Formation Group

SPECULATIVE BUY

03/03/2008 James Crux

Formation, the deal-hungry provider of professional services to high net worth sport and entertainment clients, has added Simon Cowell, Piers Morgan and Anthony McPartlin and Declan Donnelly (‘Ant & Dec’) to its client base through the acquisition of West London-based James Grant Media Group (JGMG).

Fronted by fast-talking chief executive Neil Rodford, Formation could potentially pay up to £29.93m for JGMG, a talent management business whose clients work mainly in TV and radio in the UK and US and which made pre-tax profits of £1.76m for the year to April 2007 – asset value at that balance sheet date was £1.34m.

Formation is paying an initial £11.93m in cash and shares, with an extra £18m payable in cash and shares linked to profit performance over a three-year period. The deal complements and scales up Formation’s existing professional services division, which provides clients with everything from accountancy and sports representation services to wealth management and corporate finance advice. Cross selling upside looks likely, with JGMG now able to sell in accountancy, tax and wealth management services to its clients.

The aforementioned celebrity names have been added to a Formation client base which includes Premier League footballer Wayne Rooney, no-nonsense football manager Roy Keane, Mancunian band Oasis and Welsh pugilist Joe Calzaghe. Based on Formation’s historic financials for the year to August 2007 alone – profits of £6.3m, earnings of 4p – the shares trade on a p/e ratio which is anything but punchy at only 5.6 times earnings. That looks miserly to say the least – we think the shares have good recovery potential.

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