Philip Carse, Analyst at Megabuyte.com, reports on the recent performance of leading companies in the comms space during the last quarter.
The highlight of the last three months has undoubtedly been corporate activity among the business comms service provider community, with Daisy accepting a take-private bid from founder Matt Riley and private equity investors Toscafund and Penta, Gamma successfully listing on the London AIM stock market, and XLN changing owners. There has also been plenty of M&A activity in networks, with Interoute buying Vtesse and euNetworks being in talks.
The Daisy cash offer was at 185p per share, or £494m for the equity, valuing the company at 11x historic EBITDA, a full price for a business whose EBITDA actually fell 10% in the first three months of the current financial year according to the offering prospectus. With the aim of the P2P being to undertake larger acquisitions than in the past, we consider Phoenix IT a potential target given its mid-market focus and also having Toscafund as a significant shareholder.
Gamma's successful IPO at 187p per share for a £165m market capitalisation represents second time lucky for the company. It is intended to raise the profile of the company, with no new monies being raised, but existing shareholders selling down 50% of their holdings. The IPO valued Gamma at 8.7x historic EBITDA, an interesting contrast with Daisy particularly given that Gamma grew revenues and EBITDA by 16% and 42% in the first half of 2014. There is no news on Timico which had to abort an IPO earlier this year, while rural broadband provider Gigaclear is currently attempting to IPO.
XLN, which focuses on the very small end of the business market, undertook a buyout from ECI Partners, backed by debt from Blackstone's GSO Capital Partners. The reported £140-150m price values XLN at about 8x historic EBITDA. We wonder whether XLN will use Blackstone's greater firepower to attempt to buy Universal utilities/Unicom.
Networks remains an M&A focus area, following Zayo's acquisition of Geo networks earlier this year. The most recent deal has seen Interoute buy Vtesse Networks, substantially boosting its UK footprint and bringing more data centres on-net. The deal adds about 5% to Interoute revenues.
Meanwhile, Singapore-listed but UK centred euNetworks has admitted to being in M&A discussions. A potential buyer is Zayo Group, which coincidentally achieved a US stock market listing, albeit after having to cut the price by 15% due to weak markets. There were also several small M&A deals, including by serial acquirers such as Chess (Parachute IT) and GCI (CommsXchange).
In share price terms, the sector has had a torrid three months in line with a general stock market collapse, with an average share price decline of 5.6%. However, the average 8.7% rise over the last 12 months is well ahead of the FTSE's 4.6% decline. The only stocks to have shown significant share price rises over the last quarter have been Daisy, due to the take private, Redcentric and Telecom Plus, both due to solid trading updates. Most other stocks have fallen 5-10%, with the exception of TalkTalk (-14%) and Pinnacle (-32%).
The out performance over the last year has been led by Redcentric (+43%) due to the company demonstrating organic growth and significant synergies after the acquisition of InTechnology. Other notable performances have come from Daisy, Alternative Networks, Maintel and Coms (+19-26%), while the main fallers have been Pinnacle (-69%) and Adept (-17% despite decent results).
Results and trading updates released recently show the usual mixed picture with market hotspots and notspots. The pick of the bunch were probably Gamma's very strong first half performance and the decline in Daisy EBITDA in its first quarter, while Alternative Networks and Maintel reported solid trading, aided by acquisitions of Control Circle and Intercept IT (Alternative) and Datapoint (Maintel). Among private companies, we would highlight strong performances by Fluidata and Spitfire and less impressive numbers from Charterhouse Voice and Data.
IS Research publishes www.megabuyte.com, a company analysis and intelligence service covering over 200 public and private UK technology companies.
philip.carse@megabuyte.com