TMT Sector Comment – March 2017 – Unified Communications

Dato

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Unified Communications: Market set for a shake up over the next couple of years

Whilst the major headlines in the telecommunications market have been reserved for B2C mega deals such as BT’s acquisition of EE for €14.5bn, it is in the B2B market where the volume of the M&A activity reshaping the sector is really taking place.

The lines that once separated telecoms and IT service players have become increasingly blurred over the past several years, and large scale acquisitions such as NTT’s acquisition of Dimension Data have filtered down into the mid-market where acquisition activity is beginning to really flourish. The SME market in particular, where there are fewer entrenched relationships looks ripe for consolidation.

A series of private equity investments into buy-and-build vehicles across telecoms and IT services over the last 12 months look set to accelerate this drive towards a unified communications model in the B2B market. Investments over the last year have included:

  • Lyceum’s €57m acquisition of Timico, a managed cloud service provider. Lyceum reportedly have ambitious plans to accelerate the business’ shift to becoming an end-to-end provider as well as pursuing acquisitions to accelerate growth;
  • GCP’s investment in Arrow Business Communications for which it has provided a “significant acquisition fund” to strengthen its hosting, data and IT services portfolio; and
  • Beech Tree’s €40m buyout of Wavenet, a specialist provider of unified communications services to UK SMEs for which it has committed “a significant acquisition war chest”.

Existing consolidators have also kept corporate financiers busy with transactions such as Maintel’s €55m acquisition of troubled rival Azzurri Communications, and LivingBridge-owned Metronet’s €54m acquisition of hosting services provider M247 in October last year.

Unsurprisingly given the level of demand for assets, valuations in the market appeared to hold firm through the initial Brexit decision and have even shown signs of improvement during 2017. Multiples for listed IT services and telecoms firms hit their peak in the last half of 2012 reaching an average of 14x EBITDA before falling between 2013 and 2015 to a low of 8.3x. However, valuations began to recover during 2016 before reaching a steady 12.1x EBITDA in the first quarter of 2017.

As telecoms and IT service providers vie for control of the changing landscape, business models will need to evolve to meet the challenges posed by this expansion of capabilities. However, factors including attractive growth rates, strong recurring revenues, a significant buy-and-build opportunity and the potential resulting synergies will continue to mean that the unified communications sector is an attractive market for investors in the coming months and years.

Cloudex Comment

Cloud is an increasing disruptor in the unified communications market as services like VoIP continue to gain traction. Our Cloudex index continues to monitor the performance of publicly listed cloud-model businesses to measure their performance against their traditional-model counterparts. Businesses such as RingCentral, a VoIP provider which is tracked in the index, have largely been successful performers. RingCentral has a customer base of 350,000 and announced a partnership with Google back in June 2016 to help it challenge some of the larger unified communication providers such as Apple and Microsoft. Analysts expect the business to continue its strong growth trajectory as subscription revenues are set to increase by 25% in 2017.

The Cloudex index grew 2% in February, less than both the FTSE Tech All Share and the NASDAQ index which increased by 4% and 3% respectively. There were 162 cloud transactions in February 2017 a slight decrease on the 167 completed in February 2016.

To find out more about our Cloudex index please visit our Cloudex website. Watch this space for further information about our 2017 Cloudex Awards programme.