Report by Philip Carse, Principal Analyst, Megabuyte:
Provider of telecoms services to small businesses XLN has changed owners, with Blackstone's GSO Capital Partners backing a secondary buyout from ECI for a reported £140-150m, or about 8x trailing EBITDA, mainly or wholly with debt. Ex-Travis Perkins CEO Frank McKay has been appointed Chairman. Could XLN be limbering up to pounce on United Utilities?
XLN is a South London-based provider of a full range of telecoms services to the smaller end of the business market, as well as related services such as credit card processing, insurance and energy. The most recently available accounts for the year to March 2013 showed EBITDA of £15.3m on revenues of £65.1m ECI backed an SBO from Zeus in September 2010 for £77m and this latest deal comes almost four years to the day.
Blackstone's GSO Capital Partners division has supported the latest SBO for an amount reported in the Sunday Times at £140-150m. Where GSO seems to be different is that it provides mainly debt; hence one assumes that XLN's founder Christian Nellemann has retained most if not all of the equity in this latest deal.
First thoughts
The timing of this deal comes as no great surprise given that ECI has been invested for four years. Including a special dividend paid in 2013, ECI claims a 3x return on its investment. With EBITDA of £15.3m in the year to March 2013 and expectations of double digit EBITDA growth, EBITDA of £17-18m for the year to March 2014 implies a trailing valuation of about 8x, in line with sector multiples.
On the assumption that most, if not all, of GSO's funding is in the form of debt, it also suggests that XLN will be fairly leveraged. However, the company is highly cash generative, with typically solid EBITDA conversion and minimal capex.
So what next for XLN? The stated aim at the time of ECI's investment of consolidating the UK small business telecoms market did not really happen with XLN buying just two small businesses - Shine Telecom for £2.6m and Card Processing Solutions for £3.8m - with only the former representing consolidation of a similar business.
Christian Nellmann would probably have liked to buy its main independent challenger in the small business market - Universal Utilities - but was pipped to the post by private equity investor Vitruvian in May 2011.
With Vitruvian in its third year of ownership of Universal Utilities and with Blackstone presumably providing more firepower (it has $70bn in assets under management), could XLN be getting ready to pounce on UU? Such a deal would double XLN's size at a stroke, with EBITDA increasing by perhaps 1.5x given UU's much better margins and making the business the undisputed number two behind BT in that part of the market.