Kalil Diaz: A DR-based Search Firm Considers its First Acquisition

Abstract

The case outlines Kalil Diaz’s journey from setting up a Search Fund during his studies at Yale University to finding a company that potentially could be a perfect fit for him as CEO and investors to make a return. The student is provided with information concerning the potential company, Contact Centers Dominicana, and is invited to consider if this a good investment both for the members of the Search Fund and Kalil as the potential CEO of the company.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

You are not authorized to view Teaching Notes. Please contact your librarian for instructor access or sign in to your existing instructor profile.

Resources

Exhibit 1: Kalil Diaz Resume

KALIL DIAZ

EDUCATION

YALE SCHOOL OF MANAGEMENT

Master of Business Administration (MBA)

  • Henry F. McCance Entrepreneurial Fellowship Recipient
  • Student Government – Student Life Chair, Entrepreneurship Club Leader
  • Founder of the Integrated Leadership Caw Competition and the Case Competition Club

New Haven, CT

2014

CONCORDIA UNIVERSITY

Bachelor of Commerce, Supply Chain Management/Finance

  • Cumulative; GPA 3.67. Major GPA 3.96 (Top 1%)
  • Salutatorian, Danielle Morin Award. CASA Award, Class Act Award Garnet Key Society, Beta Gamma Sigma
  • Concordia University, Senator: Concordia Student Union. Councilor; CUSA Corporation. President

Montreal, Canada

2009

PROFESSIONAL EXPERIENCE

AMERGENT CAPITAL

Managing Partner

  • Started a search fluid focused on identifying, acquiring, and operating an existing business in the Dominican Republic
  • Targeting an acquisition of a profitable business with a deal size of $6M–$15M within five sectors of interest

New Haven, CT/Santo Doming, Dom. Rep.

2014-Present

GE CAPITAL

Structuring Manager

  • Managed the loan underwriting process for specialized commercial loans in the foodservice and hospitality industries
  • Underwrote and structured twenty-two commercial loans totaling $I02 million utilizing a cash flow-based approach, including a $38 million senior debt facility for a distressed restaurant chain acquisition
  • Restructured workflow and implemented an auto-decision process that reduced underwriting cycle time by 12%
  • Managed the $800 million portfolio by using debt service coverage models, covenant testing, and exit-option analysis
  • Received the GE Silver Award for proposing improvement to the groups risk management strategy

Montreal, Canada

2011–2012

Assistant Account Manager

  • Responsible tor originating commercial loans with prospective clients and maintaining our existing relationships
  • Managed the deal closing process by acting as a liaison among credit executives, lawyers, underwriters, and clients

2009–2011

AIR CANADA

Financial Analyst (8-month full-time internship)

  • Quantified the financial benefits for a supply chain project that generated $2 million in annual savings
  • Forecasted expenses to draft a $658 million annual operating budget for the Aircraft Maintenance Division

Montreal, Canada

2008

NON-PROFIT EXPERIENCE

EXPLORE DOMINICAN REPUBLIC

President and Founder

  • Established an international 12-executive and 52-volunteer non-profit organization dedicated to providing for the education, healthcare, and mentorship of underprivileged Dominican children between the ages of four and seventeen
  • Built a Technological Development Center that promotes computer literacy and teaches via video-conferencing

Santo Domingo, Dom. Rep./Montreal, Canada

2005-Present

ADDITIONAL INFORMATION

  • Los Angeles Dodgers – Minor League Baseball team, 1st Baseman
  • Espiritu Latino Award – presented by the Canadian Minister of Immigration
  • Languages – Spanish (native), English (fluent), French (fluent)

2003

2010

Exhibit 2: Amergent Capital Investment Criteria

Investment Criteria

Amergent Capital intends to evaluate deals based on a set of investment criteria that focus the search and allow for comparison amongst potential deals. While a deal will not fit all of the criteria outlined below, the degree to which it does will help Amergent Capital select the best possible deal.

