Comms sector abuzz with M&A activity

Philip Carse, Analyst at Megabuyte.com, reports on the recent performance of leading companies in the comms space during the last quarter.

As with the previous quarter, the Telecoms & Networks peer group outperformed the FTSE All Share this last quarter with an average 9% share price rise versus 2.5% for FTSE, but slightly under-performed the broader Megabuyte universe of UK tech stocks, which was up 12%. The main share price gainers were TalkTalk and Adept Telecom off the back of results and an acquisition respectively, while the biggest story of the quarter was Daisy's deal to buy Phoenix IT in an unusually busy M&A-busy period.

TalkTalk led the share price gainers, up 23%, after the company published strong fourth quarter revenue growth of 6% to £475m, driven by 14% growth in Corporate (B2B). The company has increased medium term revenue growth guidance 1pp to 5% while reiterating 25% EBITDA margin targets, and has laid out ambitious plans for the business, including Corporate (double market share) and FTTH (up to a 10m homes rollout). TalkTalk also acquired hosted voice provider tIPicall for £5m. Adept Telecom's 16% share price rise reflected its £7m/4x EBITDA acquisition of unified comms and managed service player Centrix, boosting revenues by a third, expanding its product capabilities and its public sector exposure.

Other strong moves included Kcom (+11% for no obvious reason), Redcentric (+10% after buying Calyx's managed services business for £12m), and Vodafone (+9% on speculation concerning a corporate deal with Virgin Media owner Liberty Global). The main share price faller was Coms plc (-73%) after a Board upheaval and dire trading updates, culminating in the sale of its telecoms business to Timico for £2.5m. Multi-utility reseller Telecom Plus fell 28% after a profit warning. Adept (+52%) and Coms plc (-89%) also lead/prop up the 12 month share price performance charts.

Overall, M&A has been a key feature of the last quarter, led by Daisy's 160p/£179m agreed acquisition of Phoenix IT, which we speculated on when Daisy announced its take private last August. The agreement will boost Daisy's EBITDA by 42% before synergies and create a £200m mid-market telecoms and IT powerhouse and boost Daisy's Partner division, alongside its existing SME business, in an organisation with total combined revenue of about £620m.
Daisy also partook in the Calyx break-up, buying Break Fix for £3.75m, while Chess acquired the Carrier Services division for £1.8m, alongside Redcentric's managed services deal mentioned above. Timico was also a multiple acquirer, buying IT specialist Wirebird for an undisclosed amount alongside the aforementioned Coms plc deal. We estimate that the two deals add about £23m, or 50%, to Timico revenues, though with little to show in the way of profit in the short-term.

Other recent noteworthy deals include UK Broadband's proposed and rather expensive £14m acquisition of mass accommodation ISP Keycomm, and Specialist Computer Centres (SCC) investment in connectivity specialist Fluidata, building on its recent acquisition of SSE Telecoms' data centre business. In other corporate activity, rural fibre to the home network operator Gigaclear raised £30m to take total funding to date to £50m or so.

Aside from TalkTalk, other recent notable public company results include American-listed UCaaS player 8x8. Alongside fourth quarter 22% organic revenue growth to $43.5m at a 11% (non-GAAP) net income margin, the company guided for at least 25% growth this year from its UK subsidiary, the ex-Voicenet. BT reported a robust fourth quarter, with EBITDA up 7% to £1.8bn on revenues down 2% at £4.6bn. Again, BT Consumer was the standout division, with revenues up 3% in the quarter, taking the full year growth rate to 7%, at £4.3bn, while Openreach added a record 455k fibre broadband net connections this quarter.

In a positive trading update, Alternative Networks has described first half trading to the end of March 2015 as 'robust' and on track to meet full year expectations (consensus shows revenues up 12% to £154.8m and EBITDA up 20% to £23.5m, growth largely inorganic). Performance was driven by Advanced Solutions, helped by the Control Circle and Intercept IT acquisitions (albeit with some challenges at Control Circle) and cross-selling, as well as mobile market share growth, while fixed line is 'in line'. The company is also targeting 15% annual dividend growth.

The pick of the bunch of private company results were those from connectivity and cloud specialist Exponential-e, with revenues and EBITDA for the year to January 2015 up 22% to £60.6m and 40% to £10.2m respectively, with similar growth expected for the current year. In this last quarter, Megabuyte also started tracking fast growing business comms providers Focus Group and Wavenet.

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