this quarter: an exclusive featureon the data centres & hosting sectoraquarterly summary of corporate deal activity in the...
tech talk | q2 2013 1In wake of the recent announcement that theUK economy has demonstrated flat growthover the first quar...
q2 2013 | tech talk2This last quarter has been broadly positive forthe Data Centre & Hosting sector, with resultsfrom most...
tech talk | q2 2013 3Figure 1: Data Centre & Hosting Services share price performanceSource: Megabuyte, Capital IQSharepri...
q2 2013 | tech talk4The poor share price performances of DRT,DFT and Rackspace has had a marked effecton the peer group sh...
DCH PEDCH EV/EBITDAEV/EBITDAPEEV/EBITDA(previousquarter)PE(previousquarter)tech talk | q2 2013 5010DRT Telecity Equinix Ra...
q2 2013 | tech talk6Notwithstanding Rackspace’s results, shareprice weakness, recent Q4 and full year 2012results have re-...
tech talk | q2 2013 7Fig 11: Revenue Growth – last periodFig 10: Capex, M&A to Sales – 12mnthThe relatively capital intens...
q2 2013 | tech talk8Sector focus: Data centres & HostingFigure 12: Data Centre & Hosting Services Private company financia...
tech talk | q2 2013 9Results from private companies in the datacentre and hosting peer group broadlyreplicate the dynamics...
q2 2013 | tech talk10The data centre and hosting peer groupcontinues to be a focus for M&A, with severalrecurrent themes. ...
tech talk | q2 2013 11Table 1: Selected Data Centre & Hosting M&A DealsSource: Megabuyte, Company announcementsAcquirer Da...
q2 2013 | tech talk12CBRE: Q4 rescues 2012 for demand inyear of big colo supply growthThe latest CBRE European data centre...
tech talk | q2 2013 13CBRE noted that take up of wholesale space inLondon was double that of 2011; perhapsnot surprising g...
q2 2013 | tech talk14Our takeWhilst it is encouraging to see 2012 endon a good note, and rescuing 2012 overallin terms of ...
tech talk | q2 2013 150402002 2004 2006 2008 20102003 2005 2007 2009 2011 2012801201402060100Figure 17: Colocation Annual ...
q2 2013 | tech talk16Following what was a subdued end to theyear for corporate activity, the first quarterof 2013 saw a st...
tech talk | q2 2013 17On this point, Boston based PE house ABRYpartners followed up its recent hosting relateddeals with C...
q2 2013 | tech talk18Alongside the renewed private equity interest,it is likely that we will see an increased levelof exit...
tech talk | q2 2013 19With the shocking news this quarter being thedemise of 2e2, it was left to the administratorsto do t...
q2 2013 | tech talk20Global M&A TransactionsStrategic M&A from the global playerscontinues apace, with Cisco Systems andOr...
tech talk | q2 2013 21Meanwhile, Oracle announced the acquisitionof Acme packet for $1.7bn, and this was soonfollowed up w...
q2 2013 | tech talk22The market holds its breath for thereturn of the IPOIn number terms, Capital Market fundraisingactivi...
size of bubble = amount raisedtech talk | q2 2013 23Figure 22: Capital Market fundraisingSource: MegabuytetrailingEV/Reven...
q2 2013 | tech talk24Redstonecompletedthedemergerofitshighermargin, £50m managed services business,into a new company call...
for more information contactbirminghamgraham elswortht: 		 +44(0)121 352 6212e: 		 graham.elsworth @bdo.co.ukleedsgiles wh...
BDO's Tech Talk Q2 2013. Capital markets, M&A in the UK Technology Sector.
BDO's Tech Talk Q2 2013. Capital markets, M&A in the UK Technology Sector.
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BDO's Tech Talk Q2 2013. Capital markets, M&A in the UK Technology Sector.

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Some interesting analysis of UK Technology M&A Activity, Capital Markets Activity in the UK Technology Sector Q1 2013.

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BDO's Tech Talk Q2 2013. Capital markets, M&A in the UK Technology Sector.