Below is the set of criteria that Amergent Capital deems desirable:

The Seller

  • Honest and respected by employees and customers
  • Lacks a succession plan
  • Interested in partial net worth diversification or liquidity
  • Willing to provide future performance provisions
  • Open to providing seller financing

Industry

  • Fragmented with consolidation opportunities
  • Large potential market size
  • Low threat of technological shocks
  • Low probability of negative regulatory changes
  • Size, growth, and stability of industry demand
  • Long industry life cycle

The Company

  • Family-owned and based in the Dominican Republic
  • Annual EBITDA in the range of $1M–$6M
  • Minimum EBITDA margin of 10%
  • Scalable business model
  • Experienced, competent, and honest management
  • Talented middle management and low employee turnover
  • Stable, recurring, and predictable future free cash flows
  • Significant number of potential suppliers
  • High returns on invested capital
  • Sustained profitable operations
  • Diversified and loyal customer base
  • Sales growing at or above industry growth rates

Value Creation Opportunities

  • Excellent growth prospects within the Dominican Republic
  • Potential for launch of new product lines or services
  • Weak information systems
  • Capacity constraints
  • Weak capital structure
  • Lack of internal controls and planning
  • Potential to improve employee incentives
  • Potential to leverage foreign expertise or partnerships

Market Position

  • Clear and sustainable competitive advantage
  • High customer switching costs
  • Among leaders in the industry
  • Defensibility of market share

Exit Options

  • Multiple potential domestic strategic buyers
  • Financial buyers with larger minimum deal size
  • Attractive market for foreign strategic buyers
  • Supply chain with vertical integration potential
  • Potential interest from family conglomerates

Source: Amergent PPM

Exhibit 3: Call Center Product Lines

Call Centers perform different functions with varying level of complexities and integration with the client. Services are primarily categorized as inbound or outbound:

Inbound Services: inbound engagements are defined with service contracts that vary in scope. These contracts are 1 to 5 year contracts that have mutual renewal and breakup options. The contracts define prices by agent hour or call and specify service levels and payment terms. Inbound engagements require a higher degree of integration with client systems and processes. The client assigns a dedicated team that train agents on‐site for weeks at a time. These teams oversee operations and travel to the site frequently. Inbound contract revenues are predictable and tend to be more complex in nature, therefore making switching costs higher for clients.

Outbound Services: outbound engagements are also defined by service contracts, but are often shorter and more limited in scope. Outbound services are generally framed as telemarketing services and have a focus selling and lead generation. Outbound service contracts tend to have a fixed and variable pay component. Outbound services can be lucrative for call centers, but often place a strain on call center agents which results in higher turnover.

Source: Amergent offering memo

Exhibit 4: Payroll Hour Rate Comparison – Insourced vs Outsourced

Exhibit 5: Investment Facts About CCD

1. Industry Growth and Market Potential

Successful search fund investments are closely tied to aggressive topline growth. CCD’s future growth is supported by strong industry tailwinds. The call center industry in the Dominican Republic is growing at 10%+ and the US healthcare BPO industry is expected to continue to grow at 12%+. The US healthcare BPO market size alone is expected to be $34B+ by 2020. CCD has outpaced the industry with 100%+ growth and is expected to maintain the trend. There is great potential within the specialty imaging scheduling service, 10× growth potential just with the current CCD pipeline alone.

2. Leading Company in Attractive Imaging Scheduling Function

CCD has developed a proprietary approach to scheduling appointments within the imaging center chain industry. This includes processes and software that has been customized to the sector, and has led to a first mover position in a blue ocean market for call center/BPO outsourcing. This specialty focus will help reduce the traditional industry customer churn and raise barriers to entry.

3. Track Record

CCD has built a positive track record in both specialized imaging scheduling and the broad call center services. Track record is an important component that call centers need to build before they book larger and more attractive contracts. RadNet is a largest imaging center chain in the US and the Comcast contract provides important client validation.

4. Unique Management Qualifications

Successful offshore call centers have to bridge local operations with an ability to sell to middle‐market companies outsourcing for the first time. Amergent Capital management team and board of directors is uniquely qualified to take advantage of the opportunities in the offshore call center/BPO industry by effectively selling to US clients, but at the same time effectively operating and hiring in the Dominican Republic.

5. Recurring Revenue

Successful search funds that generate outsized returns have a high percentage of recurring revenue. The call center industry on average has high percentage of recurring revenue 75%+ and CCD has 80% recurring revenue as measured at TTM May 2016.

