Sector resilience pays

The experience of past recessions is that the comms sector is largely resilient and in demand. Not even Covid-19 has knocked the channel off its tracks. In fact, says Megabuyte Chief Analyst Philip Carse, it’s full steam ahead.

The Covid-19 crisis has exposed further the comms sector’s flexibility and resilience, evidenced by a resumption in M&A activity during the past three months, with new and resurgent buyers making their mark. “The new buyers may have decided to embark on M&A and taken external funding, such as Windsor Telecom and Prompt Communications,” stated Carse. “PE backed businesses are getting into the M&A game and major buyers are now returning to the M&A fold. Matthew Riley, a strong buyer, is back in the market with his Aurora business acquiring Union Street and Shaftesbury Systems.”

Carse noted that most existing buyers are PE backed businesses, well proven in telecoms, such as Arrow, Southern, Babble, Sabio and Wavenet. “We expect companies like these to be more busy in the coming months,” he added. “One to watch is Radius Payment Solutions which is building out its telecoms activities and is an interesting buyer in the market.”

PE interest is now on a scale perhaps greater than anything experienced before in the sector, and there is no shortage of fire power. “Private equity has so much dry powder,” added Carse. “We estimate circa £2 trillion globally sat in PE waiting to be spent. The reality is that if you’re a PE fund you can’t generate fees unless deploying money. So there is lot of money in PE looking for a place to go.”

Owners thinking about selling or expanding their business can go down the PE route or look for a market listing. But the advantages of a listing are becoming weaker, believes Carse. “New rules and regulations like MiFID reduce the amount of research on companies. On the whole, a listing is not the most obvious route to follow; and the comms sector has not had the best relationship with public markets, aside from Gamma.”

Public companies can’t lever up too much debt – two to three time EBITDA is the usual limit. So for companies wanting to invest big, as with infrastructure players, public markets are not the best place to be. For example, CityFibre went private, as did Kcom, which was limited as a public company in how much money it could raise to exploit the fibre opportunity in areas adjacent to Hull.

Valuations have held up and there are new investors looking at the sector

“PE is by far the preferred solution for any owner manager at the moment,” emphasised Carse. “The PE model in this space is well proven, it’s all about buying at five times, getting that down to three times with immediate cost synergies and building up scale, then selling at ten times. PE will be drawn to the sector even more.”

The sector’s resilience has become a stand out factor, he added. “Where we are now is far better than anyone hoped for back in the dark days of March,” noted Carse. “A ‘business as usual’ holding pattern was established in mid-July. Companies found they had more cash sat in the bank than expected, partly because of bank deferrals and drawn down debts, and a sharper focus on cash collection. On the whole, cash positions were holding up without any real bad debt and customer bankruptcies. From a financial point of view, most companies are probably not far off their pre-Covid profitability plans and new orders are getting to back to pre-Covid levels. CEOs are generally positive about the long-term future while remaining cautious about economic issues. It’s very much business as usual.”

Before Covid-9, observed Carse, the industry was facing developments like fibre roll out, 5G, IoT and the PSTN switch off – all seen as opportunities to take market share and be more crucial to customers. “Covid-19 is accelerating this digital transformation,” he stated. “Therefore CEOs are optimistic but conscious of the need to be sensible and look after the cash. Most companies are also thinking about how to adopt remote working on a more permanent basis.”

Carse reaffirmed that one of the most interesting developments is the resumption of M&A activity from June onwards when buyers and sellers realised their world wasn’t collapsing. “A reseller recently completed a deal according to the agreed terms established pre-Covid,” he added. “Valuations have held up, and there are new investors looking at the telecoms sector. One CEO of a PE-backed business said he’d been approached by three funds that had never invested in the comms industry before.

“They suddenly recognised the resilience of the sector. Everyone wants recurring and mission critical revenues, so valuations are strong. If I was an owner manager reflecting on how my business got through lockdown, and was always planning an exit, now is as good a time as any to think about it. Especially with changes to Capital Gains Tax coming down the line.”

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