  1. 1. this quarter: an exclusive featureon the data centres & hosting sectoraquarterly summary of corporate deal activity in the technologysectortechtalkq2: 2013
  2. 2. tech talk | q2 2013 1In wake of the recent announcement that theUK economy has demonstrated flat growthover the first quarter of 2013 it is encouragingto see the data centres and hosting sectordemonstrating largely positive results.With uncertainty in the economy still aprevalent theme, we should view the robustlevels of investment in new capacity and M&Aas a good sign of things to come.2012 produced good figures for new spacedemand despite the significant increase innew capacity slightly taking the edge off ofthe results. Unfortunately the net effect ofgrowing faster than demand meant vacancyrates increased 2.6% year-on-year at the endof Q4 2012.The BDO viewFrom a corporate deals perspective wewitnessed steady deal flow over Q1 with 42deals in total and 26 of these being strategic.With increasing confidence demonstrated inthe market place, 2013 may be the year foran improved IPO market with institutionswarming to certain aspects of the sector.PE deals ground to a halt towards the end of2012 so the four deals in the Q1 2013 may bean indication of things picking up.With the triple dip of the UK economy avoidedand a slow return of confidence we could beforgiven for being confident of good results in2013. Recent share price performance for UKlisted technology stocks has been strong, andwe wait to see whether returns to investorscontinue to outperform the market.Julian FrostHead of TMT at BDO
  3. 3. q2 2013 | tech talk2This last quarter has been broadly positive forthe Data Centre & Hosting sector, with resultsfrom most of the public companies continuingto show solid double-digit organic revenuegrowth and good profitability and cash flowalong with guidance for more of the same in2013. Most of the data centre companies areinvesting more than EBITDA in new capacityand M&A, especially in Europe, but 2012is likely to mark the period of peak capacityexpansion, with improving FCF expected in2013.Poor share price performances from DigitalRealty (DRT), Dupont Fabros (DFT) andRackspace has meant that the DCH shareprice index, up 24% over 12 months, is foronce lagging the Megabuyte ICT Servicesindex, up 54%, though is still way ahead ofthe FTSE and NASDAQ.We view Rackspace’s one month, post results27% share price fall as a correction rather thana vote of no-confidence in hosting/Cloud,merely taking Rackspace’s valuation back tothe peer group’s tight range of 12-14x forwardlooking EBITDA.Sector focus: Data centres & HostingM&A continues unabated after November’sClaranet/Star deal, with Pulsant buyingScoLocate and Peer1 being taken privateby local Canadian cable company Cogeco,with double-digit valuations highlighting thescarcity of good quality, large targets.January 2013 saw the IPO of CyrusOne, aUS wholesale data centre provider, whichis majority owned by Cincinnati Bell; thiswill replace the departing Peer1 in the nextquarterly review.Share prices & valuationsThe last quarter has seen a polarisation inshare price performance between the majorUS wholesale data centre players DRT andDFT, who have suffered on pricing concerns,and the carrier rich colocation providersEquinix, Interxion and Telecity, who continueto generate double digit revenue and EBITDAgrowth and give a positive outlook for 2013.The best performer has been Peer1, followingan agreed bid from local Canadian cablecompany Cogeco in December 2012.Meanwhile, the worst performer has beenRackspace, with the shares down sharply inthe last month. The company had reportedsolid Q4 results, but saw an increase in churnand guided for flat rather than rising EBITDAmargins for 2013.
  4. 4. tech talk | q2 2013 3Figure 1: Data Centre & Hosting Services share price performanceSource: Megabuyte, Capital IQSharepriceMkt Cap(m)iomart £ 2.3 242.5Coresite $ 35.2 724.6Telecity £ 9.1 1,828.6DFT $ 25.1 1,584.3Interxion $ 23.6 1,611.7Peer1 C$ 3.8 492.2DRT $ 70.2 8,661.2Equinix $ 209.6 10,230.7Rackspace $ 47.0 6,483.6 1 month3 months12 monthsReturn40% 0% 40% 80% 100%60%20%20% 10% 10%
  5. 5. q2 2013 | tech talk4The poor share price performances of DRT,DFT and Rackspace has had a marked effecton the peer group share index, causing it tounderperform against both the MegabuyteICT and All Share indices, with a one year riseof 24% versus as much as 54% for the ICTServices index.Despite this underperformance against itsTMT peers, the DCH index has still done betterthan the FTSE All Share or NASDAQ over thelast 12 months, which have risen by 9.6% and6.5% respectively.DCH IndexMBTW All ShareFTSE All ShareNASDAQICT Services1,2001,4001,6001,8002,0002,200Figure 2: Data Centre & Hosting Services peer group performanceSource: Megabuyte, Capital IQ N.B. DCH Index includes: Coresite, Digital Realty Trust, Dupont Fabros Technology,Equinix, Interxion, Iomart, Peer1, Rackspace, TelecitySector focus: Data centres & Hosting
  6. 6. DCH PEDCH EV/EBITDAEV/EBITDAPEEV/EBITDA(previousquarter)PE(previousquarter)tech talk | q2 2013 5010DRT Telecity Equinix RackspaceIomart DFT Coresite Interxion20304050515253545Figure 3: Data Centre & Hosting Services currentyear valuationSource: Megabuyte. Capital IQ N.B. PE and EV/EBITDA are next twelve months consensus estimates, PE multiplerange limited to 50x earnings.currentyearvaluationmultiplesThe broad share price out-performance of thegroup in recent years has resulted in premiumvaluations, with all of the companies tradingat low to mid teens forward looking EBITDAmultiples, despite the very different businessmodels of the constituent wholesale datacentre and retail colocation and managedhosting companies.It is interesting to note that the recent shareprice decline of Rackspace has merely taken itsmultiple back in line with its peers, suggestingmore of a share price correction than a vote ofno confidence in hosting.
