Spirit Telecom share price jumps 12% on $14 million acquisition

The Spirit Telecom Ltd (ASX: ST1) share price is finishing the week with a bang after the small-cap ASX telco announced an acquisition.

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The Spirit Telecom Ltd (ASX: ST1) share price is finishing the week with a bang after the small-cap ASX telco announced an acquisition.

At the time of writing, Spirit Telecom shares have jumped 12.2% to 23 cents after rallying as much as 17.1% in early morning trade.

Spirit Telecom considers itself a disruptor in the IT&T (information technology and telecommunication) industry. The company has developed its own advanced fixed wireless network, through which it provides Australians with 'Sky-Speed Internet'.

Along with providing internet access, Spirit offers a full range of managed IT services and cloud-based business solutions. It also offers internet products from ASX-listed telcos TPG Telecom Ltd (ASX: TPM), OptiComm Ltd (ASX: OPC), and Vocus Group Ltd (ASX: VOC).

What's the deal?

Spirit is acquiring Gold Coast-based Voice Print Data Group (VPD). VPD will become Spirit's new wholesale business arm, selling a range of cloud, internet and voice services via its Spirit X sales platform.

Consideration for the acquisition has been split into three tranches. Firstly, the gross purchase price is $14 million, comprising a combination of $7 million cash and $5.8 million of Spirit shares. This prices VPD at around 4 times normalised earnings before interest, tax, depreciation and amortisation (EBITDA).

Tranches 2 and 3 relate to future payments when EBITDA performance exceeds targets for FY21 and FY22. All up, the total maximum purchase price is $27.5 million.

Why is Spirit Telecom acquiring VPD?

In an investor presentation released this morning, Spirit summarised the transaction rationale into 4 primary factors.

Firstly, the acquisition expands Spirit's reach further into the New South Wales and Queensland markets.

Secondly, it provides the company with access to new data-hungry verticals of mining, industrials and aged care.

Thirdly, the transaction increases Spirit's scale and adds new high-margin product bundles to its arsenal.

And finally, the VPD acquisition adds a wholesale dealer sales channel for Spirit X, the company's business-to-business digital sales platform. 

What now?

Completion of the acquisition is subject to normal closing conditions and is expected to occur on 1 July 2020.

Following completion, Spirit will have a combined FY21 revenue run rate of between $70 million and $75 million.

Commenting on the acquisition, managing director Sol Lukatsky said:

"This is a game changer for Spirit and through the acquisition of VPD Group, Spirit will build and strengthen its cloud, security, data and managed IT services capabilities whilst providing entry into expanded geographies in QLD and NSW for verticals such as Mining, Industrials and Aged Care."

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has recommended SPIRIT TC FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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