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  • normlasky normlasky May 5, 2012 10:45 PM Flag

    Crump Insurance

    IRR should be based on after tax cash flow.

    If you take CFO Bible literally per the earnings transcript the denominator increases by 3% or $75 million of revenue while the numerator increases by 1.1% or $16 million of expense. Assuming 30% tax, pat is about 6 cents. Bible may have rounded off some so instead of .52 maybe it's .513, so I'm calling it 4 cents per qtr or 16 cents per year. This would validate King's statement.

    On the other hand the press release said, the purchase price equals 9 times ebitda or $63 million. I think is where credit suisse is coming up with a penny per quarter. However, I suspect this is before cost reductions and revenue synergies to be realized from the acquisition. Bbt insurance will be placing more business through Crump making it more profitable. Merger charge for the 2nd qtr. I think is $45 million (some is bbx).

    I would take CFO Bible at his word that the efficiency ratio will drop to .51 from the Crump acquisition, all other things being equal.

    We'll see in July.

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    • On the IRR bring after tax, yes in deed however iirc king mentioned on a call a year or two back that his hurdle was pretax.

      I was using Bible's numbers - the Revenue and 30% margins from the transcript for the business to generate operating income = 300MM Rev x 30% life margin=90MM operating income/ 570MM investment >15% kings pretax return on clean numbers or 12% after tax return. Eps ~10c on 25% tax rate.

      I can't see your number from a business perspective - your 16c needs a margin of between 50-55% vs Bible's ~30% for this sort of business.

      Spin

      • 1 Reply to spinvestor2003
      • IRR by definition is the rate that equate cash outflow with cash inflows. Tax is an important component of net cash inflows. Don't think there is a finance book that has ever suggested calculating irr on pretax basis. Makes no sense. Think bbt evaluates acquisitions based on after tax cash flows.

        I reread the Crump press release and it says the entire $570 million intangible will be accounted for as an intangible assets. Think it will therefore, be amortized over 15 years which should result in $38 million in annual amortization expense. The 15% irr is based on cash on cash - 15% times $570 equals $85 million pat. Factoring in amortization into the eps equation probably puts eps in the 2 cent range per quarter.

        About 75% of the Crump business is life and 25% is p&c. Bbt will get synergies off the later downstream and will take a significant acquisition charge in the 2nd qtr. to reflect this.

        Reread the 2nd quarter transcript. CFO Bible did not say the efficiency ratio would drop from .52 to .51 due to Crump. I stand corrected and apologize for misquoting Bible.

 
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