  7. 7. q2 2013 | tech talk6Notwithstanding Rackspace’s results, shareprice weakness, recent Q4 and full year 2012results have re-affirmed the broad sector’sattractive financial characteristics, withstrong growth, high profitability margins andexcellent cash conversion. However, growth isalso requiring substantial investment in datacentre capacity by the wholesale and retailcolocation providers and, to a lesser degree, incustomer equipment by the managed hostingcompanies.Broadly speaking, all of the companiesare achieving solid mid teens organicrevenue growth rates, with the exception ofRackspace’s chart-beating 25%.The growth rates for Iomart (for 1H12/13)include contributions from Titan Internet andEQSN; for DRT (Q4 12) from Sentrum; forEquinix (Q4 12) from Ancotel and AsiaTone;for Telecity (2H 12) from UK Grid and DataElectronics Group; and for Peer1 (Q1 12/13)from NetBenefit. In contrast, Interxion’s 13%is entirely organic growth.With the exception of the two major USwholesale providers DRT and DFT, EBITDAgrowth has out-paced revenue growth,with increased data centre utilisation andeconomies of scale leading to improvingmargins.Fig 4: Revenue Growth – last period Fig 7: OCF Conversion- last periodSector focus: Data centres & HostingThe actual margins achieved highlight thevery different business models and capitalintensity of the companies in the peer group;the wholesale data centre providers aregenerating the highest margins, at c60%,followed by the 40s of the carrier richcolocation providers, whilst the managedhosting providers are typically in the 30s.Allied with good EBITDA margins is operatingcash conversion, typically of 80-100% ofEBITDA, reflecting both the ‘true’ nature ofrevenues and the positive working capitaldynamics from many data centre and hostingcustomers paying upfront.yoygrowthOCCSource: Megabuyte, Company Accounts Source: Megabuyte, Company AccountsCoresiteCoresiteDRTDRTDFTDFTEquinixEquinixInterxionInterxionIomartIomartPeer1Peer1RackspaceRackspaceTelecityTelecity20%86%29% 91%16%58%20%87%13%105%29% 84%25%56%25%93%14%104%Fig 6: EBTIDA Margin – last periodmargin%Source: Megabuyte, Company AccountsCoresiteDRTDFTEquinixInterxionIomartPeer1RackspaceTelecity44%58% 60%47%43% 38%27%37%47%Fig 5: Adj. EBITDA Growth- last periodyoygrowthSource: Megabuyte, Company AccountsCoresiteDRTDFTEquinixInterxionIomartPeer1RackspaceTelecity38%25%7%24%15%51%37%27%18%
  8. 8. tech talk | q2 2013 7Fig 11: Revenue Growth – last periodFig 10: Capex, M&A to Sales – 12mnthThe relatively capital intensive nature ofdata centre operators is highlighted in capexand FCF metrics, with most of the majorwholesale data centre and retail colocationproviders currently spending 50-60% ofrevenues on capex, topped by Telecity at 58%in 2H12. Broadly speaking, maintenance capexrepresents c5% of revenues for data centreoperators, with c2% on customer equipment,with the remainder being growth capex (new/expanded data centres).The situation is rather different for the morehosting focussed companies, with Rackspaceand Iomart spending c10% of revenues. Forsuch providers, the bulk of capex tends tobe on customer equipment in data centres,driven by rather than being ahead of customerdemand.Source: Megabuyte, Company AccountsSource: Megabuyte, Company AccountsCapex / RevenueM&A / RevenueCoresiteCoresiteDRTDRTDFTDFTEquinixEquinixInterxionInterxionIomartIomartPeer1Peer1RackspaceRackspaceTelecityTelecity-4%43%-124%183%28%32%-11%58%-23%64%-2%39%-34%60%7%26%-25%72%Fig 8: Capex to Sales % - last periodSource: Megabuyte, Company AccountsCoresiteDRTDFTEquinixInterxionIomartPeer1RackspaceTelecityAverage39%103%2%50% 53%10%36%12%40%58%Fig 9: FCF to Sales % - last periodSource: Megabuyte, Company AccountsCoresiteDRTDFTEquinixInterxionIomartPeer1RackspaceTelecity4%-45%58%-3% -10%28%-8%25%-11%M&A has also been a key feature, as shownin the second set of cash flow charts for thelast reported 12 months. The nine companieshave generated $6bn in revenues and $2.8bnin EBITDA, but have spent $2.6bn on capexand $2bn on M&A. Most of the M&A billwas counted for by DRT ($1.55bn, includingSentrum properties) and Equinix ($0.33bn onAsiaTone andAncotel), with Peer1 andTelecityboth pitching in with c$40m spending.The net effect is that all of the peer group,with the exception of Rackspace, have spentmore than EBITDA in the last year on capexand/or M&A. Note, however, that this givesa distorted view of data centre returns giventhat much of this spending is to facilitatefuture growth.With 2012 possibly representing a year ofpeak capacity expansion, operator guidancesuggests a better FCF profile for 2013; forexample both Interxion and Telecity expect tospend less than EBITDA.As an indication of overall returns, Interxionand Telecity report returns on capitalemployed of 13% and 16%, whilst Equinixreport 34% cash flow annual returns on anestablished data centre.
  9. 9. q2 2013 | tech talk8Sector focus: Data centres & HostingFigure 12: Data Centre & Hosting Services Private company financial performanceSource: Megabuyte, Company announcements. Growth capped at 100%AnnualRevenue(£m)AnnualEBITDA(£m)Ark Continuity Ltd 4.8 -4.5Control Circle Ltd 20.9 1.0Gyron Internet Ltd 8.7 2.4UKFast.net Ltd 16.0 5.0Infinity SDC Ltd 3.6 -7.0Node4 Ltd 11.1 2.0Onyx Group 14.9 1.6UK2 Group 28.6 5.3Bunker Secure Hosting 7.4 1.7Host Europe Group 72.8 27.4Pulsant Ltd 26.7 8.7Telehouse Europe 90.0 44.11&1 Internet Ltd 36.6 4.9Fasthost Internet Ltd 36.2 13.1Star Technology Svs 45.9 4.2BIS Ltd 16.2 2.4Adapt Group 31.8 3.0Attenda Ltd 28.2 5.9Claranet Group Ltd 59.6 6.2-50% 50% 100%0%EBITDA marginEBITDA growthRevenue growth
  10. 10. tech talk | q2 2013 9Results from private companies in the datacentre and hosting peer group broadlyreplicate the dynamics of the publiccompanies, albeit that the UK privatecompanies tend to be smaller and thereforeat a different stage of development. Interms of recently released accounts,wholesale data centre providers ArkContinuity and Infinity both showsome of the highest growthrates, albeit off small revenues,and coming after significantinvestment (c£76m and£150m respectively).In the case of Infinity, datacentre halls opened sinceMarch 2012 (for example forCWW) suggest that FY12/13revenues could be up to 4xFY11/12’s £3.6m.Among other companiesrecently reporting, colocationand hosting provider Node4 andmanaged hosting specialist ControlCircle both registered strong growth of27% and 51% respectively.Control Circle registered a significant growthin EBITDA, after a slightly disappointing prioryear, albeit that the margin is still only at 5%.Node4 experienced a slight dip in EBITDAmargins from investing in growth, butexpects a rebound in margins andcontinued 20%+ revenue growththis year, alongside reduced capexrequirements.Meanwhile, Claranet reported1% revenue growth and an11% EBITDA decline in theyear to June 2012 (for theUK, Germany, France andSpain), reflecting pressureson its networks businessoutweighing hosting growth;it has subsequently acquiredStar Technology and Typhon,taking total Group revenuesfrom £70m to £124m.