6. Asset Light and Operating Leverage

Scalability and operating leverage are also strongly correlated with successful search fund investments. While, CCD and the call center industry are not as scalable as software based companies, it still has good operating leverage (~40%) as management and fixed telecommunications expenses are scalable. The industry is also asset light and requires no significant one‐time expenses.

7. Dominican Republic’s Competitive Position

The Dominican Republic offers unique advantages over other offshore destinations. The country has the lowest cost of labor in the region, is well positioned geographically, and has strong cultural affinity with the US. In addition, there are strong government incentives such as sales and corporate tax exemptions, as well as sponsored English language programs.

8. Existing Backlog and Pipeline

CCD has a significant backlog of seats that will be booked within the first 9 months post‐close that will conservative grow the company by ~140%. This is driven solely by requests made by four of the long‐term contract that the company holds. RadNet, accounts for 50%+ of this backlog. The new client pipeline is equally exciting as they are in late stage talks with a number of US companies such as Amazon, XM Radio, and Cable Vision. There are also two imaging center chains that are expected to come onboard in October.

9. Exit Options

Given the international nature of the industry and the level of M&A activity, there are a number of exit options, both from strategic and from financial buyers that can provide a liquidity event at the appropriate time.

10. Limited Foreign Exchange Risk

An attractive component to the CCD is the natural currency hedge. All revenue is booked in US Dollars and most expenses are paid in Dominican Pesos (DOP). There has been an average 5% DOP to USD depreciation per year over the last decade, which provided a nice tailwind for the industry.

Source: Amergent offering memo

Exhibit 6: Call Center Industry Dynamics

The call center outsourcing industry at a global scale is characterized by a number of industry dynamics that relate to both smaller and larger centers.

Below is a summary of these characteristics:

  • Labor Intensive: labor is the most significant cost component and represents close to two thirds of all costs and 61% of total industry revenue.
  • Labor Attrition: labor attrition is relatively high in part because of the nature of the call center work and in part due to the employee profile.
  • Customer Churn: clients can be lost if performance is inadequate, pricing is uncompetitive, or if the client changes their customer service strategy.
  • Customer Concentration: As call centers grow they tend to book larger contracts which produce customer concentration. For example, the second largest publicly‐traded call center has 30% concentration with two clients.
  • Recurring Revenue: Most of call center revenue (~75%+) is recurring. This is more characteristic of inbound contracts as outbound contracts are often for fixed short terms.
  • Asset light: Capex is limited to facilities buildout, work stations, computers, and servers. Capex investment per agent is less than 33% of their respective annual revenue.
  • Low Supplier Pressure: Since telecommunications costs have steadily declined and since several best‐practices call center software exist, supplier pressures are low.
  • EBITDA Margins: Given competition on price, call centers in the US have single‐digit EBITDA margins. Call centers in emerging markets can have EBITDA margins in 20%+.
  • Government Incentives: Governments tends to provide tax incentives since they create jobs and generate revenues in foreign currency. This is the case in the Dominican Republic.

Despite these industry nuances, call centers are relatively simple to operate given the best practices that have been defined over time by the industry certifications.

Source: Amergent offering memo

Exhibit 7: Historical and Pro Forma Income Statements for CCD

CCD – Financial Model

2013

2014

2015

TTM Marl6

Adjusted

2017

2018

2019

2020

2021

2022

2023

($000s)

$DOP

$DOP

$DOP

$DOP

$USD

$USD

$USD

$USD

$USD

$USD

$USD

$USD

Income Statement

Avg. DOP-USD Exchange

45.73

Growth

n/a

79%

122%

n/a

n/a

80%

45%

16%

22%

13%

9%

6%

Revenues

33,627

60,069

133,153

155,115

4,363

7,861

11,397

13,268

16,216

18,355

20,048

21,295

Direct Labor

15,290

26,342

74,293

84,106

2,400

4,324

6,268

7,297

8,919

10,095

11,026

11,712

Gross Profit

18,337

33,726

58,861

71,009

1,963

3,537

5,129

5,971

7,297

8,260

9,021

9,583

Operating Expenses

Telecom and IT

2,331

7,173

11,428

11,875

305

550

627

597

568

551

601

639

Electricity

848

2,248

3,8977

4,743

131

197

285

332

405

459

501

532

Rent

1,411

3,279

4,695

5,959

218

393

684

796

1,135

1,285

1,403

1,491

Management Salaries

5,371

6,121

10,423

11,121

393

747

855

796

762

771

782

809

General and Admin.

