BDO's Tech Talk Q2 2013. Capital markets, M&A in the UK Technology Sector.

this quarter: an exclusive feature on the data centres & hosting sector

a q

uarterly summary of corporate deal activity in the technolog

y sector

techtalkq2: 2013

tech talk | q2 2013 1

in wake of the recent announcement that the uK economy has demonstrated flat growth over the first quarter of 2013 it is encouraging to see the data centres and hosting sector demonstrating largely positive results.

With uncertainty in the economy still a prevalent theme, we should view the robust levels of investment in new capacity and m&a as a good sign of things to come.

2012 produced good figures for new space demand despite the significant increase in new capacity slightly taking the edge off of the results. unfortunately the net effect of growing faster than demand meant vacancy rates increased 2.6% year-on-year at the end of q4 2012.

The BDO view

from a corporate deals perspective we witnessed steady deal flow over q1 with 42 deals in total and 26 of these being strategic. With increasing confidence demonstrated in the market place, 2013 may be the year for an improved ipo market with institutions warming to certain aspects of the sector.

pe deals ground to a halt towards the end of 2012 so the four deals in the q1 2013 may be an indication of things picking up.

With the triple dip of the uK economy avoided and a slow return of confidence we could be forgiven for being confident of good results in 2013. recent share price performance for uK listed technology stocks has been strong, and we wait to see whether returns to investors continue to outperform the market.

Julian frost head of tmt at Bdo

q2 2013 | tech talk2

this last quarter has been broadly positive for the data centre & hosting sector, with results from most of the public companies continuing to show solid double-digit organic revenue growth and good profitability and cash flow along with guidance for more of the same in 2013. most of the data centre companies are investing more than eBitda in new capacity and m&a, especially in europe, but 2012 is likely to mark the period of peak capacity expansion, with improving fcf expected in 2013.

poor share price performances from digital realty (drt), dupont fabros (dft) and rackspace has meant that the dch share price index, up 24% over 12 months, is for once lagging the megabuyte ict services index, up 54%, though is still way ahead of the ftse and nasdaq.

We view rackspace’s one month, post results 27% share price fall as a correction rather than a vote of no-confidence in hosting/cloud, merely taking rackspace’s valuation back to the peer group’s tight range of 12-14x forward looking eBitda.

SecTOr fOcuS: DaTa cenTreS & hOSTing

m&a continues unabated after november’s claranet/star deal, with pulsant buying scolocate and peer1 being taken private by local canadian cable company cogeco, with double-digit valuations highlighting the scarcity of good quality, large targets.

January 2013 saw the ipo of cyrusone, a us wholesale data centre provider, which is majority owned by cincinnati Bell; this will replace the departing peer1 in the next quarterly review.

share prices & valuationsthe last quarter has seen a polarisation in share price performance between the major us wholesale data centre players drt and dft, who have suffered on pricing concerns, and the carrier rich colocation providers equinix, interxion and telecity, who continue to generate double digit revenue and eBitda growth and give a positive outlook for 2013.

the best performer has been peer1, following an agreed bid from local canadian cable company cogeco in december 2012. meanwhile, the worst performer has been rackspace, with the shares down sharply in the last month. the company had reported solid q4 results, but saw an increase in churn and guided for flat rather than rising eBitda margins for 2013.


figure 1: data centre & hosting services share price performance

Source: Megabuyte, Capital IQ

share price

mkt cap (m)

iomart £ 2.3 242.5

coresite $ 35.2 724.6

telecity £ 9.1 1,828.6

DFt $ 25.1 1,584.3

Interxion $ 23.6 1,611.7

Peer1 c$ 3.8 492.2

DRt $ 70.2 8,661.2

equinix $ 209.6 10,230.7

Rackspace $ 47.0 6,483.6 1 month3 months12 months

return

40% 0% 40% 80% 100%60%20%20% 10% 10%


the poor share price performances of drt, dft and rackspace has had a marked effect on the peer group share index, causing it to underperform against both the megabuyte ict and all share indices, with a one year rise of 24% versus as much as 54% for the ict services index.

despite this underperformance against its tmt peers, the dch index has still done better than the ftse all share or nasdaq over the last 12 months, which have risen by 9.6% and 6.5% respectively.

