BUSINESS MATTERS Transformational value
The big theme for this year’s Comms Vision Convention – Transformation takes shape – neatly captures the fast pace of change within the comms industry and the value of this change to investors, writes Marcus Allchurch, Telecoms M&A Specialist at BDO Corporate Finance.
Marcus Allchurch T
ransformation has been seen by investors as a real opportunity to
leverage their experience to create significant value. This is shown by ECI’s investment in XLN Telecom, Synova’s investment in Actimax, Montagu’s investment in Host Europe, LDC’s investment in Easynet Business Services, Vitruvian’s
investment in Unicom, Gresham’s investment in Team Telecom (which recently acquired C&C Technology), Bridgepoint Development Capital’s investment in Lumison (which recently acquired Blue Square) and Kelso Place’s investment in MDNX (plus many others).
When chief executives call me to discuss putting their
company up for sale two of the first questions they ask are, what’s it worth and is there anything I can do to increase the price? The first question is easier to answer these days because of the volume of transactions that are taking place in the sector. Depending on the particular focus of your business it’s generally quite straightforward to determine which precedent deals are most relevant to you, and who the likely buyers of your business are.
Working this out lets us come up with a tight indicative valuation range based on multiples of EBITDA (earnings before interest, tax, depreciation and amortisation) or monthly gross profit that we’ve seen in other deals, and also our knowledge of how specific buyers look at valuing targets (frustratingly they don’t all work the same way).
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What drives value? A clear and simple service proposition: Buyers like to be able to picture easily what they are buying and how they will integrate their new acquisitions. A complex, multi-service proposition to customers ranging from small SMEs to large corporates
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is likely to confuse buyers and make their integration planning more difficult. It probably also means that synergies and efficiencies won’t be as easy to generate as they would be for a more straightforward acquisition.
A good sales operation that drives growth: Growing businesses are worth more than stable businesses. In telecoms that means having a good sales team and low CACs.
Strong performance metrics: Low CACs, churn, and cost to serve, strong ARPU, and a good track record on billing errors and fault resolution all help to convince buyers that they are taking on a quality operation. Reducing the perceived risk should lead to an increase in the price.
Good systems, books and records: Yes, it’s dull, but I can’t over-emphasise how important this is. Due diligence is forensic these days and buyers will not gloss over inconsistencies or holes in your records. A lack of confidence will either lead to a longer process (which can be very bad for business), a lower price (bad for your bank account) or the deal may just not happen. Spend
time up-front to get these things straight and you’ll be better off in the long run.
The answer to question two, ‘is there anything I can do to increase the price?’, is also quite straightforward. Focus on the value drivers and plan for the sale. Speak to a corporate finance advisor ahead of time to get an informed view of how your company is doing against the value drivers above and then take the time to tweak and polish what you can before pressing the button.
But beware. There have been a couple of cases where sellers have tried to position their businesses as something they aren’t, but where valuations tend to be significantly higher. Stretching the truth when you’re positioning your business for sale is likely to be counterproductive as the vast majority of buyers nowadays will quickly detect that all is not as presented. If you lose the confidence of your buyers then they are likely to be even more thorough and testing as they go through due diligence, which means more time and a very increased possibility of seeing your deal fall over. n
marcus.allchurch@
bdo.co.uk
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