Thank you very much. Good afternoon, everyone. Welcome to our call. Thank you for joining us at such short notice. I'm joined by our CFO, Barbara Gibbes. I hope that by now you will have had access to an RNS and hopefully a presentation too. We'll run through the 15 or so slides and hopefully have plenty of time for your questions at the end. We'll get started. Turning to the second slide, we're very excited to be acquiring Windy City Wire and Cable, which is a fantastic U.S.-based controls business. It's absolutely consistent with our business model, which, as you know, is about strong differentiating value-add customer propositions. It's about exciting organic growth potential. It's about strong management teams and cultures that will deliver that for us, and this business has that in spades.
It's also right in our strategic sweet spot, expanding into the U.S., which I believe is the best industrial market for our seals and controls businesses, it's in a core product range that we understand well. They have an incredible track record of performance, with a platform to deliver market share gains in structurally high growth end segments. We'll pay a consideration of GBP 357 million with a funding structure that allows us to maintain a conservative and flexible balance sheet. In year one, the deal will be both significantly earnings-enhancing, it will cover comfortably our cost of capital. Turning now to the next slide, a quick reminder of our strategy to put the deal into some context. We've built the group on some very strong foundations of value-add distribution.
We look to grow into core, large, developed markets with both current and adjacent product ranges. We look to develop scalable businesses that can sustain exciting and resilient organic growth. Of course, we support the development of capability required to effectively operate those businesses at scale too. All of this while retaining a strong balance sheet, as I said. Windy City Wire and this transaction hits on all of these strategic points. Turning the page now to slide four and an overview of the transaction itself. It's a highly effective business, and I'll come on to talk about it a bit more in a second. Windy City is majority-owned and led by their founder, Rich Galgano, and along with a strong management team, he will be staying with the business.
It's a distributor of premium low voltage wire and cable with a strong service component and reaches across all of the U.S. They have a track record of double-digit revenue growth, and 26 years of uninterrupted profit growth. Revenues are expected to be in 2020, $190 million, and EBITDA of a little over $44 million. The consideration of GBP 357 million is at a multiple of 10.5x EBITDA and 11.5x EBIT. The group's return on capital will be in the high teens next year after the transaction. We'll fund with a 10% placing and the rest in debt, and Barbara will cover that in more detail in a minute. Turning now to slide five. It's right in our strategic sweet spot, as I said. The importance of the U.S. in our future is significant.
I believe it's the biggest, best, and most potential industrial market for us. Of course, it gets controls into the U.S., a core product range that we understand well in Europe. I just love the value proposition of this business. It's simple, it's highly effective, and it's truly scalable. On top of that, it's accretive to the group's future organic growth and earnings. It's in structurally high growth end segments with a differentiated proposition driving market share gains and a fantastic platform of technology, facilities, network of facilities, and some control of the supply chain on which to build real scale in the future. On top of that, as I said, it delivers very strong financial returns for the group. Now turning the page, I'll take you through this in a little more detail in the business itself. Slide six.
Windy City Wire was founded in 1994 and is headquartered in Bolingbrook, which is near Chicago. We've been aware of them for some time and been building relationships with the people around them. In fact, managed to circumnavigate a formal process, which was great. We've done extensive due diligence, as you would expect, spent a lot of time together, got to know them well. It's a really impressive management team and a strong customer and performance-orientated culture. It supplies product that is designed for customer convenience and for productivity with a high speed to market and high touch customer relationships. It operates with a diverse customer base in structurally high growth segments like building automation, audio, video, fire security, data centers. It has an incredible performance track record with revenue CAGR of 12% in the last 10 years and EBITDA margins now over 20% and growing.
Moving now to the next slide, the value-add customer proposition. The model, as I said, is simple and yet very powerful. They have patented products that are essential to customers and yet at low component costs. Products that are built for convenience, as I said, they have SmartWire as wiring that has specially designed compound for reduced friction. They have what's called Rack-Pack. Wire wheels are stored in custom-sized and labeled boxes, which can be easily transported, conveniently stacked for an organized workspace, and then the wire pooled from the multi-boxes simultaneously as the technician works. This convenience leads to productivity gains for the customers, 20%-30% normally on their labor costs. The business has been built for speed to market with a same-day dispatch policy based on technology, a network of facilities, and some control of the supply chain.
