8-K: First Advantage to Acquire Sterling Check Corp. in $2.2 Billion Deal, Announces 2023 Results and 2024 Guidance

First Advantage Corporation announced its acquisition of Sterling Check Corp. for $2.2 billion, along with its full year and fourth quarter 2023 financial results and full year 2024 guidance.

Summary

• First Advantage Corporation has agreed to acquire Sterling Check Corp. for approximately $2.2 billion in a cash and stock transaction.
• The deal is expected to close in the third quarter of 2024, subject to regulatory approvals and other conditions.
• First Advantage reported full year 2023 revenues of $763.8 million, net income of $37.3 million, and adjusted EBITDA of $237.6 million.
• For the fourth quarter of 2023, revenues were $202.6 million, net income was $14.8 million, and adjusted EBITDA was $68.2 million.
• The company has provided full year 2024 guidance with revenue expected to be between $750 million and $800 million, adjusted EBITDA between $228 million and $248 million, and adjusted net income between $127 million and $142 million.
• The acquisition of Sterling is expected to generate at least $50 million in run-rate synergies and is expected to be immediately accretive to adjusted EPS on a run-rate synergy basis.
• First Advantage will fund the cash portion of the transaction and retire existing Sterling debt through the issuance of $1.8 billion of new debt and the use of balance sheet cash.

Sentiment

Score: 7

Explanation: The document presents a mixed picture with a significant acquisition that is expected to be accretive, but also shows a decline in financial performance for 2023. The forward-looking guidance is positive, but the execution of the merger and realization of synergies will be key to future success.

Positives

• The acquisition of Sterling is expected to create significant synergies and be immediately accretive to earnings.
• The combined company will have greater diversification of revenue across customer segments, industries, and geographies.
• First Advantage's 2023 results show strong cash flow from operations of $162.8 million for the full year and $56.7 million for the fourth quarter.
• The company's adjusted EBITDA margin reached a record of nearly 34% in the fourth quarter of 2023.
• The company has a strong balance sheet with $213.8 million in cash and cash equivalents at the end of 2023.
• First Advantage has a history of returning capital to shareholders through share repurchases, although this program is currently suspended due to the acquisition.

Negatives

• First Advantage's full year 2023 revenue decreased by 5.7% compared to 2022.
• The company's full year 2023 net income decreased by 42.3% compared to 2022.
• The company's full year 2023 adjusted EBITDA decreased by 4.6% compared to 2022.
• The company's fourth quarter 2023 revenue decreased by 4.7% compared to the same period in 2022.
• The company's fourth quarter 2023 net income decreased by 26.5% compared to the same period in 2022.
• The company's fourth quarter 2023 adjusted EBITDA decreased by 2.9% compared to the same period in 2022.
• The company is suspending its share repurchase program due to the acquisition of Sterling.
• The company is taking on $1.8 billion in new debt to fund the acquisition.

Risks

• The proposed transaction may not be completed in a timely manner or at all.
• The failure to satisfy the conditions to the consummation of the proposed transaction, including the receipt of certain governmental and regulatory approvals, could prevent the deal from closing.
• The occurrence of any event, change or other circumstance could give rise to the termination of the Merger Agreement.
• The announcement or pendency of the proposed transaction could negatively impact First Advantage's business relationships, operating results, and business generally.
• The proposed transaction could disrupt current plans and operations of First Advantage or Sterling and cause difficulties in employee retention.
• The company could face unexpected costs, charges or expenses resulting from the proposed transaction.
• Legal proceedings may be instituted against Sterling or First Advantage related to the Merger Agreement or the proposed transaction.
• The company's forward-looking statements are subject to various risks, uncertainties, assumptions, or changes in circumstances that are difficult to predict or quantify.
• The company's indebtedness could adversely affect its ability to raise additional capital to fund its operations, limit its ability to react to changes in the economy or its industry, and prevent it from meeting its obligations.

Future Outlook

First Advantage has provided full year 2024 guidance with revenue expected to be between $750 million and $800 million, adjusted EBITDA between $228 million and $248 million, and adjusted net income between $127 million and $142 million. The company expects the acquisition of Sterling to be immediately accretive to adjusted EPS on a run-rate synergy basis and to drive accelerated earnings growth potential from topline development, synergies, and deleveraging.

Management Comments

• Scott Staples, Chief Executive Officer, stated that the company was pleased with its 2023 performance and that the fourth quarter exemplified the strength of their business model.
• Scott Staples also said that the acquisition of Sterling is a transformative step for First Advantage and the background screening industry.
• David Gamsey, EVP and Chief Financial Officer, commented that the company continued its balanced approach to capital allocation in 2023.
• Josh Peirez, Chief Executive Officer of Sterling, stated that the combination with First Advantage will accelerate Sterling's strategic goals and deliver added value for stakeholders.

Industry Context

The acquisition of Sterling Check Corp. by First Advantage is a significant consolidation move in the background screening industry, combining two major players. This deal reflects a trend towards larger, more diversified companies in the sector, aiming to leverage technology and expand service offerings. The combined entity is expected to have a stronger market position and be better equipped to compete with other large players in the industry.

Comparison to Industry Standards

• First Advantage's revenue decline of 5.7% for the full year 2023 contrasts with some industry peers who have shown modest growth, indicating potential challenges in market share or pricing.
• The adjusted EBITDA margin of 31.1% for the full year 2023 is competitive but not leading, with some peers achieving margins closer to 35% or higher.
• The acquisition of Sterling Check Corp. is a strategic move to gain scale and improve profitability, similar to other consolidation efforts seen in the industry.
• The projected $50 million in synergies is a typical target for mergers of this size, but the actual realization of these synergies will be critical to the success of the deal.
• The use of debt financing for the acquisition is a common practice, but the level of debt taken on by First Advantage will need to be carefully managed to avoid financial strain.
• Companies like HireRight and Accurate Background are also major players in the background screening industry, and the combined First Advantage and Sterling entity will be a significant competitor to these companies.

Management Changes

Legal Proceedings

• The document mentions the risk of legal proceedings related to the Merger Agreement or the proposed transaction.

Stakeholder Impact

• Shareholders of both First Advantage and Sterling will be impacted by the acquisition, with Sterling shareholders receiving cash or stock in the combined company.
• Employees of both companies will be affected by the integration process, with potential for job changes and restructuring.
• Customers of both companies are expected to benefit from a broader suite of products and solutions.
• Creditors of both companies will be impacted by the new debt structure of the combined company.

Next Steps

• First Advantage will work to close the acquisition of Sterling Check Corp. in the third quarter of 2024.
• The company will focus on realizing synergies from the acquisition to improve adjusted EBITDA margins and cash flows.
• First Advantage will continue to invest in innovation and reduce overall net leverage.
• The company will provide additional forward-looking financial information regarding the transaction's impact at or around the time of closing.

Key Dates

Keywords

acquisition, background screening, merger, financial results, synergies, adjusted EBITDA, revenue, net income, earnings per share, guidance, debt, share repurchase, technology, identity verification