  11. 11. q2 2013 | tech talk10The data centre and hosting peer groupcontinues to be a focus for M&A, with severalrecurrent themes. Consolidation has beena key feature, driven both by private equitybacked buy and builds (eg Pulsant, Six DegreesGroup and Adapt Group) as well as otherplayers such as Iomart.The most noteworthy recent deal wasClaranet’s £55m acquisition of StarTechnology in November 2012, representingmeaningful consolidation of UK mid-marketfocussed networks and hosting players (with£37m and £46m UK revenues respectively).Claranet also boosted its French businesswith the smaller £3.4m Typhon acquisition.Claranet received subordinated debt fundingfrom US private equity house Abry Partnersfor the Star deal.Meanwhile, Pulsant returned to its Scottish(Lumison) roots in December 2012, buyingdata centre colocation and peering providerScolocate for £26m.Sector focus: Data centres & HostingThe Claranet/Star 8x post synergy EBITDAand the Pulsant/Scolocate 10x historicEBITDA were both at the top end of the rangeof similar UK deals, and highlight the relativescarcity of good quality, reasonably largetargets.Canadian-based hosting provider Peer1 wassubject to an agreed bid from local cable TVcompany Cogeco for $635m enterprise value,or14.4xannualisedEBITDAinDecember2012,with the bid now declared unconditional.This came just six months after buying theUK-based Netbenefit from GroupNBT for£25m, or 10x EBITDA. It remains to be seenwhether Peer1 will maintain its UK presence,or focus just on North America, under its newownership.January 2013 saw the IPO of CyrusOne, aUS wholesale data centre provider, which ismajority owned by Cincinnati Bell.
  12. 12. tech talk | q2 2013 11Table 1: Selected Data Centre & Hosting M&A DealsSource: Megabuyte, Company announcementsAcquirer Date Target Activity Initial price Est. multipleIomart 11.11 EQSN Managed hosting £2.5m 9x EBITDAHost Europe 1.12 Red Coruna Hosting (spain)Six Degrees Group 2.12 Ultraspeed Managed hosting £1.5mAdapt Group 4.12 eLINIA Managed services £13m 15x EBITDASix Degrees Group 5.12 Firstserv Managed HostingSix Degrees Group 5.12 Serverstream Managed HostingSix Degrees Group 5.12 Datahop Datacentre interconnect.Equinix 5.12 AsiaTone Data centres (Asia) $230.5m 7.7x salesEquinix 5.12 Ancotel Data centres (Germany) $85.7m 4x salesHost Europe 5.12 Mesh Digital Domain namesNTT Comms 6.12 Gyron (85%) Date centres £40m(e) 21.7x EBITDAPEER1 6.12 NetBenefit Managed hosting £25m 10.0x EBITDADigital Realty Trust 6.12 Sentrum (3 DCs) Data centres £716mTelecity 7.12 Tenue Data centres (Finland) £3.7mSix Degrees Group 7.12 Cloud Computing Centre Managed Hosting & cloudIomart 7.12 Skymarket Limited Web hosting £1.2m 1.2x salesColt 8.12 Fidelity Telecom Ltd Cloud-based solutionsIomart 8.12 Melbourne Server Hosting Managed Hosting £7.0m 11.1x EBITDA365Main 9.12 Equinix (16 US centres) Data centres $75.0m 2x salesIomart 10.12 Internet Engineering Web solutions £1.2mTelecity 11.12 Academica Data centres £22.4mClaranet 11.12 Star Managed Services £55m 13.1x EBITDAClaranet 12.12 Typhon Hosting services £3.4mPulsant 12.12 ScoLocate Colocation provider £26m 9.6x EBITDACogeco Cable 1.13 Peer1 Managed hosting $635m 14.4x EBITDA
  13. 13. q2 2013 | tech talk12CBRE: Q4 rescues 2012 for demand inyear of big colo supply growthThe latest CBRE European data centrequarterly paints a mixed picture; 2012ended on a relative high in terms of newdemand, thus rescuing 2012 overall demandgrowth; but 2012 also saw significant newcapacity. The focus on square metres alsounderstates demand and supply dynamicsgiven improvements in power supply per unitof space.According to CBRE data, Q4 2012 was betterfor colocation demand across the majorEuropean markets, with new demand of16,955 square metres (sqm) representing 38%of the full year new demand of 44,980 sqmand being 3xQ3 new demand of 5,340sqm;this takes total EuropeanTier1 colo demand to551,000sqm.With this late demand spurt, 2012 has markedthe fourth year of 40–50,000sqm of new colodemand, down on the c70,000sqm in 2007and 2008, but still representing steady 7%volume growth.Whilst 2012 demand growth turned out to bein line with recent years, 2012 saw significantdata centre expansion. Total colo stockincreased by 12.4% to 78,000sqm whilstsupply increased 10.7% to 649,000sqm, morethan double the 2011 increase.The major European Tier 1 players - Equinix,Interxion and Telecity – all did their bit, withInterxion for example increasing revenuegenerating space by 19%. The net effect offaster supply than demand growth was anincrease in the vacancy rate from 12.4% at Q42011 to 15.0% at Q4 2012.CBRE noted strong demand in Amsterdam.Meanwhile, London supply increased in linewith the European average, at 10.9% to276,000sqm (43% of the European total),whilst incremental colo demand for 2012, at14,900sqm, was up 22% on 2011.Sector focus: Data centres & HostingFig 13: Data centre space - EuropeFig 15: Data centre space - LondonFig 14: Data centre space - EuropeFig 16: Colocation take up - Londonm2(‘000)m2(‘000)MWm2(‘000)Source: CBRESource: CBRESource: CBRESource: CBRE2007200720072007000020020010400100400206002006008003008003020082008200820082009200920092009201020102010201020112011201120112012201220122012supplystocksupplyTake upavailabilityavailabilityavailability5 yr average