1,820

3,279

6,127

6,541

175

314

399

464

486

459

481

511

Depreciation and Amort.

1,018

2,865

2,328

2,328

131

197

285

332

405

459

501

532

Loan Interest

338

736

4,302

6,649

-

-

-

-

-

-

-

-

Total Expenses

13,357

25,701

43,200

49,216

1,353

2,398

3,134

3,317

3,762

3,983

4,270

4,515

Net Income

4,980

8,026

15,651

21,793

611

1,140

1,994

2,654

3,535

4,277

4,751

5,068

EBITDA

6,556

11,627

22,291

30,767

742

1,336

2,279

2,985

3,941

4,735

5,252

5,601

EBITDAMargin

19%

19%

17%

20%

17%

17%

20%

23%

24%

26%

26%

26%

EBITDA Growth

77%

92%

-

-

80%

71%

31%

32%

20%

11%

7%

Note: The summarized income statement highlights historical and projected financial results for a base case scenario. Amergent Capital expects to maintain variable expenses at relatively constant margins and expects scalable expenses such as telecom, IT and management salaries to provide margin improvement at the company grows.

Exhibit 8: Proposed Sources and Uses for CCD Acquisition

Given the lack of readily available bank debt and CCD’s growth, the deal will be an all‐equity deal. 100% of equity will be structured as redeemable voting preferred stock at an interest coupon of 7%. Below is a summary of the sources and uses:

Amount

Uses

Amount

Preferred Equity

$5,990,000

Acquisition Price

$3,710,000

Rol1over Search Capita1

$60,000

Transaction Fees

$140,000

Buildout Capital

$2,200,000

Total

$6,050,000

Total

$6,050,000

Seller Participation

The seller has demonstrated desire to remain involved long term and will roll 10% ($371,000) of his equity into the deal, but will not retain a board seat. The VP of Sales has expressed strong desire to participate in the deal and will buy 5% stake in the company. The seller will remain employed as the Chief Commercial Officer post‐close for an indefinite time period. The role will have a proportion of variable pay and will focus on client relationships, sales, and strategy.

Source: Amergent offering memo

Exhibit 9: Historical and Pro Forma Balance Sheets for CCD

CCD – Financial Model

2013

2014

2015

Adjusted

2017

2018

2019

2020

2021

2022

2023

($000s)