They maintain close contact with their customers, with sales reps and data from their systems, allowing them to be agile and responsive. Once you're on this platform, you never come off. It's a very compelling proposition and undoubtedly gaining market share. In many respects, it reminds me of the characteristics of our Hercules aftermarket business in the U.S. Again, a simple sealed product packaged for convenience and productivity in kits on a strong technology and distribution base with speed to market through same-day delivery. They're both very simple but very powerful models. Turning the page now to slide eight. I think this slide really demonstrates the quality of this business. You can see in the pie chart two critical factors from my perspective. Firstly, very diverse range of end customers who typically transact small values with multiple repetitions. There's no concentration nor dependency.
Once they're on, they rarely leave. As you can see from the recurring base chart on the right, the retention levels are exceptional. It's a quality business. The model is very resilient as well as truly scalable. As an example of that resilience through COVID-19, 2020 revenues are expected to be flat year-on-year with profit growth of around 18%. Moving now to the next slide, number nine. Great track record for performance. I think this chart speaks for itself. The EBITDA growth has been exceptional at 13% CAGR. I mentioned earlier the revenue growth, organic revenue growth at 12% CAGR. That's built up some excellent margins, which I think represent the pricing power from the differentiated services, along with the benefits of scale.
With strong cash conversion and returns characteristics, in many respects, as you would expect, the financial model is very, very similar to Diploma's. I'll come back in a second to explain why I think this performance can continue into the future. Turning the page to slide 10. I've mentioned how the business has a strong platform to deliver its customer proposition and financial performance. It's really critical. This platform is built for growth and scale. It's kind of what we're trying to do as a core part of the operational strategy in our existing Diploma businesses that develop the capability to operate at scale. Firstly, they have a network of facilities across the country, and that drives speed to market. It builds customer base in local territories.
They have some control of the supply chain with some light manufacturing, which is basically insulating the wire with compound, and we do some of this already in Europe. That brings benefits too, speed, responsiveness, quality control, and some margin. They have great systems which are crucial to allow the customer servicing element to operate successfully at scale. Finally, it might be most critically, talent is a key part of the capability for this platform to operate at scale, and I'll talk a little bit about that now on the next slide 11. I was so impressed with Rich Galgano, with the strength of the team, and with the powerful culture. He's carefully built a broad and effective team. They have a very experienced CFO who's done public markets roles before, strong and disciplined operations leads, and a fantastic sales organization.
The culture is built around many of the Diploma characteristics, accountable, agile, customer, and performance oriented. This team is fully on board and committed to partner with us on the next phase of Windy City Wire's development, which is exciting. Moving now to the next slide, significant future growth opportunities. I've talked a little bit about the track record, which is phenomenal. They've built a brilliant customer proposition, and there's a fantastic platform for scale. Now it's really about how they'll continue to grow. For me, this is, I think, the most exciting part. The low voltage wire market is huge, and we have a tiny share. The business benefits from exposure to high growth end segments, building automation, pro audio video, fire security, as I said, data centers, and the like.
Along with the structurally high growth rates, they've also been, and they'll continue to take market share as the 13% revenue CAGR demonstrates. They're now starting to break into some new and high growth areas too, such as data center development, digital antenna systems for 5G. Really exciting technological developments in these areas, which really only increases the need for premium wiring and cabling. It's really the infrastructure around that technological development. Finally, we will be exploring some revenue synergies. We can help Windy City Wire break into Europe through our existing channels, and vice versa, I believe they can help us take some of our existing controls products into the U.S.
I think it's incredibly exciting, and we believe the growth story will continue, and it will be accretive to Diploma. On the next slide 13, a bit of context on the short term as we start on that journey with some current trading. Diploma has been very resilient through COVID. We continue to generate strong profits and cash, and we've seen revenues recover in recent months. We're on track to hit the market expectations as we outlined in the August trading update.
As a result of that and our confidence in the future, the board is recommending a combined half and final dividend in respect of 2020 at GBP 0.30, just slightly higher than last year's full dividend. Windy City Wire, as I said, is also demonstrating the real resilience of its model this year too. The business will be flat top line, incredible in this environment with strong profit growth. As we progress through 2021, the prospects, therefore, for both together are really very encouraging. On that note, I'll hand over to Barbara to say a few words on the financials.