DCH Index

MBTW All Share

FTSE All Share

NASDAQ

ICT Services

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figure 2: data centre & hosting services peer group performance

Source: Megabuyte, Capital IQ N.B. DCH Index includes: Coresite, Digital Realty Trust, Dupont Fabros Technology, Equinix, Interxion, Iomart, Peer1, Rackspace, Telecity


DCH PE

DCH EV/EBITDA

EV/E

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A

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A (p

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drt telecity equinix rackspaceiomart dft coresite interxion

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figure 3: data centre & hosting services current year valuation

Source: Megabuyte. Capital IQ N.B. PE and EV/EBITDA are next twelve months consensus estimates, PE multiple range limited to 50x earnings.

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ear v

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the broad share price out-performance of the group in recent years has resulted in premium valuations, with all of the companies trading at low to mid teens forward looking eBitda multiples, despite the very different business models of the constituent wholesale data centre and retail colocation and managed hosting companies.

it is interesting to note that the recent share price decline of rackspace has merely taken its multiple back in line with its peers, suggesting more of a share price correction than a vote of no confidence in hosting.


notwithstanding rackspace’s results, share price weakness, recent q4 and full year 2012 results have re-affirmed the broad sector’s attractive financial characteristics, with strong growth, high profitability margins and excellent cash conversion. however, growth is also requiring substantial investment in data centre capacity by the wholesale and retail colocation providers and, to a lesser degree, in customer equipment by the managed hosting companies.

Broadly speaking, all of the companies are achieving solid mid teens organic revenue growth rates, with the exception of rackspace’s chart-beating 25%.

the growth rates for iomart (for 1h12/13) include contributions from titan internet and eqsn; for drt (q4 12) from sentrum; for equinix (q4 12) from ancotel and asiatone; for telecity (2h 12) from uK grid and data electronics group; and for peer1 (q1 12/13) from netBenefit. in contrast, interxion’s 13% is entirely organic growth.

With the exception of the two major us wholesale providers drt and dft, eBitda growth has out-paced revenue growth, with increased data centre utilisation and economies of scale leading to improving margins.

fig 4: revenue growth – last period fig 7: ocf conversion- last period


the actual margins achieved highlight the very different business models and capital intensity of the companies in the peer group; the wholesale data centre providers are generating the highest margins, at c60%, followed by the 40s of the carrier rich colocation providers, whilst the managed hosting providers are typically in the 30s.

allied with good eBitda margins is operating cash conversion, typically of 80-100% of eBitda, reflecting both the ‘true’ nature of revenues and the positive working capital dynamics from many data centre and hosting customers paying upfront.

yoy

grow

th

OC

C

Source: Megabuyte, company accounts Source: Megabuyte, company accounts

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20%

86%29% 91%

16%58%20%

87%

13%

105%29% 84%25%

56%25%

93%

14%

104%

fig 6: eBtida margin – last period

mar

gin

%Source: Megabuyte, company accounts

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DFT

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44%

58% 60%47% 43% 38%

27%37%

47%

fig 5: adJ. eBitda growth- last period

yoy

grow

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Source: Megabuyte, company accounts

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DRT

DFT

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38%

25%

7%

24%15%

51%

37%27%

18%


fig 11: revenue growth – last period

fig 10: capex, m&a to sales – 12mnth

the relatively capital intensive nature of data centre operators is highlighted in capex and fcf metrics, with most of the major wholesale data centre and retail colocation providers currently spending 50-60% of revenues on capex, topped by telecity at 58% in 2h12. Broadly speaking, maintenance capex represents c5% of revenues for data centre operators, with c2% on customer equipment, with the remainder being growth capex (new/expanded data centres).

the situation is rather different for the more hosting focussed companies, with rackspace and iomart spending c10% of revenues. for such providers, the bulk of capex tends to be on customer equipment in data centres, driven by rather than being ahead of customer demand.



