specific risk, and the multiple does. Another factor, which drags down private market valuations even further, is that they’re illiquid. What this means is that they’re hard to turn into cash at short notice. Investors typically slap a further 25 per cent discount on a private market valuation for this reason.

A drawback of using this particular DCF is that it assumes Edison Voltage is in  “midlife mode” — that is, neither growing quickly or declining. It doesn’t do a good job of valuing companies that are growing very fast. But based on the recent trajectory of Edison Voltage earnings, midlife mode looks like a reasonable assumption.

Edison Voltage is a steadily profitable business. It made €1 million in operating profit in 2020, the most recent year for which we have figures. Based on the trajectory of earnings, we arem forecasting €1.3 million in operating profit by 2022.