Philip Carse, Analyst at Megabuyte.com, reports on the recent performance of leading companies in the comms space during the last quarter.
While there were several private equity deals in the sector over the summer (such as Lyceum/Sabio, GCP/Arrow, Beech Tree/Wavenet), the more recent interesting corporate activity has involved M&A, particularly Daisy's agreed £185m/9.6x current EBITDA bid for Alternative Networks and Metronet's £48m/8x acquisition of M247. While these are trade deals, both buyers are PE backed and have used debt funding for a major part of their deals.
So how does the Daisy deal change the B2B supplier landscape? We estimate that Daisy and Alternative today have about a 3.1% and 0.8% share of the UK's £19 billion B2B comms market respectively (though less if one also included the similarly multi-billion UK IT services market). The deal elevates the combined business to about £720-730 million revenues, or about a 3.9% market share. It also moves Daisy above Virgin to behind Arqiva, though the latter with its mobile and TV masts and broadcast transmission is a very different business to Daisy. In pure business comms and IT services terms, we estimate that Daisy is now fourth behind BTEE, Vodafone and O2.
Meanwhile, the pick of the bunch of recent results and updates, for all the wrong reasons, are Alternative Networks' third profit warning in 12 months, a major accounting issue at Redcentric, TalkTalk admitting what all the City analysts already knew, that full year EBITDA would be at the low end of guidance, and more dire results from PCCW-backed wireless broadband provider UK Broadband.
Alternative Networks reported on its year to forget, with EBITDA down 17% to £18.4 million on revenues down 8% to £135.8 million for the year to September 2016. As the details show, the year was derailed by non-EU roaming and Advanced Solutions' non-recurring revenue weakness, offsetting some good progress in mobile subscribers, connectivity and hosted desktop. With a better second half than the first (EBITDA down 27% on revenues down 4%), the outlook is reasonably positive.
In somewhat of a shocking statement, AIM-listed managed IT services provider Redcentric announced in November that historic accounting misstatements over several years have overstated net assets by at least £10 million, while net debt is nearer £30 million than the high teens implied by an earlier trading update. The company does not appear to be in any fundamental danger given that the higher and more accurate net debt of £30 million is still only just over 1x full year EBITDA, but it will clearly need to regain the trust of its bankers and shareholders.
TalkTalk reported first half to September 2017 EBITDA up 44% to £130 million on revenues down 1.1% at £902 million, within which corporate was strong at a carrier driven +11% to £208 million (underlying +2.3%). With a sense of déjá vu the company now expects full year EBITDA to be at the bottom end of the £320-360 million range, though the city had already guessed this given current consensus of £318 million.
KCOM announced first half 2016/17 EBITDA down 14% to £32.0 million on revenues down 7.1% at £165.3 million, partly reflecting increased costs following the sale of its national network to CityFibre and lower spending on the major HMRC project. The results can best be described as reflecting a period of transformation for KCOM as the company starts to reinvest some of the £90 million received from CityFibre for its national network into its Hull fibre network and enterprise national business.
Adept Telecom reported interim revenues up 19% to £16.5 million, although the majority of this growth came from the five month contribution of Comms Group, with adjusted EBITDA up 20% to £3.5 million. Adept also revealed the £2.0m/1.5x 2015 sales acquisition of CAT Communications, further strengthening its Avaya presence.
Accounts to April 2016 from Excell Group showed a second year of solid growth with EBITDA up 23% to £3.0 million on revenues up 10% to £30.0 million, with exemplary operating cashflow. However, the fireworks are happening this year off the back of a major contract with Workspace Group and an acquisition. In contrast, accounts to January 2016 from BGF-backed mobile-cum-unified comms service provider Olive Communications showed a poor year, with revenues down marginally at £28.6 million, a one third decline in estimated EBITDA to £3.1 million and substantial cash outflows.
The overdue 2015 accounts for PCCW-backed wireless broadband operator UK Broadband showed yet another poor cash-guzzling year, with EBITDA losses up 6% at £17.2 million on revenues up 114% at £3.3 million, with the company's Relish 4G product yet to deliver the goods.
Share price under-performance
Although telecoms and networks share prices broadly tracked both the Megabuyte universe and the FTSE All-Share over the last three months, with a decline of 2.4%, the peer group has under-performed considerably over the last year. The average one year decline of 0.7% compares with +8.5% for the FTSE All-Share and 15% for the broader Megabuyte universe in which software stocks have generally performed well. The major share price under-performer over the last three months is Redcentric, down 60% on its accounting issues. Alternative Networks is down 16%, but only after the shares jumped 18% on the Daisy bid announcement.
IS Research publishes www.megabuyte.com, a company analysis and intelligence service covering over 400 public and private UK technology companies.
philip.carse@megabuyte.com