capex / revenue

M&a / revenue

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-4%

43%

-124%

183%

28%

32%

-11%

58%

-23%

64%

-2%

39%

-34%

60%

7%

26%

-25%

72%

fig 8: capex to sales % - last period


Cor

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DFT

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Iom

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Peer

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Rack

spac

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Tele

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Ave

rage

39%

103%

2%

50% 53%

10%

36%

12%

40%

58%

fig 9: fcf to sales % - last period


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m&a has also been a key feature, as shown in the second set of cash flow charts for the last reported 12 months. the nine companies have generated $6bn in revenues and $2.8bn in eBitda, but have spent $2.6bn on capex and $2bn on m&a. most of the m&a bill was counted for by drt ($1.55bn, including sentrum properties) and equinix ($0.33bn on asiatone and ancotel), with peer1 and telecity both pitching in with c$40m spending.

the net effect is that all of the peer group, with the exception of rackspace, have spent more than eBitda in the last year on capex and/or m&a. note, however, that this gives a distorted view of data centre returns given that much of this spending is to facilitate future growth.

With 2012 possibly representing a year of peak capacity expansion, operator guidance suggests a better fcf profile for 2013; for example both interxion and telecity expect to spend less than eBitda.

as an indication of overall returns, interxion and telecity report returns on capital employed of 13% and 16%, whilst equinix report 34% cash flow annual returns on an established data centre.



figure 12: data centre & hosting services private company financial performance

Source: Megabuyte, Company announcements. Growth capped at 100%

annual revenue

(£m)

annual eBitda

(£m)

Ark continuity Ltd 4.8 -4.5

control circle Ltd 20.9 1.0

Gyron Internet Ltd 8.7 2.4

UKFast.net Ltd 16.0 5.0

Infinity SDc Ltd 3.6 -7.0

Node4 Ltd 11.1 2.0

Onyx Group 14.9 1.6

UK2 Group 28.6 5.3

Bunker Secure hosting 7.4 1.7

host europe Group 72.8 27.4

Pulsant Ltd 26.7 8.7

telehouse europe 90.0 44.1

1&1 Internet Ltd 36.6 4.9

Fasthost Internet Ltd 36.2 13.1

Star technology Svs 45.9 4.2

BIS Ltd 16.2 2.4

Adapt Group 31.8 3.0

Attenda Ltd 28.2 5.9

claranet Group Ltd 59.6 6.2

-50% 50% 100%0%

EBITDA marginEBITDA growthRevenue growth


results from private companies in the data centre and hosting peer group broadly replicate the dynamics of the public companies, albeit that the uK private companies tend to be smaller and therefore at a different stage of development. in terms of recently released accounts, wholesale data centre providers ark continuity and infinity both show some of the highest growth rates, albeit off small revenues, and coming after significant investment (c£76m and £150m respectively).

in the case of infinity, data centre halls opened since march 2012 (for example for cWW) suggest that fy12/13 revenues could be up to 4x fy11/12’s £3.6m.

among other companies recently reporting, colocation and hosting provider node4 and managed hosting specialist control circle both registered strong growth of 27% and 51% respectively.

control circle registered a significant growth in eBitda, after a slightly disappointing prior year, albeit that the margin is still only at 5%.

node4 experienced a slight dip in eBitda margins from investing in growth, but

expects a rebound in margins and continued 20%+ revenue growth

this year, alongside reduced capex requirements.

meanwhile, claranet reported 1% revenue growth and an 11% eBitda decline in the year to June 2012 (for the uK, germany, france and spain), reflecting pressures on its networks business outweighing hosting growth; it has subsequently acquired star technology and typhon,

taking total group revenues from £70m to £124m.


the data centre and hosting peer group continues to be a focus for m&a, with several recurrent themes. consolidation has been a key feature, driven both by private equity backed buy and builds (eg pulsant, six degrees group and adapt group) as well as other players such as iomart.

the most noteworthy recent deal was claranet’s £55m acquisition of star technology in november 2012, representing meaningful consolidation of uK mid-market focussed networks and hosting players (with £37m and £46m uK revenues respectively). claranet also boosted its french business with the smaller £3.4m typhon acquisition. claranet received subordinated debt funding from us private equity house abry partners for the star deal.

meanwhile, pulsant returned to its scottish (lumison) roots in december 2012, buying data centre colocation and peering provider scolocate for £26m.


the claranet/star 8x post synergy eBitda and the pulsant/scolocate 10x historic eBitda were both at the top end of the range of similar uK deals, and highlight the relative scarcity of good quality, reasonably large targets.

canadian-based hosting provider peer1 was subject to an agreed bid from local cable tv company cogeco for $635m enterprise value, or 14.4x annualised eBitda in december 2012, with the bid now declared unconditional. this came just six months after buying the uK-based netbenefit from groupnBt for £25m, or 10x eBitda. it remains to be seen whether peer1 will maintain its uK presence, or focus just on north america, under its new ownership.

