Grafenia launches £28m fundraise to continue acquisition strategy

Grafenia, the Manchester-based software services group, is aiming to raise £27.9m to fund future acquisitions, repurchase £7.6m of its existing bond arrangements, and pay £3.4m deferred consideration on previous acquisitions.

The fundraise is in line with the group’s previous statements that it is looking to raise additional capital to continue the execution of its acquisition strategy.

Grafenia will use a placing and subscription to raise approximately £23m at an issue price of 8.5p per new ordinary share, and an open offer to qualifying shareholders to raise up to approximately £4.9m at an issue price of 8.5p per new ordinary share.

The issue price represents a discount of 17.1% to the closing mid-market price of 10.25p per ordinary share on August 25, 2023.

Given its background in software, in 2021, Grafenia announced a change in its acquisition plans, repositioning the business to better utilise its status as a public company and to focus on, and invest in, building the structure required to become a serial acquirer of vertical market software (VMS) businesses.

The first step in the transition was the sale of its production facility, Works Manchester Limited. That moved the business away from asset-heavy manufacturing, enabling it to focus on software and systems.

What that meant was its Nettl Systems business became a software operation, with a significantly reduced cost base.

But as a group, it became smaller as a result of the divestment, with the same central costs. Growing the size of the group, faster, became the priority.

Since then, Grafenia has doubled down on its acquisition strategy with the aim of achieving that growth, developing an active deal origination process which has resulted in four acquisitions during the previous financial year ended March 31, 2023, and building a healthy deal flow at the same time.

To date, Grafenia has utilised its bond facility to fund the acquisitions. During fiscal year 2023 it has issued £11.2m of bonds, at nominal value, raising £9.5m before expenses. It deployed £9.6m of capital, including deal costs.

Grafenia is now home to five software business units across multiple sectors that match its criteria. Those businesses have been, in the main, acquired during the latter stages of financial year 2023.

Announcing the fundraise today, Grafenia also issued a trading update, saying, with the acquisitions that have been added to the group, on a run-rate basis, annualised sales would be approximately £17m.

The group is currently trading in line with internal forecasts and newly acquired business units are performing as expected and contributing to profitability.

The board said it is cautiously optimistic about the upcoming year. With a full year’s trade from the newly acquired businesses, the goal of achieving EBITDA at 10-15% of sales, after central costs, is considered by the directors to be a realistic target.

As Grafenia further repositions the business, the search for VMS businesses continues and the deal flow looks healthy, it said, adding: “Our focus remains on scaling the group by way of acquisition.”

The group announced its annual results for the year to March 31, 2023, in July, which revealed a pre-tax loss of £2.21m, compared with a loss of £0.41m the previous year, which it said was due to a writedown of £0.81m against the sale of Rymack Signs Solutions.