$DOP

$DOP

$DOP

$USD

$USD

$USD

$USD

$USD

$USD

$USD

$USD

Balance Sheet

Assets

Current Assets

Cash and Equivalents

1,184

2,732

2,483

2,200

626

2,084

769

596

1,029

1,058

1,058

Account Receivables

2,570

9,819

7,461

262

1,077

1,561

1,818

2,221

2,514

2,746

2,917

Total Current Assets

3,755

12,551

9,944

2,462

1,703

3,645

2,587

2,818

3,544

3,804

3,975

Property, Plant, and Equipment

37,571

34,707

53,607

1,172

2,896

2,989

3,281

3,611

3,766

3,793

3,719

Other Assets

1,151

1,178

2,530

87

157

228

199

243

184

200

213

Goodwill

-

-

-

3,204

3,204

3,204

3,204

3,204

3,204

3,204

3,204

Total Assets

42,477

48,435

66,082

6,925

7,960

10,066

9,271

9,876

10,697

11,001

11,110

Liabilities and Shareholder Equity

Current Liabilities

ST Bank Debt

4,555

3,896

11,985

-

-

-

-

-

-

-

-

Accounts Payables

2,321

1,866

12,491

349

174

215

229

240

241

260

277

Other Debt and Payables

119

99

13,605

87

157

228

265

324

367

401

426

Total Current Liabilities

6,996

5,861

38,081

436

332

443

494

564

608

661

702

LT Bank Debt

-

-

-

-

-

-

-

-

-

-

-

Total Liabilities

6,996

5,861

38,081

436

332

443

494

564

608

661

702

Equity

Total Preferred Stock

-

-

-

6,489

6,489

6,489

6,489

6,489

6,489

6,489

6,489

Total Common Stock

33,885

33,885

3,650

-

-

-

-

-

-

-

-

Retained Earnings

1,597

8,689

24,350

-

1,140

3,134

2,288

2,823

3,600

3,851

3,919

Total Equity

35,482

42,574

28,000

6,489

7,629

9,623

8,777

9,312

10,088

10,340

10,408

Total Liabilities and Shareholder Equity

42,477

48,435

66,082

6,925

7,960

10,066

9,271

9,876

10,697

11,001

11,110

Exhibit 10: Pro Forma Cash Flow Statements for CCD

CCD – Financial Model

2013

2014

2015

2017

2018

2019

2020

2021

2022

2023

($000s)

$DOP

$DOP

$DOP

$USD

$USD

$USD

$USD

$USD

$USD

$USD

Cash Flow Statement

Cash From Operating Activities

Net Income

4,980

8,026

15,661

1,140

1,994

2,654

3,535

4,277

4,751

5,068

Depreciation and Amortization

1,018

2,865

2,328

197

285

332

405

459

501

532

Change in Account Receivables

(3,876)

(7,249)

2,358

(815)

(484)

(256)

(404)

(293)

(232)

(171)

Change in Other Assets

-

-

(1,377)

(70)

(71)

29

(44)

60

(17)

(12)

Change in Other Debt and Payables

-

-

-

70

71

37

59

43

34

25

Change in Account Payables

1,415

(475)

23,626

(175)

41

14

11

1

19

16

Net Cash From Operating Activities

3,500

3,140

42,620

347

1,836

2,809

3,562

4,546

5,056

5,458

Cash from Investment Activities

Maintenance CapEx

(79)

(114)

(133)

(162)

(184)

(200)

(213)

Capital Expenditures

(22,896)

(934)

(21,229)

(1,842)

(264)

(491)

(573)

(430)

(328)

(246)

Net Cash from Investment Activities

(22,896)

(934)

(21,229)

(1,921)

(378)

(624)

(735)

(613)

(528)

(459)

Cash from Financing Activities

Net Change in Debt

4,555

(659)

8,595

-

-

-

-

-

-

-

Shareholder Dividends

15,791

-

(30,234)

-

-

(3,500)

(3,000)

(3,500)

(4,500)

(5,000)

Net Cash from Financing Activities

20,346

(659)

(21,640)

-

-

(3,500)

(3,000)

(3,500)

(4,500)

(5,000)

2,017

2,018

2,019

2,020

2,021

2,022

2,023

Change in Cash

950

1,547

(248)

(1,574)

1,458

(1,315)

(173)

433

28

(0)

Beginning cash

234

1,184

2,732

2,200

626

2,084

769

596

1,029

1,058

Ending Cash

1,184

2,732

2,483

626

2,084

769

596

1,029

1,058

1,058

Exhibit 11: Pro Forma IRRs and MOIC for Amergent Capital Investors

Amergent Capital believes that CCD presents a unique investment opportunity with excellent returns for the investor group. Under a base case scenario, a 5‐year exit, and a 5.0× exit multiple, the investment yields a gross IRR of 44% and an 5.3× multiple of invested capital.

On a downside case, a 5‐year exit, and a 4.0× exit multiple, the investment yields a gross IRR of 17% and a 2.0× multiple of invested capital. Amergent Capital plans to reinvest free operating cash flows into growth capex for new seats and for potential roll‐up acquisitions. Dividends will be paid only if excess cash (above ~4% of revenues) accumulates in the business and if there are no other value creation options.

Below is a summary of the net cash flows that yield the base case IRR:

Exhibit 12: CCD Customer Data

Customer

Type

Start

Hourly Rate May 2016 Rev

% LT Contract Rev

1

Inbound

Oct-15

$9.80

$128,419

37%

2

Inbound/Outbound

Jan-14

$9.75

$97,133

28%

3

Inbound/Outbound

Jul-14

$7.90

$30,514

9%

4

Inbound/Outbound

Aug-15

$13.75

$41,713

12%

5

Outbound

May-15

$8.00

$32,977

10%

6

Inbound

Dec-15

$13.75

$15,863

5%

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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