While telecommunications and IT have been named as sectors seeing increased interest from potential buyers lately, only in a few cases this interest had resulted into done deals so far. To break with this, earlier this week Stream Networks SIA, a telecommunications and IT outsourcing services provider, announced the acquisition of LATNET Serviss SIA, one of the oldest internet services providers in Latvia, for an undisclosed consideration.

Established in 1992, LATNET is one of the first IT and telecommunications companies set up in Latvia. Actually, it claims that was the first ever internet domain name registered in Latvia in 1993. In 2013 it reported revenues of EUR 2,069 thousand, EBITDA of EUR 356 thousand and assets of EUR 1,025 thousand. Stream Networks, which was established in 2007 (and renamed in 2008), is only a tad larger than LATNET, reporting revenues of EUR 3,179 thousand, EBITDA of EUR 179 thousand and total assets of EUR 1,265 thousand in 2013.

The companies believe that their services offerings are highly complimentary and that combining Stream Networks' wireless internet access solutions with LATNET’s optical cable network would result in a better services package to be offered to customers. Over the last few years the performance of both companies has been stagnating, with revenues actually showing a decrease in 2013. While both companies have achieved similar gross margins of 19-20%, the EBITDA margin of 17.2% as reported by LATNET is significantly higher than Stream Networks’ 5.6%. Both companies had practically no interest bearing debt on their balance sheet as at the end of 2013.

A substantial portion (49%) of Stream Networks’ shares are held by ZGI Capital, a domestic private equity fund manager, which made its first investment in the company in 2008. Growing through acquisitions seems to be their attempt to address the stalling growth and to increase profitability. Given that ZGI has held its investment in Stream Networks for 6 years already, this might also be their first step towards the exit.

The actual transaction price paid might be affected by a myriad of factors, including the quality of physical assets. Nevertheless, in our opinion, the price is unlikely to have exceeded 1.0x the year 2013 sales, or 6.0x times EBITDA - approximately EUR 2 million in money terms. This is also in the upper range of the price which could possibly be all debt-financed. The total debt of EUR 2 million would be within the limits of 4.0x EBITDA of the combined entity (which is considered as prudent level of debt) and will not require ZGI to fund the acquisition with an additional investment.

On a pro forma combined basis after the merger both companies would have revenues of 5,248 thousand and EBITDA of EUR 535 thousand. In a public statement the management called this merger as “establishing a new telecom giant which will be the second largest service provider to corporate customers”. It could be of Lilliputian proportions, but a giant nevertheless.


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