January 2013 saw the ipo of cyrusone, a us wholesale data centre provider, which is majority owned by cincinnati Bell.


taBle 1: selected data centre & hosting m&a deals

Source: Megabuyte, Company announcements

Acquirer Date Target Activity Initial price Est. multiple

iomart 11.11 eqsn managed hosting £2.5m 9x eBitdahost europe 1.12 red coruna hosting (spain)six degrees group 2.12 ultraspeed managed hosting £1.5madapt group 4.12 elinia managed services £13m 15x eBitdasix degrees group 5.12 firstserv managed hosting six degrees group 5.12 serverstream managed hosting six degrees group 5.12 datahop datacentre interconnect.equinix 5.12 asiatone data centres (asia) $230.5m 7.7x salesequinix 5.12 ancotel data centres (germany) $85.7m 4x saleshost europe 5.12 mesh digital domain namesntt comms 6.12 gyron (85%) date centres £40m(e) 21.7x eBitdapeer1 6.12 netBenefit managed hosting £25m 10.0x eBitdadigital realty trust 6.12 sentrum (3 dcs) data centres £716mtelecity 7.12 tenue data centres (finland) £3.7msix degrees group 7.12 cloud computing centre managed hosting & cloudiomart 7.12 skymarket limited Web hosting £1.2m 1.2x salescolt 8.12 fidelity telecom ltd cloud-based solutionsiomart 8.12 melbourne server hosting managed hosting £7.0m 11.1x eBitda365main 9.12 equinix (16 us centres) data centres $75.0m 2x salesiomart 10.12 internet engineering Web solutions £1.2mtelecity 11.12 academica data centres £22.4mclaranet 11.12 star managed services £55m 13.1x eBitdaclaranet 12.12 typhon hosting services £3.4mpulsant 12.12 scolocate colocation provider £26m 9.6x eBitdacogeco cable 1.13 peer1 managed hosting $635m 14.4x eBitda


cBre: q4 rescues 2012 for demand in year of Big colo supply growththe latest cBre european data centre quarterly paints a mixed picture; 2012 ended on a relative high in terms of new demand, thus rescuing 2012 overall demand growth; but 2012 also saw significant new capacity. the focus on square metres also understates demand and supply dynamics given improvements in power supply per unit of space.

according to cBre data, q4 2012 was better for colocation demand across the major european markets, with new demand of 16,955 square metres (sqm) representing 38% of the full year new demand of 44,980 sqm and being 3xq3 new demand of 5,340sqm; this takes total european tier1 colo demand to 551,000sqm.

With this late demand spurt, 2012 has marked the fourth year of 40–50,000sqm of new colo demand, down on the c70,000sqm in 2007 and 2008, but still representing steady 7% volume growth.

Whilst 2012 demand growth turned out to be in line with recent years, 2012 saw significant data centre expansion. total colo stock increased by 12.4% to 78,000sqm whilst supply increased 10.7% to 649,000sqm, more than double the 2011 increase.

the major european tier 1 players - equinix, interxion and telecity – all did their bit, with interxion for example increasing revenue generating space by 19%. the net effect of faster supply than demand growth was an increase in the vacancy rate from 12.4% at q4 2011 to 15.0% at q4 2012.

cBre noted strong demand in amsterdam. meanwhile, london supply increased in line with the european average, at 10.9% to 276,000sqm (43% of the european total), whilst incremental colo demand for 2012, at 14,900sqm, was up 22% on 2011.


fig 13: data centre space - europe

fig 15: data centre space - london

fig 14: data centre space - europe

fig 16: colocation take up - london

m2

(‘000

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cBre noted that take up of wholesale space in london was double that of 2011; perhaps not surprising given major projects coming on stream from companies such as infinity. nevertheless, the london vacancy rate increased 3.2pp to 18.6% over the course of the year.

