The Over the Wire Holdings Ltd (ASX: OTW) share price has been a very strong performer on Friday.
In afternoon trade the telecommunications, cloud, and IT solutions provider's shares are up 14% to $4.87.
At one point today, the Over the Wire share price was up as much as 17% to a record high of $5.00.
Why is the Over the Wire share price rocketing higher?
Investors have been buying the company's shares after it announced a binding agreement to acquire all of the shares in Digital Sense Hosting.
According to the release, Over the Wire has agreed an upfront consideration of $27 million. This comprises $21.6 million in cash and $5.4 million in Over the Wire shares.
It is worth noting that these shares are priced at a sizeable discount of $3.64 per share. Management explained that this was the 10-day volume weighted average price when it first signed a letter of intent.
The cash component will be fully funded by an institutional placement of $20 million and a $5 million share purchase plan. These will be priced at $4.00 per share, which represents a 6.1% discount to its last close price.
In addition to this, Digital Sense is entitled to receive further deferred consideration of up to $12 million (up to $7 million in FY 2021 and up to $5 million in FY 2022) based on achieving agreed targets.
For the 12-month period to 30 June 2020, Digital Sense Hosting recorded revenue of approximately $18.3 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of approximately $5.4 million.
This means the upfront consideration of $27 million represents a valuation of 5 times historical FY 2020 EBITDA.
What is Digital Sense Hosting?
Digital Sense Hosting is a high-quality cloud business that provides a customisable and scalable cloud offering to Enterprise and Government customers.
Management notes that it introduces further solution capability in the areas of Infrastructure as a Service (IaaS), Desktop as a Service (DaaS), Storage as a Service (STaaS), and Data Protection as a Service (DPaaS).
Furthermore, its extensive cloud offering gives the company cross sell opportunities to existing Over the Wire customers. It also offers cross sell opportunities of its own solutions to Digital Sense customers.
In light of this, its high levels of recurring revenue, and strong margins, the acquisition is expected to be earnings accretive.
