Leading global satellite network provider Speedcast International Ltd (ASX: SDA) today announced the acquisition of WINS Limited for €60 million in cash. The company is also looking to raise equity of at least $62.1 million to partially fund the purchase.
WINS is a leading European provider of satellite internet services for the maritime industry and its customers include cruise ship operators and merchant shipping companies. It has a strong local presence in Germany where Speedcast currently has no operations.
Speedcast's CEO, Pierre-Jean Beylier, believes that the cruise ship sector has strong growth prospects particularly in Asia thanks to its gigantic emerging consumer class. The WINS purchase will mean that the company now has a presence in this attractive segment in Europe, North America and Asia.
Speedcast is proposing a three tier approach to raising equity for the deal. The majority of funds will be raised through the placement of 17.3 million new shares underwritten at $3.49 per new share, representing a 4.9% discount to Friday's closing price. Speedcast shares are currently in a trading halt and will remain so until tomorrow morning whilst the book-build is conducted.
The second tranche of shares will be subject to shareholder approval at an extraordinary general meeting to be held in late September. The proposal is to issue 487,106 shares to Pierre-Jean Beylier for $3.49 per share which would take the CEO's ownership interest to 5.4%. Pierre-Jean Beylier's intention to participate in the capital raising in a serious way suggests that the acquisition is not merely about empire building.
Finally, Speedcast intends to offer a share purchase plan to eligible shareholders. The issue price is not disclosed, but it is good to see that all existing shareholders will be given the opportunity to take part in the equity raise.
WINS expects to record revenue of €25 million in 2016 and generates earnings before interest, tax, depreciation and amortisation (EBITDA) margins of around 25%. Speedcast hopes to achieve annual synergies of €1.2 million from cost savings by the end of the first year following completion. Therefore, the acquisition isn't cheap at around 10 times annualised EBITDA post synergies.
However, WINS grew EBITDA by 10% per year on a compound basis between 2013 and 2015 and so there is a good chance that the business will grow into its valuation.
Speedcast has also increased its debt facilities by US$30 million to US$166 million in total to fund the remainder of the WINS purchase. Following the acquisition, the company's net debt-to-EBITDA ratio will be approximately 3.1, but management is confident this number will reduce over time thanks to Speedcast's strong cash flows and growing earnings.
Speedcast's recent growth is such that it has now reached a size whereby it can exert some pricing power when negotiating bandwidth supply with satellite companies. It has renegotiated several contracts on more favourable terms in the first half of 2016 and expects to improve profit margins as the business continues to expand in the future.
I estimate that Speedcast will have a market capitalisation of about $515 million following the equity raise. After converting to US dollars and based on the company's estimated post acquisition debt and underlying annualised EBITDA, Speedcast is trading on an enterprise value-to-EBITDA ratio (EV/EBITDA) of just over 10.
This is a reasonable price for a company that is fast becoming a major global player in an attractive niche market. However, it should be noted capital requirements are reasonably high with this type of business due to the need to replace and upgrade network equipment. Therefore, EBITDA is not representative of the ability of the business to generate cash, especially when you factor in interest payments on US$166 million of debt and tax.
