Channel M&A

Sector consolidation shows no sign of abating with transactions and valuations remaining high – and a new trend could be emerging among trade buyers, writes Knight Corporate Finance Director Paul Billingham.

TalkTalk’s acquisition of Virtual1 significantly increases its presence in the wholesale connectivity market. It provides additional scale and the improved partner interfaces that are so important to wholesale channel providers. Virtual1 had previously been backed by private equity provider BGF in 2016, and we would assume there would have been significant interest from private equity in a secondary buyout. But following on from Daisy’s recent acquisition of XLN (circa £21million EBITDA) and Wavenet’s acquisition of Excell Group (circa £6million EBITDA) we could be entering a new phase of sector consolidation at the larger-scale end of the market driven by trade buyers rather than private equity.

As we have written many times, private equity has been more active than trade buyers for businesses at the £5million-plus EBITDA level, with a range of ICT providers moving through primary, secondary and even tertiary private equity-backed buyouts, rather than exit to larger trade acquirers. Almost all of these investments have been to support M&A activity and this has driven high volumes of transactions and maintained healthy valuations for ICT providers of all sizes. Even during the pandemic and the lockdown period, transaction volumes remained high for trade deals as the consolidators continued to acquire given the resilience shown by the sector.

Maintaining volumes

We don’t see any sign of a reduction in volumes of trade sales in the sector during 2022, and the latest Megabuyte Quarterly Barometer highlighted Comms and IT Resellers as the hottest section across the whole ICT & Digital spectrum in its UK activity heat map, followed by Cloud Services and Networks & Connectivity. At Knight, we continue to be busy with eight transactions completed in Q1 in 2022 (we completed 24 in total in 2021) and six or seven more imminent. For business owners in the ICT sector there still remains a range of options open in terms of crystallising all or some value in their business.

In a significant change of direction to the last seven or eight years, we expect to see some much larger sector transactions featuring trade buyers rather than private equity, with the recent Excell Group, XLN and Virtual1 exits being the first of a larger number of trade deals at the higher end of the market. This is less down to private equity suddenly losing interest in the sector – despite significant falls in valuations of publicly quoted technology companies – and more to do with the appetite of a number of private equity-backed consolidators to now seriously scale up. We expect to see maybe one or two mergers between consolidators and some more straightforward trade buyouts. Both will present significant synergy opportunities post-deal that will be important as margins continue to be squeezed as voice services continue to migrate from the old PSTN world to IP-based solutions.

Warning

Beware – is your business being offered to buyers without you realising? Knight has had instances where brokering sites are listing ICT businesses for sale without owners being aware of it, in order to facilitate deals without any prior agreement from sellers. If you are considering any type of transaction, always talk to a corporate finance provider that can set out all of your options, knows buyer behaviour in the sector and will not rush you into a process you may not be ready for.