COMMS VISION 10-12 NOVEMBER GLENEAGLES PREVIEW


www.commsvision.com CHANNEL FIT FOR EQUITY


A growing number of comms resellers could soon become the darlings of investment houses, writes Marcus Allchurch, Telecoms M&A Specialist at BDO Corporate Finance.


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n my experience, entrepreneurs operating in the channel tend to be highly ambitious sales focused people who are driven to build profitable businesses. As those businesses develop, M&A becomes an increasingly important consideration, prompting questions such as, should I buy or sell, and if so, when? Building a business should be done with two key objectives – to create a business with long-term value and to maximise its value on exit. How to make the most of a business has been the preoccupation of many channel players in recent times.


It has been a busy few months for M&A activity. Among other deals, we saw the secondary management buyout of


Key drivers for boosting value


• The nature of your revenue and customer relationships


• A strong track record of growth with a credible story going forward • A scalable platform • A high quality


management team that is set up for growth • High quality performance metrics • The size and composition of your customer base • Quality of reporting and management information systems • Driving competitive tension in the sale process


XLN Telecom backed by ECI Partners. This marks an excellent return for Zeus Private Equity. The deal proves that well capitalised, fantastically managed businesses operating in the channel can work well with private equity investors to deliver value for all involved.


In another deal, MDNX has been formed through the private equity backed combination of Solution1, VTL (UK) and CI-Net, selling into mid-market enterprise and local government organisations. The strategy for MDNX is to take advantage of the synergy and cross selling opportunities available by combining these three companies (it aims to double EBITDA margins from 10 per cent to 20 per cent) and to acquire further complementary businesses where there is a clear growth opportunity.


More broadly, 2010 is proving to be a boom M&A market for SME facing companies that operate in the channel. While large corporate buyers are beginning to show signs of interest in M&A, much of the activity is being generated by entrepreneurs and private equity investors who see the channel as an attractive opportunity to create significant value. There are a number of deals in the pipeline and there is no sign of activity levels abating. One of the largest processes at present is the battle for high street mobile phone


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retailer, Phones4u. Market rumours suggest significant private equity interest and, despite appetite from trade, the company looks likely to remain in the hands of private equity for the time being.


Continuing the theme, the number of private equity deals involving TMT companies has already surpassed 2009, and by the end of the year the number of deals is forecast by Mergermarket to be up by 12.5 per cent. At the same time, the value of completed deals is expected to almost triple, getting close to levels last seen in 2005.


Private equity interest is being spurred on by two broad themes. Firstly, many investment houses have held off making acquisitions through the downturn and are left with a limited period of time to invest their funds. Secondly, there are genuine and exciting dynamics around the channel that set it apart from other investment opportunities.


Paul Egan, partner at Canter Equity Partners, recently told me that he sees the channel as an interesting market because many businesses are now getting to a size where they can be platforms for consolidation. Add to that continuing deregulation, a high degree of fragmentation in the market, the emergence of new business models and the convergence of voice and data, and he sees a


Marcus Allchurch


There are genuine and exciting


dynamics around the channel that set it apart from other investment opportunities


real opportunity to create significant returns. The prize for those able to deliver growth is significant, and highly attractive both to entrepreneurs and financial institutions.


We have also seen some examples in the past of consolidations that have not run so smoothly, and there are some valuable lessons to be learnt. One of the most obvious is to ensure sufficient bandwidth within the team to integrate new businesses while continuing to service existing customers well. Falling into the trap of neglecting existing customers can endanger future growth by failing to deliver the full synergies and risk increasing churn.


A powerful way to avoid making mistakes is to undertake a thorough due diligence exercise before committing to an acquisition. Understanding what you are buying, warts and all, is the best way to plan for the integration. Invest time and effort to identify the things you need to fix, and budget prudently to make sure those changes happen.


Spend time too working out your target level of synergies and your plan to extract those synergies. Doing this up-front with your advisor will result in less unknowns once you have done the deal. This should ensure that you extract every ounce of value from what you’ve bought. n


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