Thank you, Johnny. I'm now on slide 14. Let me fill you in on some of the details on valuation and deal structure. On valuation, we are buying Windy City at 10 and a half times EBITDA or 11 and a half times EBIT. This is an attractive multiple for a U.S. business of this scale, of the sheer quality, and the excellent organic growth prospects. For us specifically, this means double-digit earnings accretion in year one, as well as returning in excess of our cost of capital also in year one. ROACE is a key metric for us. Mathematically, this will come down initially. Remember, we are buying organic growth at scale. We are looking at a ROACE in high teens post-transaction, which is strong. This is the right thing to do for us, the right thing for Diploma.
As for smaller bolt-ons, we'll continue with those with the same discipline and the same returns hurdles we have always applied. On deal structure, we have a conservative approach to our balance sheet, which is why we have chosen a combination of debt and equity, also bearing in mind that we have visibility over an attractive pipeline of potential bolt-on opportunities. We are expecting to fund the transaction with the proceeds of this placing of around GBP 200 million and approximately GBP 160 million in debt. The new financing package is a total of GBP 260 million, which allows for headroom and flexibility into the future. Interest cost is around 2.2% at a blended rate. Now on to slide 15.
After the transaction, we'll have a balance sheet that's at the right level for a business such as Diploma. A strong balance sheet is very much at the core of our financial model. In terms of leverage, both businesses are highly cash generative, which means we'll be de-leveraging rapidly. I expect net debt of the combined business to be around 1x EBITDA at the end of the full year 2021, which for us is next September. That means we'll have the headroom to continue with our bolt-on acquisition, which remain a key element of the Diploma business model. Overall, we'll maintain balance sheet strengths, we'll retain our conservative approach to leverage. We'll have built the flexibility to take advantage of bolt-ons. This structure also allows us to have enough liquidity to pay a progressive dividend, as Johnny just mentioned. Now back to Johnny to sum up.
Summing up on slide 16. We're really excited about this deal. It's a high-quality business which fits perfectly with our model. It's well prepared for scale and has exceptional growth prospects and exposes us more to the U.S. The earnings accretion and returns profile are outstanding, and we can, as Barbara said, retain the conservative balance sheet for future dividends and bolt-ons. It's a great deal. Thank you very much, I'll now hand back to Orlando to take your questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one if you would like to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. As an additional reminder, if you would like to ask a question over the phone, please press star one on your telephone keypad at this time. We will move on to our first question, calling from Will Kirkness with Jefferies.
Hi there. Thanks. Just a couple of quick ones, please. Could you just confirm whether all that revenue growth there is organic? I think you said it was. Whether they've done any M&A in the past at all? Just lastly, sort of what the owner rationale was for selling? Thanks.
Sure. Well, just on the growth profile, yes, that growth is organic. They did some very small deals, I think, very early in their history, but what you see there is organic. Maybe I'll just take you through very quickly the deal process. We've been trying to get close to them for some time. I've built relationships with some of their advisors over the last year or two. They contacted me early in the summer to say that he was ready to discuss the sale process, after which we had numerous Zoom calls. His rationale is firstly that he believes that U.S. capital gains tax will increase post-election into 2021, and therefore he feels that now is the right time for him to take his cash off the table.
He also was very keen to talk to us because he was still keen to stay on in the business and wanted a partner that could work with him on developing their business model, their growth strategy into the future, and clearly that fits in with Diploma's philosophy. He was keen to talk to us, and as a result of that, we managed to circumnavigate a competitive process and have a bilateral negotiation and discussion, and clearly due diligence over the last few months.
Okay, thanks. Is he tied in for a year then, or longer?
Sorry, yes. He's tied in for three years, as is the top 20 or so of the management team with some retention packages.
Great. Thanks very much.
I should just say on that, if I may just add to it, Will, that it's really, really important that he is part of the future as the leader and the figurehead, as founder of the business, and we're really glad to have him on board. I'd also just say that the quality of the business also is really resilient, and there isn't really any kind of customer contract dependency or anything like that because we have so many customers across such a wide range of end segments, which makes the business very resilient.
Thanks very much.
Next, we will take a question from Henry Carver with Peel Hunt.
Thanks. Afternoon, guys. Just on top of Will's query, and the rationale, just wondering about the sort of integration with the controls business over in Europe and just the sort of how you see that going forward. Are you going to sort of rebrand or do any how far is the integration going to come? I guess, yeah, just a little bit more color on the cross-sell across the Atlantic.