cBre expects supply to continue to increase, but at a slower pace than in 2012. it noted that 26,000sqm is currently in the pipeline (versus the 63,000sqm for 2012). this is also reflected in lower capex guidance and improving cash flow again evident from the three big quoted players; for example interxion is guiding 2013 capex of €130-150m versus €178m for 2012.

one interesting figure that comes out of the stats, but which isn’t given any prominence,

is the improvement in power supply per square metre. Whilst supply in space

terms increased nearly 11%, power supply in mW terms increased

20% to 636mW, with the implied power per space unit increasing 9% in the year. in other words, both the supply and demand growth figures

in pure space terms are under-stating growth in revenue generation capabilities, given the ability to squeeze yet more processing power into a given

unit of space.


our takeWhilst it is encouraging to see 2012 end on a good note, and rescuing 2012 overall in terms of demand, the cBre figures are a stark illustration of the significant capacity expansion that occurred during 2012. put simply, decisions were made on capex for new facilities at a time of probably slightly better economic visibility than now, and 2012 may well go down as the year of peak capacity growth.

this is not all doom and gloom however, particularly for the major european players in prime locations and with the cash flow to continue investing and buying capacity and for the smaller, uK-based players with good facilities, locations and business offerings.

as we noted recently, sse telecoms is seeing colo prices hold steady, despite the growth in south east england colo capacity, whilst interxion reported underlying growth of 3% in revenues per square metre for 2012.


Broadly speaking, even at steady prices and with year on year volume growth, colo suppliers should be able to grow margins from improving data centre utilisation and yield management, whilst the better funded players can also buy growth through m&a and/or investment in data centre capacity expansion.

the ongoing shift from on-premise to off-premise is likely to continue, driving what could perhaps be described as ‘suburban’ colo, whilst the inexorable global growth of mobile and increasing penetration of the web into the home will fuel internet traffic volumes, keeping the city centre, carrier neutral operators busy for years to come.”.

add in strong growth in managed and cloud hosting, and demand for data centre space is not going to die anytime soon, though operators in the wrong location, or with ageing, under-invested properties and/or a lack of track record might struggle relative to others.


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figure 17: colocation annual availaBility and new demand - europe

Source: CBRE

m2

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Colocation availability Colocation take-up


following what was a subdued end to the year for corporate activity, the first quarter of 2013 saw a steady flow of deals across the technology sector. in total, there were 42 deals, with the majority of these (26) of the strategic m&a flavour while transaction value totalled £10.8bn, the majority of which came from liberty global’s agreed bid for virgin media (£9.6bn), the largest deal across our universe this quarter. private equity activity picked up from a standing start with four secondary buyout deals (total value of £332m), alongside three secondary fundraising events, raising £474m. meanwhile, although we still await ipo activity to resume, capital market fundraising remained active with a total of nine fundraising events, totalling £78m.

sector focused m&ain a continuation of the theme, strategic m&a continues to be predominantly sector focused, with the enterprise software space and telecoms & networks peer group a hot bed for activity. there were seven related accounting & enterprise software deals, the most significant of which was advanced computer software’s £110m acquisition of computer software holdings. meanwhile, amongst the telecoms players, daisy purchased the net crowd and also significantly expanded its m&a firepower with an extension to its banking facility at £200m.

pe backed deals valued at £332m, alongside three follow-on fundraising events totalling £474m.

however, despite the apparent slowdown in the level of activity towards the end of last year, there remains a significant interest in the technology sector in the uK, and as well as new private equity houses entering the fray, interest from us players remains evident.

SecTOr fOcuS: cOrpOraTe DealS review

private equity activity and ipo market to re-emerge in 2013?While the wait for another ipo in the sector continues, there are green shoots of optimism that the ipo market could make a return this year. institutions have warmed favourably to certain aspects of the sector as of late, particular around mobile money and enterprise software, bringing hope of more ipos on the london market.

likewise, as private equity houses sit on cash, interest in the sector continues to pick up and, alongside new pe firms entering the fray, overseas interest remains apparent.

whither 2e2?the shock news of this quarter was the downfall of 2e2 group, with excess levels of debt proving too much for the company.

