TMT Blog: Alternative pays up in hosting



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The theme of convergence between the worlds of telecoms and IT services is a long running one but it is only recently that we have seen this translate into significant M&A activity for the telecoms resellers in the market.  Not surprisingly it was Daisy that really got the ball rolling, picking up the data centre business of a dying 2e2 along with the acquisitions of The Net Crowd and, in October last year, Indecs, a provider of technical maintenance and support services for IT server and data cloud storage facilities.  The deal valued Indecs at £17m, representing 6.5x historic EBITDA (5.7x prospective) based on the historic figures to June 2013.

On a slightly more racy note, Alternative Networks has just announced the acquisition of Intercept IT, a slightly more racy business, for a cash price of £12.95m, or 13x projected and adjusted EBITDA.  The price difference is in the activities (at least in part) – Intercept operates in the high value world of the provision of hosted desktop solutions (via its own Online Desktop product) and desktop and server virtualisation services.  We have seen other hosting businesses going at similarly racy multiples and indeed Alternative CEO Ed Spurrier commented that the business was pleased to complete the deal in the face of other “considerable interest”.  Naturally considerable interest is always a considerable element in driving up the price.

The business has also been focused on moving away from its heritage of low margin hardware product resale which means this year’s revenues will actually be lower than last but, again, as the price demonstrates, they are better quality revenues.  In spite of that, recurring revenues in the business still only represent around 50% of the total – Indecs’ recurring maintenance revenues are much higher at 80% but it is the low capital investment requirement (spending £0.2m in 2013) which Alternative found particularly attractive in Intercept, plus they expect to realise additional synergies in migrating Intercept’s IT infrastructure to their own data centres over time.

At first glance the price seems somewhat crazy but the market has certainly reacted favourably to the news in spite of the hefty price tag – shares are now up around 30% since the deal was announced so it’s clear that many believe that price is warranted.  And for good reason – Alternative has a good track record of integrating deals of this size, the business is operating in a highly attractive, high growth segment of the market and offers a highly synergistic customer base.  Typically if you want to buy an asset with those kind of credentials you are going to have to cough up – exactly what Alternative have done.