Report by Philip Carse, Analyst at Megabuyte.com
BGF-backed business comms provider GCI has started to spend its new £50m M&A war chest with the acquisition of owner-managed Freedom Communications for an undisclosed sum, boosting revenues by about £18m, or just under a third. On a call, CFO Mark Allen and Marketing Director Phil Hambly highlighted in particular the boost to GCI's Microsoft/Skype for Business (SFB) standing and its public sector presence, with the prospect of more M&A to come in 2017.
GCI is a business comms provider offering a full suite of telephony, connectivity, unified comms, hosting and data centre colocation services, with Microsoft, Vodafone and Cisco as key partners. It targets enterprises and large SMEs direct and via the channel. The business was founded by Wayne Martin, and received a minority investment from the Business Growth Fund in February 2012.
Its M&A activities stepped up a notch in 2016 with the acquisitions of Outsourcery, Packet Media and Fusion Media, and in October the company announced a new £50m bank-funded M&A war chest.
The acquisition of Freedom Comms represents the first acquisition under the new facility, and we estimate it is GCI's most significant to date. Founded in 1989, Watford-based, owner-managed Freedom Communications has expanded from its PBX, lines & minutes heritage to become a unified comms system integrator, providing a range of communication, data infrastructure and voice and data network services. Freedom supports over 6,000 voice, data and connectivity installations to companies and the UK public sector, including Home Retail Group, Hamleys, Shropshire Council and Cardiff University.
In 2011/12 Freedom decided to transition to unified communications off the back of Microsoft products, and particularly Lync/SFB. However, this investment in people, processes, systems and customer education has resulted in a lacklustre financial performance in recent times. Indeed, the newly available accounts to March 2016 show EBITDA halving to £0.3m on revenues down 4% at £18.8m, well down on the £1.4m EBITDA on £19.4m revenues in fiscal 2013. Of Freedom's near £19m revenues, CPE & software and support services each contribute about a third, with the remainder from Networks, Applications and Professional Services.
The acquisition thus boosts GCI's £57m revenue run rate by about a third to £75m, whilst the removal of various lifestyle costs and other cost synergies should lift Freedom EBITDA to about £2m by the end of the year, or a 20% uplift on GCI's £10m run rate. Price has not been revealed, but given GCI's record of paying modest prices, we would guess a valuation of perhaps £10-13m, or a mid-single digit multiple of post-synergy EBITDA.
Aside from the financial impact, GCI management was keen to highlight Freedom's Skype for Business and public sector credentials. Regarding the former, Freedom has 40k SFB seats to add to GCI's 140k (of which 40k came from Outsourcery), making the newly enlarged GCI one of Microsoft's largest SFB partners in the UK. Meanwhile, Freedom is present on nine of the 11 lots of RM1045 Network Services Framework, significantly enhancing GCI's public sector presence. Management also highlighted Freedom's significant pipeline, mirroring the optimistic tone of our conversations with Freedom in the Summer.
Away from Freedom, GCI management noted ongoing improvements to its sales and marketing functions which are starting to generate meaningful new contracts and organic growth, which it hopes to boost through the launch of a new Cloud PBX service in February.
Megabuyte view
Subject of course to the usual caveat over price, this seems a sensible strategic move for GCI, providing a significant boost to its Microsoft standing and adding significant scale. On paper, its target, Freedom, does not have a particularly attractive financial track record, which we attribute partly to being a lifestyle business and partly to the recent investment in SFB. The opportunity for GCI therefore is to both build profitability through taking out lifestyle costs (some of which will fall away immediately, for example a portion of the £1m of directors' remuneration), as well as energise Freedom's sales function. Meanwhile, with this deal representing at most a third of the new £50m M&A fund, we fully anticipate more GCI acquisitions this year.