Whilst administrators did their best to recuse some of its assets, with oakley capital/daisy (two data centres) and datatec (european assets) stepping in, much of the uK business was closed, with several hundred job losses. a sad moment for the sector.

private equity activity picks upfollowing a complete dearth of private equity (pe) deals in the latter half of 2012, pe activity within the technology sector began to pick up in the first quarter 2013, with a total of four

fig 18: deals tracker – value

fig 19: deals tracker – volume

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on this point, Boston based pe house aBry partners followed up its recent hosting related deals with claranet (minority investment to fund star acquisition) and its purchase of nordic managed services player Basefarm, with the secondary buyout of thomsons online Benefits, valuing the company at just under £100m, as thomsons looks to double in size by the end of 2015. likewise, low cost mobile international call service provider truphone also received investment from abroad, with a £70m investment from roman abramovich’s investment vehicle minden, valuing the company at £300m, aiding its international expansion.

meanwhile, Wireless infrastructure group changed private equity owners, with us pension fund backed Wood creek capital management stepping in, valuing the company at approximately £150m, or 8.2x revenues. fellow peer arqiva also received funding this quarter, as it raised £400m from its shareholders as part of its debt refinancing financing process, with bank debt at £3.3bn as of June 2012. elsewhere, business management software provider sage continued its divestment of non-core assets with accell-KKr buying sage nonprofit solutions for £58.4m, while sage also received a binding offer from argos soditic for the sale of four product suites in europe (c&i, atl, automotive and aytos) for a total of £28.6m.

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sep 11 apr 12 oct 12dec 11 Jul 12 Jan 13 may 13

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figure 20: private equity activity

Source: Megabuyte

ESWC Aquisitions - Prologic (1.8x EV/EBITDA)

August Equity - Secure Data (10.4x EV/EBITDA)

ABRY Partners - Thomsons Online Benefits

(2.9x EV/Rev)

Francisco Partners - Kewill (7.8x EV/EBITDA)

Wood Creek Capital - WIG (8.2x EV/Rev)

Bowmark Capital - CSL DualCom (9.7x EV/EBITDA)

LDC - Workplace Systems (4.2x Rev)

Mobius Equity Partners - Tessella (1.0x EV/Rev)

Vista Equity Partners - Misys (12.1x EV/EBITDA)

BDC - BigHand (9.2x EV/EBITDA)

trai

ling

EV/R

even

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MBO SBO P2Psize of bubble = transaction value


alongside the renewed private equity interest, it is likely that we will see an increased level of exit activity this year, as many pe firms are entering a stage in their investment cycles where we would naturally expect to see some form of liquidity event.

this was recently demonstrated by KKr, which is in full exit mode on northgate information solutions, having already sold northgate managed services to capita, and has begun formal sale process of northgate public services. and this comes at the same time as 3i seeks an exit of civica.

other exits of note are lms capital’s wind down of apogee though, at present, it is in no immediate rush to exit updata infrastructure and august equity backed saas vendor 4projects was purchased by us software supplier viewpoint construction software.


a steady flow of m&athere was a continued steady flow of m&a deals this quarter, 26 in total, with a total enterprise value of £15.2bn, though the majority of this comprises of liberty’s agreed bid for virgin (£14.9bn), excluding which, deal value totalled approximately £350m. moreover, at the beginning of second quarter, activity continues to pick up, with cisco’s agreed bid for ubiquisys at £205m, whilst there were also deals for six degrees and the innovation group amongst others.

the major acquisition this quarter came from John malone’s liberty global, which agreed a $48.87 per share bid for virgin median valuing the company at £14.9bn. While the transaction will put malone against rival BskyB and rupert murdoch, we see little strategic rationale for the deal given the lack of potential synergies available from cross-border cable businesses, though liberty will be able to tap virgin’s strong cash flow and its reputable management team.

enterprise software continues to act as a hub of activity, with a total of seven deals completed in the peer group this quarter, including deals from serial acquirers advanced computer software (computer software holdings for £110m in cash), and access technology (sazneo).

further to this, Kofax acquired altosoft for $13.5m, whilst sage sold sage act! and sage saleslogix to swiftpage, in a deal worth £6.4m.

other deals included Big hand’s purchase of verdatum, and sdl’s acquisition of Bemoko. furthermore, although not directly linked with the peer group, capita acquired northgate managed services in a deal worth £65m; with a 4x eBitda valuation attached to the deal, we feel this rightly reflects that much of the business is made of traditional managed services; a part of the market experiencing structural pressure on margins.

continuing with the sector theme, there were a number of deals in the telecoms & networks peer group as, alongside the liberty-virgin media deal, daisy purchased the net crowd, and has also substantially increased its banking facilities to £200m in order to fund its acquisition trail.

meanwhile, Xln telecom acquired shine telecom, solar communications bolted-on armstrong whilst in early second quarter activity, six degrees purchased Bis ltd, its 13th acquisition to date.


