Spirit Telecom harnesses record revenues to acquire trio of managed service providers in NSW

Spirit Telecom ASX ST1 record revenues Solutions Partners
The three businesses generate $12 million in combined revenue with more than 60% as recurring revenue.

Two days since announcing record financial results and a fast start to the new financial year, internet service provider Spirit Telecom (ASX: ST1) has moved to acquire Reliance IT, Beachhead Group and Altitude IT – three IT managed service providers in central New South Wales (NSW).

According to Spirit, the three companies will immediately be rebranded as “Spirit Solutions Partners” to serve as Spirit’s new wholesale division. Currently, Reliance IT operates as a cloud managed services provider and stands as one of the largest providers of IT services in regional NSW.

Meanwhile, Beachhead Group specialises in cloud and infrastructure deployment to businesses and private schools while Altitude IT carries a diverse base of recurring revenue across the commercial and industrial sectors.

The acquisitions will “add critical mass” to Spirit Solutions Partners in NSW – Australia’s largest telco and IT market, the company said.

Multimillion-dollar funding

To fund the acquisition Spirit has raised $18.2 million as part of a placement to institutional and sophisticated investors and intends to further supplement its balance sheet with a $5 million share purchase plan, aimed specifically at retail investors.

The share purchase plan is due to open on 28 August 2020 and close on 15 September 2020 while the trifecta of acquisitions is set to be finalised before 1 September 2020.

The rationale behind the deal is to sequentially extend Spirit’s growth and its Spirit solution partners network, the company said.

Combined, the three businesses are set to deliver strong sales, intellectual property, IT engineering skills and, possibly most importantly, generate around $12 million in revenue every year.

Moreover, Spirit said that approximately 60% of the three companies’ revenue is recurring which represents around $2.5 million in EBITDA for the last financial year and a corresponding 21% EBITDA margin.

More specifically, Spirit said it expects EBITDA multiples for new acquisitions of between x3-3.5.

To finalise the deal, Spirit has agreed to provide an upfront payment of $5.7 million in cash and a further $2.6 million in Spirit shares. According to the deal terms, the buyouts are valued at $10.4 million including potential incentive earn-outs.

Once the deal is complete, Spirit said it plans to deploy the funds to pursue additional acquisition opportunities, accelerate development of the cloud product range within the Spirit X digital sales platform and to market the Spirit brand and its products nationally.

“These acquisitions are consistent with our strategy to bring in right-fit, right price, high-margin IT & Telco services businesses. Additionally, these transactions give us a much deeper presence in Sydney and Central NSW immediately,” said Spirit Telecom’s managing director, Sol Lukatsky.

“We can now take advantage of national media buys across major advertising networks, online digital platforms at a time when media prices are at historical lows. Furthermore, we push aggressively with the rollout of Spirit Solution Partners, our wholesale network.

“We have recently signed 21 new partners, and now with these transactions and new funding lines our sales network expands at pace nationally,” said Mr Lukatsky.

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