Case
Teaching Notes
Supplementary Resources
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
Resources
Exhibit 1: Kalil Diaz Resume
KALIL DIAZ | |
EDUCATION | |
YALE SCHOOL OF MANAGEMENT Master of Business Administration (MBA)
| New Haven, CT 2014 |
CONCORDIA UNIVERSITY Bachelor of Commerce, Supply Chain Management/Finance
| Montreal, Canada 2009 |
PROFESSIONAL EXPERIENCE | |
AMERGENT CAPITAL Managing Partner
| New Haven, CT/Santo Doming, Dom. Rep. 2014-Present |
GE CAPITAL Structuring Manager
| Montreal, Canada 2011–2012 |
Assistant Account Manager
| 2009–2011 |
AIR CANADA Financial Analyst (8-month full-time internship)
| Montreal, Canada 2008 |
NON-PROFIT EXPERIENCE | |
EXPLORE DOMINICAN REPUBLIC President and Founder
| Santo Domingo, Dom. Rep./Montreal, Canada 2005-Present |
ADDITIONAL INFORMATION | |
| 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 |
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Industry |
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The Company |
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Value Creation Opportunities |
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Market Position |
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Exit Options |
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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