With the shocking news this quarter being the demise of 2e2, it was left to the administrators to do their best to salvage some value out of the business. as a result, two data centres and customers were sold to oakley capital private equity for £2.8m, and were subsequently sold to daisy for £7.5m in early q2 activity, delivering revenue and eBitda of circa £10m and £0.75m this year respectively.

meanwhile 2e2’s european assets were acquired by datatec through its logicalis subsidiary for $31m. furthermore, although some of the smaller parts of the uK business were acquired, sadly much of the business was closed down, with the loss of several hundred jobs.

away from 2e2 and there were a number of other deals of note this quarter, ffastfill fell to a bid from ion trading valuing the company at £106.1m, or 16.5x current year eBitda.

meanwhile, Kelway added yet more hardware to its business through its deal for equanet, accumuli secured a 4x return on investment from the disposal of Webscreen systems limited to Juniper networks for £6.3m, while telit bought crossbridge for a us presence, and salmon was snapped up by media goliath Wpp.

0

40

60

dec 12 feb 13 apr 13Jan 13 mar 13 may 13

120

15,000

20

80

100

figure 21: m&a transactions

Source: Megabuyte

ente

rpri

se v

alue

£m

Digital Barriers - Visimetrics

Juniper Networks - Webscreen Systems

Pilat Media - OTTilus

Swiftpage - Sage ACT! and Sage SalesLogix

Anite - Propsim

Capita - Northgate Managed Services

Ion Trading - Ffastfill

Cisco Systems - Ubiquisys

(£205m)

ACS - Computer Software Holdings

TIG - Gemini Vehicle Solutions

Six Degress Group - BIS

Datatec - 2e2 Group Europe

Kofax - Altosoft

BITSS Global - Gresham Computing

Liberty Global - Virgin Media

(£14.9bn)


gloBal m&a transactionsstrategic m&a from the global players continues apace, with cisco systems and oracle yet again splashing the cash. for cisco, it purchased israeli based intucell, a specialist in self optimising networks for $475m, and this was followed by its aforementioned deal for small cell specialist ubiquisys. since mid-november, cisco has spent well in excess of $2.2bn on five companies, as it looks to lessen its reliance on its core hardware business.



meanwhile, oracle announced the acquisition of acme packet for $1.7bn, and this was soon followed up with the purchase of tekelec for an undisclosed sum, representing its 15th acquisition since the start of 2012. Whilst oracle’s deal was the largest deal amongst the global players this quarter, fiserv likewise opened its purse strings with the $1bn deal for connecticut based open solutions inc, provider of enterprise account processing technology, paying $55m and assuming $960m of debt.

alongside cisco’s purchase of ubiquisys, Jdsu’s acquisition of network optimisation specialist arieso is another example of larger us strategic players targeting the uK market. arieso was snapped up for $85m in cash, with a 4.4x revenue multiple attached to the deal.

elsewhere, cloud storage provider dropbox announced the acquisition of orchestra, the company behind the email app mailbox, with the file sharing company looking to broaden its horizon beyond its core offering.

Wholesale data centre digital realty trust acquired three paris based data centres from Bouygues telecom for €60m whilst, in early second quarter activity, the purchase of french it services player alti for €75m by tata consultancy services was notable for an interesting shift of strategy for the company, and may point to more consolidation in the european it services market.

the bidding process for dell inc continues, with further bids coming through billionaire investor carl icahn, and pe firm Blackstone. icahn offered $15 per share for up to 58% of the equity, while Blackstone offered a bid in excess of $14.25 per share (against the original bid of $13.65 per share).

