Daisy Group has recommended a 185p per share cash offer from founder and CEO Matt Riley and private equity investors Toscafund and Penta, 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. With the aim of the P2P being to undertake larger acquisitions than in the past, we consider possibilities.
Report by Philip Carse, Principal Analyst, Megabuyte:
The offer acceptance comes just over two months since the approach was made public, with the share price being chipped from 190p to 185p in that time. The offer price is 16% above the price when the first approach was made (apparently at the end of July) and compares with a price of 80p when Daisy arrived on AIM and raised funds in the Summer of 2009. The offer already has irrevocable undertakings in respect of 93.8% of the shares. The approximate £494m cash cost is being part financed by a £135m PIK (payment in kind) loan and £265m in senior banking facilities.
The bid represents 11x EBITDA to the year March 2014. The company has also published financial information for the three months to June 2014 showing EBITDA down 10% at £12.2m on revenues down marginally at £84.7m. The flat revenues masked some considerable underlying swings, with Networks down 15% at £32.2m, Mobile up 10% at £24.9m, Data up 8% at £21.4m and Systems up 31% at £9.7m. The EBITDA trend is contra to the marginal increase to £58.0m expected for the current year.
The private equity backers to the bid are well known to Daisy and to UK telecoms; Toscafund has been a long term shareholder of Daisy whilst Penta Capital currently owns Six Degrees and sold its previous UK telecoms play - SpiriTel - to Daisy in November 2010. The offer document states that whilst Daisy has been approached in the past by other companies and private equity investments, no other formal offers have been tabled, including since the Riley et al interest was publicised.
First thoughts
Just like buses, we have now had a second public to private in the space of a week, after HgCapital's £110m bid for workforce management software provider Allocate Software. The Riley consortium is paying a full price for a business that is essentially flat, even after the recent price shaving, with 11x historic EBITDA (and 10.9x current year consensus based on stable rather than declining EBITDA) above the 6-10x of most of its UK listed telecoms peer, with only Alternative Networks on 11.9x above the offer price.
So what next? The stated rationale for the take private is for Daisy to undertake larger acquisitions that in the past, involving more risk and time for proper integration etc, and drawing up the resources of the new private equity backers. At the time of the take private being publicised in August we speculated that targets could include Phoenix IT, in which Toscafund owns the maximum possible stake of 29% without having to launch a bid. Phoenix would increase Daisy's approximate £58m annual EBITDA by a half and the combination would have a much stronger presence in mid market IT and comms services, albeit with a major integration challenge. Phoenix's current enterprise value of £157m is about a quarter of Daisy's £635m.
We also speculated about Six Degrees, which is also backed by Penta and Toscafund, though this deal seems much less likely, albeit that it would add substantial strategic value in terms of hosting and networking capabilities. Other acquisitions that would fall in the 'larger' category could include Redcentric (£21m EBITDA) or carve outs such as Kcom's UK business comms division (£29m EBITDA). There will also be plenty of private equity exits to come from IT/hosting businesses over the next couple of years, including Adapt Group, Onyx and Intrinsic, though these would be smaller deals in EBITDA terms. If Daisy wanted to boost its position in the smaller end of the market, Universal Utilities (£25m EBITDA) and Chess (£11m EBITDA) could be targets.