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ARSI acquisition to strengthen FSOL’s debt collection capabilities

* FSOL has agreed to acquire a 100% stake in Thousand Oaks, California-headquartered legal collection service provider, American Recovery Service Inc (ARSI), for a cash consideration of USD53mn, including earnouts (~0.7x EV/Sales on FY21 sales).

* Deal rationale: The acquisition will expand and strengthen FSOL’s consumer debt management services by adding legal stage collections capabilities, creating a one-stop shop for debt collections. The debt collection market is a significant part of the consumer credit ecosystem with evolving regulatory demand. FSOL is a leading player in providing high-quality, responsible collection services in the early and late-stage receivables management business. With the addition of ASRI’s legal collection services through its nationwide partner network and in-house experts, FSOL will now be able to help clients navigate the complex legal collection process, all from under one roof. Both ARSI and FSOL are pioneers in driving best-in-class debt recovery compliance, using advanced technology and emphasizing a positive consumer experience. These shared tenets add to the symmetry of this combination.

* Deal structure and timelines: FSOL is paying a cash consideration of USD53mn, including earnouts, for the acquisition. The transaction was closed on 29th Dec 2021.

* Brief profile of ARSI: ARSI, founded in 1986, provides legal collection services to leading BFS and Fintech clients in USA for over three decades through its nationwide partner network and in-house experts. The company’s revenues for FY19/FY20/FY21 (Year-end September) were USD61.5mn/USD65.3mn/USD72.5mn.

* Our view: ARSI’s acquisition is in line with FSOL’s ‘Digital First, Digital Now’ strategy and will further strengthen its leadership in the consumer debt management services by adding legal-stage collection capabilities. FSOL will fund the acquisition through debt and internal accruals. Considering the onsite-centric nature of the business, we expect the acquisition to be margin dilutive initially. However, with anticipated revenue and operational synergies, the margin profile is expected to improve gradually. The acquisition is expected to be EPS accretive. We have yet not incorporated the acquisition’s impact into our estimates, pending more clarity; however, we don’t expect material changes to our EPS estimates. We have a Buy rating on the stock with a TP of Rs230 at 21x Dec’23E EPS.

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