BskyB announced the acquisition of o2’s uK broadband business for up to £200m, making the company the number two player in the market. the deal highlights the abject failure by uK mobile operators in persuading its customers to take broadband and fixed line telephony packages, while for sky; it adds 0.56m of fixed line broadband customers to its base.


the market holds its Breath for the return of the ipoin number terms, capital market fundraising activity picked up in the first quarter of 2013, albeit with the usual absence of an ipo. overall, nine funding rounds were completed raising a total £77.9m, compared to £128.4m raised from five rounds in the final quarter of 2012.

in the most significant placing, advanced computer software raised £44.0m which was put to work on the acquisition of computer software holding for £110m.

mobile billings provider Bango raised £6.5m on the markets to fund its expansion into emerging markets and to shore up its balance sheet. it is significant to note that, at 200p per share (a 3.6% discount), this was the first fundraising since its ipo (at least four previously) to be at a price substantially above its June 2005 ipo price of 134p.


Keeping with all things mobile, mobile gambling provider probability raised £2.8m at 64p (a 5% discount), coming on the back of its success with its 40 shades of santa game.

meanwhile, corero raised £4.1m to fund investments in its new generation of products, while there were also fundraising events from pinnacle; £2.6m to fund working capital purposes, and from K3; £2.7m to strengthen its balance sheet. datatec also raised £8.6m to help fund its 2e2 acquisition.

size of bubble = amount raised


figure 22: capital market fundraising

Source: Megabuyte

trai

ling

EV/R

even

ue

0

4

6

nov 12 feb 13Jan 13 may 13

12

2

8

10

Statpro Group Plc

Parity Group Plc Datatech Ltd

Digital Barriers Plc

Redstone Plc

Probability Plc

Advanced Computer Software

Monitise Plc

Bango Plc

Corero Network Security Plc

eServGlobal Ltd

Pinnacle Technology Group Plc

Pinnacle Technology

Group Plc

K3 Business Technology

Group Plc

FPO IPO


redstone completed the demerger of its higher margin, £50m managed services business, into a new company called redcentric, while redstone now composes of the lower margin, £30m infrastructure cabling business. at the same time, redstone raised £6m on the markets, at 1p per share, a 12% discount to its closing price, with the funds being used to reduce its debts (approximately £18m post the maxima deal).

as activity within the private equity community begins to show signs of revival, there are also green-shoot signs that the ipo market could make a comeback this year. With just 4 ipos in the sector over the last couple of years, and with a number of players having exited either london’s main market or aim, institutional investors are warming to technology firms.


over the last year, the city has treated certain trends such as mobile money or enterprise software favourably, with the likes of monitise, eservglobal, Bango, and advanced computer software raising significant sums of money. meanwhile performances from the likes of stock market wonder kid Wandisco will further help sentiment towards fast growing technology companies.

moreover aim may make an ideal hub for those fast growing companies that may still be too immature for private equity backing, but not ideal for vc investment either.

for more information contact

birminghamgraham elsworth t: +44(0)121 352 6212 e: graham.elsworth @bdo.co.uk

leedsgiles wharton t: +44(0)113 204 1234 e: [email protected]

southampton (audit)paul anthony t: +44(0)238 088 1909 e: [email protected]

sheffieldcraig Burton t: +44(0)114 223 1760 e: [email protected]

cambridgegary hanson t: +44(0)122 353 5050 e: [email protected]

readingsimon Brooker t: +44(0)118 925 4488 e: [email protected]

london (audit)Julian frost t: +44(0)207 893 2350 e: [email protected]

reading (cf)philipp prince t: +44 (0) 118 952 7372 e: philipp. [email protected]

guildfordrhodri whitlock t: +44(0)148 356 4646 e: [email protected]

bristolneil dimes t: +44(0)117 930 1501 e: [email protected]

manchesterJulien rye t: +44(0)161 817 7505 e: [email protected]

southampton (cf)paul russell t: +44(0)238 088 1796 e: [email protected]

nottinghamsimon Browning t: +44(0)115 962 9244 e: [email protected]

gatwickJohn everingham t: +44(0)129 359 1089 e: [email protected]

scotlandneil mcgill t: +44 (0)141 249 5232 e: [email protected]

london (tax)ross wilkinson t: +44(0)20 7893 3603 e: [email protected]

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BDO's Tech Talk Q2 2013. Capital markets, M&A in the UK Technology Sector.

Technology

Transcript of BDO's Tech Talk Q2 2013. Capital markets, M&A in the UK Technology Sector.