Yeah, sure. Well, look, if go back to, I guess, the principles of our model, we don't really do heavy integration. We're really buying businesses that have got a unique customer proposition, a strong team and culture that have got organic growth potential, and that's what we're buying into. While occasionally we have some cost synergies, there's no real integration as such, and we'll preserve the Windy City Wire brand, and we'll preserve the business in its integrity. The business will report, if you like, externally as part of controls, but Rich Galgano himself will report directly to myself. In terms of the cross-sell, yeah, we're excited about that. I mean, the deal, we didn't price any of the synergies into the valuation, actually. For me, the deal stands up just on the basis of Windy City Wire's potential on its own.
However, there's no doubt that we're excited about what we can do to help them bring products into Europe. We have some existing wire and cabling businesses in the U.K. and Europe, which kind of are similar types of products and similar types of end customers, but not quite this product itself, and I think we can use them, access their channels, to bring that differentiating product range and service component into the European market. They're very, very excited about that. They've been looking for a European partner for some time. That was really one of the reasons why they were excited about Diploma.
That's great. Thanks.
Up next, we'll hear from Sam Bland with JP Morgan.
Hi there. Thanks. Congrats on the deal. I've got two questions, please. First one is, can you talk about how the business has managed to, I think it is EBITDA up 18% this year, I think, on flat revenue. Can you just talk about how that's been achieved? The second question is, obviously, this is quite a different scale of acquisition versus what we've seen from Diploma in the past. Do you sort of view this scale of acquisition as a kind of one-off to get a platform in the U.S., or could we see more acquisitions of this kind of scale in the future? Thank you.
Okay. Just on the EBITDA question, first of all. Two real driving factors there. Firstly, they're really carrying forward from the last year or two the benefits of growth and scale leveraging into their margin as they come into this year. Secondly, they've done quite a lot of work in the last year or two on their operations and their facilities and processes in Bolingbrook, in Chicago. They put a lot of automation in, a lot of technology in, that's allowed them to improve their gross margin, but also reduce their overhead as well. That's come through really strong this year as well. It's a great performance. In terms of acquisitions of scale, yeah, obviously it's a bigger one than we've done before. As I was saying a bit earlier, it really ticks all the business model criteria.
It's important strategically in getting controls into the U.S., and the financial returns are obviously pretty strong. Of course, as Diploma gets bigger, therefore we have the financial muscle to be able to do deals of this size. Now, having said all that, you shouldn't expect that we're going to do one of these every day. Our pipeline is full of the normal size of Diploma acquisitions. I think occasionally, and how frequently is that? I don't know, a couple of years, whatever, if the right thing comes along, we should be prepared to look at it, and I think that's the way I would see it. Particularly for this deal, it may be a bit bigger, but as I said earlier, significantly earnings enhancing and covering our cost of capital, I think is great returns.
All right. Thank you very much.
Next we will take a question from David Brockton with Numis.
Good afternoon. Two questions as well from me, please. Just in terms of the ongoing growth opportunity, are there any sort of obvious states still to expand into or where the business can add density? That's the first question. Then tied into the last question, just in terms of the short-term COVID impact, I think you've given a sort of clear explanation for the margin improvement. I'm just wondering if you can give us a feel for how much COVID has slowed revenue growth in this year. I appreciate it's flat, but I'm just sort of keen to understand where it was and where the expectation was pre-COVID. Thanks.
Okay. Well, geography-wise, I mean, really, there's a slide in there which shows the dispersion of their 19 facilities, which gives them really good geographical coverage, which is great. They've still got very, very low levels of penetration across almost all of those markets. I don't necessarily sit here and point to one geography or another. I don't think it's about that. I think it's more about these exciting technology orientated segments that they're growing into, and I think they have opportunities in those across all of the geographies within the U.S. In terms of the revenue profile, I guess, like most businesses, I guess through the tough months, it was a little tougher. Their results in the last few months have been pretty exceptional, actually. They're coming through it well.
As I said, revenues will be broadly flat for this year, and that's down from what has been double digit. What's going to happen in the future? I absolutely believe, as I said earlier, that this is a double-digit organic growth business. Clearly, there's a bit of uncertainty in the short term, as we all know, not just COVID, but getting past the election process. Once we do get past that, I'm really excited about, I guess, the pent-up industrial demand in the U.S., and I'm excited about that for Windy City and our other U.S. businesses.
Okay. Thank you.
Up next, we will take a question from Jane Sparrow with Barclays.
