Traditionally, the Business Communications sector has been associated with providing mobile phones and landlines to SMEs, corporates and enterprises. Given the obsession of present day private equity houses in technology, this would hardly cut the mustard for today's investment requirements.
However, the rapid adoption of IT in the workplace means that the Business Communications sector has been able to break free of its unexciting traditional model and is growing quickly against a highly favourable market backdrop, GVR predicts a 16.8% CAGR in the technology-enabled Business Communications sector between 2019 and 2025.
With technology now a major focus within the Business Communications sector, there is evidence of a wave of service diversification that is driving private equity interest. Providers are expanding their traditional product portfolios to offer a range of technology-based services, such as hosted telephony, VoIP, audio and video conferencing, instant messaging, enterprise software, data connectivity and managed security, many of which are cloud-based.
In this world of converged IT, players in the Business Communications sector are vying to be the one-stop shop for all of their clients' needs. This trusted adviser relationship is particularly attractive to the private equity community because it goes hand-in-hand with sticky revenue streams.
Many of the services now provided by Business Communications companies are subscription-based, resulting in a loyal client base with recurring revenues of 90%+. Combine this with an asset-light business model and you get an ideal candidate for private equity investment.
And this is just the micro view of Business Communications companies. The macro view is the icing on the cake for private equity investors:
- The Business Communications sector is highly fragmented, making it a hotbed for M&A activity. This is giving rise to market consolidation, with private equity backed businesses adopting buy-and-build strategies to achieve scale.
- Since 2010, there have been 44 standalone private equity investments into Business Communications businesses. These businesses, alongside strategic market incumbents, have then gone on to make 229 bolt-on acquisitions, with 30+ per year in 2016, 2017 and 2018.
- While there are still a plethora of independently-owned businesses to target, increasing competition is driving up prices. A private equity investor should now expect to pay c.12.5x EBITDA for a platform investment, against a long-term average of c.10x. Buy-and-build strategies are also becoming more expensive with acquisitions now costing 7x EBITDA compared to 5x historically.
These recent price pressures have not affected volumes. In fact, some of the most significant transactions have completed this month in July 2019:
- On 3 July, Apiary-backed G3 Comms merged with Connect Managed Services (previously backed by LDC) to create a leading global customer experience and unified communication managed service provider. The deal is estimated to be worth £30m, representing c.9x EBITDA (source: MegaBuyte); and,
- On 22 July, Onecom , a communications service provider and major Vodafone partner, announced that it has raised a £100m funding package from LDC and Ares.