What is the deal?

Spectra Systems’ acquisition of Cartor Holdings, which was completed in December 2023. Spectra is US-headquartered and AIM-listed and is a market leader in machine-readable high-speed banknote authentication, brand protection technologies and gaming security software. Cartor is in the security printing industry, with a manufacturing facility in Wolverhampton and a French subsidiary. In the year prior to the acquisition, Cartor made £3m EBITDA on £16m turnover.

How were you introduced to the deal?

Being a US company quoted in the UK, Spectra didn’t have huge exposure to UK advisers, so we were introduced by its nominated adviser (NOMAD), WH Ireland. Part of Spectra’s growth plans targeted the UK, and this acquisition was part of it. This will have been part of the reason it chose AIM as its market of choice, as it is a good exchange for SME growth companies.

What was the structure of the deal?

Spectra acquired 100% of Cartor, for total consideration of up to £10.5m – £5.5m cash on completion, up to £3m of net asset adjustment and £2m related to a successful tender submission with a major customer. The additional consideration to the initial cash will be settled through an issue of new shares in Spectra. Also, £4.5m of Cartor’s debt was taken on by Spectra. The entire senior management team stayed with the business and took roles in Spectra. CEO Andrew Brigham, whose father founded Cartor, retained his role.

Who were the advisers?

I led the team from haysmacintyre providing Spectra with financial and tax due diligence, buy-side support and SPA advice. Our team included Mark Allwood, Sabina Burke, Tanya Yeremenko and Sophy Ghosh. For Spectra, WH Ireland, as NOMAD, acted as advisers to the transactions and Greenberg Traurig provided legal advice. Cartor’s corporate finance advisers were Alinea Corporate Finance and Stepstone Corporate Finance, and the legal advisers were Legal Clarity. Crowe did tax and accountancy work for Cartor.

What were the challenges?

The scope of the deal changed because assets in the business were identified that needed to be spun out. The Cartor shareholders wanted to retain ownership of a property and debt related to the property had to be transferred out at the same time. In addition, the French subsidiary held a defined benefit pension scheme. So, the deal had to be structured to ensure those future pension liabilities didn’t form any part of Spectra’s ongoing obligations. 

Unusually, the completion mechanism for this transaction was based on a target net asset position, as opposed to target working capital. This evolved during the deal as we considered the best approach to mitigate the property and debt risk. The property and pension liability fell outside a working capital calculation, so we all agreed this was the best way to manage the risk. 

Were any lessons learned?

We phased our due diligence in stages to provide our client with a ‘red flags report’ highlighting potential concerns and challenges at an early stage of the process. Companies hoping to sell should look at any potential structuring work before going to market. Partway through the deal, we started working more closely with the lawyers, having been acting relatively independently. We all agreed that moving to a target net asset mechanism was the right move, but that was decided late on in the process. In hindsight, the closer you work with lawyers early on in a deal, the quicker you can move things along.