  14. 14. tech talk | q2 2013 13CBRE noted that take up of wholesale space inLondon was double that of 2011; perhapsnot surprising given major projectscoming on stream from companiessuch as Infinity. Nevertheless, theLondon vacancy rate increased3.2pp to 18.6% over thecourse of the year.CBRE expects supply tocontinue to increase, butat a slower pace thanin 2012. It noted that26,000sqm is currentlyin the pipeline (versusthe 63,000sqm for 2012).This is also reflected inlower capex guidance andimproving cash flow againevident from the three bigquoted players; for exampleInterxion is guiding 2013 capexof €130-150m versus €178m for2012.One interesting figure that comes out of thestats, but which isn’t given any prominence,is the improvement in power supply persquare metre. Whilst supply in spaceterms increased nearly 11%, powersupply in MW terms increased20% to 636MW, with the impliedpower per space unit increasing9% in the year. In other words,both the supply and demandgrowth figuresin pure space terms areunder-stating growthin revenue generationcapabilities, given theability to squeeze yet moreprocessing power into a givenunit of space.
  15. 15. q2 2013 | tech talk14Our takeWhilst it is encouraging to see 2012 endon a good note, and rescuing 2012 overallin terms of demand, the CBRE figures are astark illustration of the significant capacityexpansion that occurred during 2012. Putsimply, decisions were made on capex for newfacilities at a time of probably slightly bettereconomic visibility than now, and 2012 maywell go down as the year of peak capacitygrowth.This is not all doom and gloom however,particularly for the major European playersin prime locations and with the cash flow tocontinue investing and buying capacity andfor the smaller, UK-based players with goodfacilities, locations and business offerings.As we noted recently, SSE Telecoms is seeingcolo prices hold steady, despite the growthin South East England colo capacity, whilstInterxion reported underlying growth of 3% inrevenues per square metre for 2012.Sector focus: Data centres & HostingBroadly speaking, even at steady pricesand with year on year volume growth, colosuppliers should be able to grow margins fromimproving data centre utilisation and yieldmanagement, whilst the better funded playerscan also buy growth through M&A and/orinvestment in data centre capacity expansion.The ongoing shift from on-premise to off-premise is likely to continue, driving whatcould perhaps be described as ‘suburban’ colo,whilst the inexorable global growth of mobileand increasing penetration of the web intothe home will fuel internet traffic volumes,keeping the city centre, carrier neutraloperators busy for years to come.”.Add in strong growth in managed and Cloudhosting, and demand for data centre spaceis not going to die anytime soon, thoughoperators in the wrong location, or withageing, under-invested properties and/or alack of track record might struggle relative toothers.
  16. 16. tech talk | q2 2013 150402002 2004 2006 2008 20102003 2005 2007 2009 2011 2012801201402060100Figure 17: Colocation Annual Availability and New Demand - EuropeSource: CBREm2(‘000)Colocation availability Colocation take-up
  17. 17. q2 2013 | tech talk16Following what was a subdued end to theyear for corporate activity, the first quarterof 2013 saw a steady flow of deals across thetechnology sector. In total, there were 42deals, with the majority of these (26) of thestrategic M&A flavour while transaction valuetotalled £10.8bn, the majority of which camefrom Liberty Global’s agreed bid for VirginMedia (£9.6bn), the largest deal across ouruniverse this quarter. Private equity activitypicked up from a standing start with foursecondarybuyoutdeals(totalvalueof£332m),alongside three secondary fundraising events,raising £474m. Meanwhile, although we stillawait IPO activity to resume, capital marketfundraising remained active with a total ofnine fundraising events, totalling £78m.Sector focused M&AIn a continuation of the theme, strategic M&Acontinues to be predominantly sectorfocused,with the enterprise software space andTelecoms & Networks peer group a hot bedforactivity. There were seven related Accounting& Enterprise Software deals, the mostsignificant of which was Advanced ComputerSoftware’s £110m acquisition of ComputerSoftware Holdings. Meanwhile, amongstthe Telecoms players, Daisy purchased TheNet Crowd and also significantly expandedits M&A firepower with an extension to itsbanking facility at £200m.PE backed deals valued at £332m, alongsidethree follow-on fundraising events totalling£474m.However, despite the apparent slowdown inthe level of activity towards the end of lastyear, there remains a significant interest inthe technology sector in the UK, and as wellas new Private Equity houses entering the fray,interest from US players remains evident.Sector focus: Corporate Deals ReviewPrivate Equity activity and IPOmarket to re-emerge in 2013?While the wait for another IPO in thesector continues, there are green shoots ofoptimism that the IPO market could makea return this year. Institutions have warmedfavourably to certain aspects of the sector asof late, particular around mobile money andenterprise software, bringing hope of moreIPOs on the London market.Likewise, as private equity houses sit on cash,interest in the sector continues to pick upand, alongside new PE firms entering the fray,overseas interest remains apparent.Whither 2e2?The shock news of this quarter was thedownfall of 2e2 Group, with excess levels ofdebt proving too much for the company.Whilst administrators did their best to recusesome of its assets, with Oakley Capital/Daisy(two data centres) and Datatec (Europeanassets) stepping in, much of the UK businesswas closed, with several hundred job losses. Asad moment for the sector.Private Equity activity picks upFollowing a complete dearth of private equity(PE) deals in the latter half of 2012, PE activitywithin the technology sector began to pick upin the first quarter 2013, with a total of fourFig 18: Deals tracker – valueFig 19: Deals tracker – volume£(bn)Source: CBREQ1 1204812Q2 12 Q3 12 Q4 12 Q1 13£(bn)Source: CBREQ1 12020604080Q2 12 Q3 12 Q4 12 Q1 13M&AM&APEPEFundraisingFundraising