Afternoon. Just one left from me. It was if you could just give a bit more color on the market in the U.S. for these products. You've obviously given on slide 12 some detail on some of the sub-markets in which it operates in. Just keen to understand the, this has obviously been growing ahead of the market has been delivered, what the competitive landscape is out there, how fragmented it is. Are there any big competitors, and so on?
Yeah. Sure. The market for low voltage wire and cable is massive. We did pretty extensive market due diligence as part of this. The market is massive, so our share of it is minuscule. It's growing at around about 5%-6% as a core market, if you like. As I said before, we're in pretty high growth technology-based segments, building automation, and the growth that goes with that as a result of smartphone, energy efficiency, government regulation, government investment in residential development is really, really significant. On top of that, the investment into areas such as data centers in the U.S. is particularly big right now. It's big everywhere, but the U.S. seem to be really putting some capital behind it, perhaps trying to catch up with China from a technological perspective. There's real growth in that data center area.
As I said also, they're breaking into digital antenna and the opportunity there on the back of 5G is pretty massive because this is all about the infrastructure that goes around it. The summary of all of that is that the market for wire and cable is about 5% or 6%, but the markets that we're in is probably in the 8%, 9%, 10% bracket. Then on top of that, as I was talking about earlier, the quality of their business model and customer proposition, the differentiating nature of what they do is taking market share, and that takes them from the 8%, 9%, 10% into the 11%, 12%, 13%, if you like. That's kind of like the profile of how their growth is made up.
When you look at the competitive set and how they're taking market share, well, they have a cluster of very, very big, high volume platform, low margin distributor competitors. People like Belden, Anixter, HWC, Southwire, and a few others. They have at the bottom end, masses of kind of regional moms and pops around the country. We're kind of in the sweet spot in the middle, which means we're winning share from the big boys because we're able to deliver lower cost proposition, a lower net cost proposition for our customers.
We're able to be responsive and agile, and we've got high customer touch points, and they struggle to compete with us on that basis, and we take market share. Clearly at the other end of the market, in the smaller regional players, we take market share on the basis of scale, national distribution, and indeed, quality of service proposition too. We're right in the sweet spot, I think, in terms of the market, high growth end segments, and with a value proposition that's gaining share, which I think, as I said, is really, really exciting.
Yep. Thanks so much. Sorry, I just had one extra one that just came into my mind about the figures that you've given for the pro forma EBITDA for this year. Is that there's no sort of, often with private companies, you get sort of management recharges or various things going through the P&L that wouldn't go through your P&L. Can you just check that's a sort of clean number that we can build from for next year's forecast?
Yeah, that's a clean number, Jane.
Thank you.
Once again, to ask a question, please press star one. Next we'll hear from Daniel Cowan with HSBC.
Hi there. Good afternoon. Thanks for the call. My question is on operating cash flow. Just wondering how that would grow in the current year. Was that going to grow in line with EBITDA, or is there some more CapEx involved in that? Second question is, obviously, proving resilient from what you're saying this year, and with a strong track record of double-digit revenue growth, how soon would you expect that double digits growth to resume, please?
Okay. I'll take the first one, and then Barbara can come back to answer the second one on cash. Look, it's a crystal ball. The business is doing incredibly well. It's really well positioned. The track record is there, the end segments is there. As I was just saying, they're in a great position. Clearly, a lot's going to depend on how we come through the virus, how we come through lockdowns. A lot's going to depend probably on the U.S. election and how tricky a process that turns out to be. Assuming that we can move into 2021 and beyond, who knows, in a slightly better environment, I think they're in a great position to be returning to their historic track records. There's no reason why they shouldn't be. Barbara can answer on cash.
On cash. It's a business similar to Diploma, generating very strong cash returns. In terms of CapEx, the business is pretty well invested. They've spent over $25 million or so over the last three years upgrading their facility in Chicago and also investing in the assembly lines. In terms of capacity, there's plenty of capacity there to accommodate the kind of growth we've seen over the last two years for the medium term. We're not expecting to have to make any significant CapEx contributions.
Super. Thank you.
We have no further questions in the queue. I'll turn the call back to CEO Johnny Thomson for additional or closing remarks.
Yeah, just a couple of closing remarks. As you can tell, we're really excited about it. It's a quality business, fits well with our model, well prepared for scale with great growth potential. I think the returns criteria are absolutely fantastic. So overall, we're very, very pleased with it. We think it's a great deal, and we thank you very, very much for taking the time to listen to us and ask your questions today. I appreciate it very much at short notice. Thank you.