  18. 18. tech talk | q2 2013 17On this point, Boston based PE house ABRYpartners followed up its recent hosting relateddeals with Claranet (minority investmentto fund Star acquisition) and its purchase ofNordic managed services player Basefarm,with the secondary buyout of ThomsonsOnline Benefits, valuing the company at justunder £100m, as Thomsons looks to doublein size by the end of 2015. Likewise, low costmobile international call service providerTruphone also received investment fromabroad, with a £70m investment from RomanAbramovich’s investment vehicle Minden,valuing the company at £300m, aiding itsinternational expansion.Meanwhile, Wireless Infrastructure Groupchanged private equity owners, with USpension fund backed Wood Creek CapitalManagement stepping in, valuing thecompany at approximately £150m, or 8.2xrevenues. Fellow peer Arqiva also receivedfunding this quarter, as it raised £400mfrom its shareholders as part of its debtrefinancing financing process, with bankdebt at £3.3bn as of June 2012. Elsewhere,business management software providerSage continued its divestment of non-coreassets with Accell-KKR buying Sage NonprofitSolutionsfor £58.4m, while Sage also receiveda binding offer from Argos Soditic for the saleof four product suites in Europe (C&I, ATL,Automotive and Aytos) for a total of £28.6m.02Sep 11 Apr 12 Oct 12Dec 11 Jul 12 Jan 13 May 1348.513Figure 20: Private Equity activitySource: MegabuyteESWC Aquisitions- Prologic (1.8x EV/EBITDA)August Equity- Secure Data (10.4x EV/EBITDA)ABRY Partners- Thomsons Online Benefits(2.9x EV/Rev)Francisco Partners- Kewill (7.8x EV/EBITDA)Wood Creek Capital- WIG (8.2x EV/Rev)BowmarkCapital- CSL DualCom(9.7x EV/EBITDA)LDC - Workplace Systems(4.2x Rev)Mobius Equity Partners- Tessella (1.0x EV/Rev)Vista Equity Partners- Misys (12.1x EV/EBITDA)BDC - BigHand(9.2x EV/EBITDA)trailingEV/RevenueMBO SBO P2Psize of bubble = transaction value
  19. 19. q2 2013 | tech talk18Alongside the renewed private equity interest,it is likely that we will see an increased levelof exit activity this year, as many PE firms areentering a stage in their investment cycleswhere we would naturally expect to see someform of liquidity event.This was recently demonstrated by KKR,which is in full exit mode on NorthgateInformation Solutions, having already soldNorthgate Managed Services to Capita, andhas begun formal sale process of NorthgatePublic Services. And this comes at the sametime as 3i seeks an exit of Civica.Other exits of note are LMS Capital’s winddown of Apogee though, at present, it is in noimmediate rush to exit Updata Infrastructureand August Equity backed SaaS vendor4Projects was purchased by US Softwaresupplier Viewpoint Construction Software.Sector focus: Corporate Deals ReviewA Steady flow of M&AThere was a continued steady flow of M&Adeals this quarter, 26 in total, with a totalenterprise value of £15.2bn, though themajority of this comprises of Liberty’s agreedbid for Virgin (£14.9bn), excluding which,deal value totalled approximately £350m.Moreover, at the beginning of second quarter,activity continues to pick up, with Cisco’sagreed bid for Ubiquisys at £205m, whilstthere were also deals for Six Degrees and TheInnovation Group amongst others.The major acquisition this quarter came fromJohn Malone’s Liberty Global, which agreeda $48.87 per share bid for Virgin Medianvaluing the company at £14.9bn. While thetransaction will put Malone against rivalBSkyB and Rupert Murdoch, we see littlestrategic rationale for the deal given the lackof potential synergies available from cross-border cable businesses, though Liberty willbe able to tap Virgin’s strong cash flow and itsreputable management team.Enterprise software continues to act as ahub of activity, with a total of seven dealscompleted in the peer group this quarter,including deals from serial acquirers AdvancedComputer Software (Computer SoftwareHoldings for £110m in cash), and AccessTechnology (Sazneo).Further to this, Kofax acquired Altosoft for$13.5m, whilst Sage sold Sage ACT! andSage SalesLogix to Swiftpage, in a deal worth£6.4m.Other deals included Big Hand’s purchase ofVerdatum, and SDL’s acquisition of Bemoko.Furthermore, although not directly linked withthe peer group, Capita acquired NorthgateManaged Services in a deal worth £65m;with a 4x EBITDA valuation attached to thedeal, we feel this rightly reflects that much ofthe business is made of traditional managedservices; a part of the market experiencingstructural pressure on margins.Continuing with the sector theme, there werea number of deals in theTelecoms & Networkspeer group as, alongside the Liberty-VirginMedia deal, Daisy purchased The Net Crowd,and has also substantially increased itsbanking facilities to £200m in order to fund itsacquisition trail.Meanwhile, XLN Telecom acquired ShineTelecom, Solar Communications bolted-onArmstrong whilst in early second quarteractivity, Six Degrees purchased BIS ltd, its13th acquisition to date.
  20. 20. tech talk | q2 2013 19With the shocking news this quarter being thedemise of 2e2, it was left to the administratorsto do their best to salvage some value out ofthe business. As a result, two data centres andcustomers were sold to Oakley Capital PrivateEquity for £2.8m, and were subsequentlysold to Daisy for £7.5m in early Q2 activity,delivering revenue and EBITDA of circa £10mand £0.75m this year respectively.Meanwhile 2e2’s European assets wereacquired by Datatec through its Logicalissubsidiary for $31m. Furthermore, althoughsome of the smaller parts of the UK businesswere acquired, sadly much of the business wasclosed down, with the loss of several hundredjobs.Away from 2e2 and there were a number ofother deals of note this quarter, Ffastfill fell toa bid from Ion Trading valuing the company at£106.1m, or 16.5x current year EBITDA.Meanwhile, Kelway added yet more hardwareto its business through its deal for Equanet,Accumuli secured a 4x return on investmentfrom the disposal of Webscreen SystemsLimited to Juniper Networks for £6.3m, whileTelit bought Crossbridge for a US presence,and Salmon was snapped up by media goliathWPP.04060Dec 12 Feb 13 Apr 13Jan 13 Mar 13 May 1312015,0002080100Figure 21: M&A TransactionsSource: Megabuyteenterprisevalue£mDigital Barriers- VisimetricsJuniper Networks- Webscreen SystemsPilat Media- OTTilusSwiftpage - Sage ACT!and Sage SalesLogixAnite- PropsimCapita- Northgate Managed ServicesIon Trading- FfastfillCisco Systems- Ubiquisys(£205m)ACS- Computer Software HoldingsTIG - GeminiVehicle SolutionsSix Degress Group- BISDatatec - 2e2Group EuropeKofax - AltosoftBITSS Global- GreshamComputingLiberty Global- Virgin Media(£14.9bn)
  21. 21. q2 2013 | tech talk20Global M&A TransactionsStrategic M&A from the global playerscontinues apace, with Cisco Systems andOracle yet again splashing the cash. For Cisco,it purchased Israeli based Intucell, a specialistin Self Optimising Networks for $475m, andthis was followed by its aforementioned dealfor small cell specialist Ubiquisys. Since mid-November, Cisco has spent well in excess of$2.2bn on five companies, as it looks to lessenits reliance on its core hardware business.Sector focus: Corporate Deals Review
  22. 22. tech talk | q2 2013 21Meanwhile, Oracle announced the acquisitionof Acme packet for $1.7bn, and this was soonfollowed up with the purchase of Tekelec foran undisclosed sum, representing its 15thacquisition since the start of 2012. WhilstOracle’s deal was the largest deal amongstthe global players this quarter, Fiserv likewiseopened its purse strings with the $1bn dealfor Connecticut based Open Solutions Inc,provider of enterprise account processingtechnology, paying $55m and assuming$960m of debt.Alongside Cisco’s purchase of Ubiquisys,JDSU’s acquisition of network optimisationspecialist Arieso is another example of largerUS strategic players targeting the UK market.Arieso was snapped up for $85m in cash, witha 4.4x revenue multiple attached to the deal.Elsewhere, Cloud storage provider Dropboxannounced the acquisition of Orchestra, thecompany behind the email app Mailbox, withthe file sharing company looking to broadenits horizon beyond its core offering.Wholesale data centre Digital Realty Trustacquired three Paris based data centresfrom Bouygues Telecom for €60m whilst, inearly second quarter activity, the purchaseof French IT services player Alti for €75m byTata Consultancy Services was notable for aninteresting shift of strategy for the company,and may point to more consolidation in theEuropean IT services market.The bidding process for Dell Inc continues,with further bids coming through billionaireinvestor Carl Icahn, and PE firm Blackstone.Icahn offered $15 per share for up to 58% ofthe equity, while Blackstone offered a bid inexcess of $14.25 per share (against the originalbid of $13.65 per share).BSkyB announced the acquisition of O2’s UKbroadband business for up to £200m, makingthe company the number two player in themarket. The deal highlights the abject failureby UK mobile operators in persuading itscustomers to take broadband and fixed linetelephony packages, while for Sky; it adds0.56m of fixed line broadband customers toits base.
  23. 23. q2 2013 | tech talk22The market holds its breath for thereturn of the IPOIn number terms, Capital Market fundraisingactivity picked up in the first quarter of 2013,albeit with the usual absence of an IPO.Overall, nine funding rounds were completedraising a total £77.9m, compared to £128.4mraised from five rounds in the final quarter of2012.In the most significant placing, AdvancedComputer Software raised £44.0m which wasput to work on the acquisition of ComputerSoftware Holding for £110m.Mobile billings provider Bango raised £6.5mon the markets to fund its expansion intoemerging markets and to shore up its balancesheet. It is significant to note that, at 200pper share (a 3.6% discount), this was thefirst fundraising since its IPO (at least fourpreviously) to be at a price substantially aboveits June 2005 IPO price of 134p.Sector focus: Corporate Deals ReviewKeeping with all things mobile,mobile gambling providerProbability raised £2.8mat 64p (a 5% discount),coming on the back of itssuccess with its 40 Shadesof Santa game.Meanwhile, Corero raised£4.1m to fund investmentsin its new generation ofproducts, while therewere also fundraisingevents from Pinnacle;£2.6m tofund workingcapital purposes,and from K3; £2.7mto strengthen itsbalance sheet.Datatec also raised£8.6m to help fundits 2e2 acquisition.
  24. 24. size of bubble = amount raisedtech talk | q2 2013 23Figure 22: Capital Market fundraisingSource: MegabuytetrailingEV/Revenue046Nov 12 Feb 13Jan 13 May 13122810StatproGroup PlcParityGroup Plc Datatech LtdDigitalBarriers PlcRedstone PlcProbabilityPlcAdvancedComputerSoftwareMonitise PlcBango PlcCoreroNetworkSecurity PlceServGlobalLtdPinnacle TechnologyGroup PlcPinnacleTechnologyGroup PlcK3 BusinessTechnologyGroup PlcFPO IPO
  25. 25. q2 2013 | tech talk24Redstonecompletedthedemergerofitshighermargin, £50m managed services business,into a new company called Redcentric, whileRedstone now composes of the lower margin,£30m infrastructure cabling business. Atthe same time, Redstone raised £6m on themarkets, at 1p per share, a 12% discount toits closing price, with the funds being used toreduce its debts (approximately £18m postthe Maxima deal).As activity within the private equitycommunity begins to show signs of revival,there are also green-shoot signs that the IPOmarket could make a comeback this year.With just 4 IPOs in the sector over the lastcouple of years, and with a number of playershaving exited either London’s main market orAIM, institutional investors are warming totechnology firms.Sector focus: Corporate Deals ReviewOver the last year, the City has treated certaintrends such as Mobile Money or EnterpriseSoftware favourably, with the likes ofMonitise, eServGlobal, Bango, and AdvancedComputer Software raising significant sumsof money. Meanwhile performances from thelikes of stock market wonder kid WANdiscowill further help sentiment towards fastgrowing technology companies.Moreover AIM may make an ideal hub forthose fast growing companies that may stillbe too immature for private equity backing,but not ideal for VC investment either.
  26. 26. for more information contactbirminghamgraham elswortht: +44(0)121 352 6212e: graham.elsworth @bdo.co.ukleedsgiles whartont: +44(0)113 204 1234e: giles.wharton@bdo.co.uksouthampton (audit)paul anthonyt: +44(0)238 088 1909e: paul.anthony@bdo.co.uksheffieldcraig burtont: +44(0)114 223 1760e: craig.burton@bdo.co.ukcambridgegary hansont: +44(0)122 353 5050e: gary.hanson@bdo.co.ukreadingsimon brookert: +44(0)118 925 4488e: simon.brooker@bdo.co.uklondon (audit)julian frostt: +44(0)207 893 2350e: julian.frost@bdo.co.ukreading (cf)philipp princet: +44 (0) 118 952 7372e: philipp. prince@bdo.co.ukguildfordrhodri whitlockt: +44(0)148 356 4646e: rhodri.whitlock@bdo.co.ukbristolneil dimest: +44(0)117 930 1501e: neil.dimes@bdo.co.ukmanchesterjulien ryet: +44(0)161 817 7505e: julien.rye@bdo.co.uksouthampton (cf)paul russellt: +44(0)238 088 1796e: paul.russell@bdo.co.uknottinghamsimon browningt: +44(0)115 962 9244e: simon.browning@bdo.co.ukgatwickjohn everinghamt: +44(0)129 359 1089e: john.everingham@bdo.co.ukscotlandneil mcgillt: +44 (0)141 249 5232e: neil.mcgill@bdo.co.uklondon (tax)ross wilkinsont: +44(0)20 7893 3603e: ross.wilkinson@bdo.co.ukThis publication has been carefully prepared, but it has been written in general terms andshould be seen as broad guidance only. The publication cannot be relied upon to coverspecific situations and you should not act, or refrain from acting, upon the informationcontained therein without obtaining specific professional advice. Please contact BDOLLP to discuss these matters in the context of your particular circumstances. BDO LLP,its partners, employees and agents do not accept or assume any liability or duty of carefor any loss arising from any action taken or not taken by anyone in reliance on theinformation in this publication or for any decision based on it.IS Research Ltd will not accept any liability to any third party who for any reason or by any means obtains access or otherwise relies on this report. IS Research Ltd has itself relied on informationprovided to it by third parties or which is publicly available in preparing this report. While IS Research Ltd has used reasonable care and skill in preparing this report, IS Research Ltd does notguarantee the completeness or accuracy of the information contained in it and the report solely reflects the opinions of IS Research Ltd.The information provided by IS Research Ltd should not be regarded as an offer to buy or sell securities and should not be regarded as an offer or solicitation to conduct investment business asdefined by The Financial Services and Markets Act 2000 (“the Act”) nor does it constitute a recommendation. Opinions expressed do not constitute investment advice. Any information on the pastperformance of an investment is not necessarily a guide to future performance. IS Research Ltd operates outside the scope of any regulated activities defined by the Act. If you require investmentadvice we recommend that you contact an independent adviser who is authorised by the Act to conduct such services. IS Research Ltd does not have any direct investments in any companiescontained in the report and has compiled this report on an independent basis.BDO LLP, a UK limited liability partnership registered in England and Wales undernumber OC305127, is a member of BDO International Limited, a UK company limitedby guarantee, and forms part of the international BDO network of independent memberfirms. A list of members’ names is open to inspection at our registered office, 55 BakerStreet, London W1U 7EU. BDO LLP is authorised and regulated by the Financial ConductAuthority to conduct investment business.BDO is the brand name of the BDO network and for each of the BDO Member Firms.BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, islicensed to operate within the international BDO network of independent member firms.© 2013 BDO LLP. All rights reserved.

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